FISCAL FEDERALISM AND REGIONAL INEQUALITY IN INDIA

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Abstract

India’s federal fiscal system must reconcile two objectives that do not automatically coincide: preserving incentives for state-level economic initiative and ensuring that citizens can access comparable public services regardless of where they live. Wide differences in income, tax capacity, infrastructure, human development, administrative capability, and exposure to climate or demographic pressures make this task difficult. This paper examines how tax devolution, grants, centrally sponsored schemes, borrowing rules, and intergovernmental institutions influence regional inequality. It argues that equalization is essential for national cohesion and inclusive growth, but transfers are effective only when their design is transparent, predictable, sensitive to expenditure needs, and supported by stronger state and local capacity. Excessive conditionality can weaken accountability, while poorly designed unconditional transfers may fail to improve services. Abalanced framework should combine rule-based general transfers with carefully targeted grants, credible fiscal responsibility, stronger municipal and panchayat finance, and public reporting of outcomes. Fiscal federalism should therefore be evaluated not merely by the volume of resources transferred, but by its ability to equalize opportunity, protect macroeconomic stability, and strengthen democratic accountability.

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