Non-Uniform Impact of Fiscal Decentralization on Economic Growth : A State Level Analysis in India

In this paper, I examine the impact of fiscal decentralization on state-level economic growth in India. There is little empirical evidence testing for a non-uniform impact of fiscal decentralization within a country. I build a social development index (SDI) to characterize 15 Indian states into developed and under-developed, based on their education and health outcomes. Using an analytical model, I identify the specific channels through which fiscal decentralization impacts economic growth. My results suggest that, while both expenditure and revenue decentralization strongly impact economic growth positively, developed states only show a small effect. Further, looking at specific aspects of expenditure and revenue decentralization lend support to a non-uniform impact of fiscal decentralization on growth across states in India. These findings call for a re-evaluation of the center-state fiscal arrangements and have important implications for policy