The Determinants and Impacts of Local Revenue Raising and Higher Level Grants in Rural India

A nationally representative Indian panel data set is used to estimate systems of equations which account for endogeneity of grants received by villages. The estimates explore the factors that determine the levels of employment generating, social welfare, untied grants; the impacts of these grants on own taxation; of grants and own taxation on welfare indicators and on public investment. We find three advantages Panchayat fiscal autonomy: greater devolution of functions and autonomy to Panchayats increases local taxation; untied grants have the strongest (positive) welfare and public investment impacts; and providing untied grants induces local government to raise significant additional tax resources. The last finding suggests that shifting the balance of grant resources from tied to untied grants would have strong incentives effects on local revenue raising. By limiting authority over grants and their fungibility, both the central and many of the state governments have created disincentives for raising local revenues