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Fiscal decentralization, regional disparity, and the role of corruption

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Abstract

In this study, we examine how efforts taken by states to combat corruption act as a mediator in the relationship between fiscal decentralization and regional income disparities. Fiscal decentralization may affect regional disparities via access to funding, but corruption could limit the ability to efficiently transfer fiscal resources. India is one of the most decentralized nations of the world and also exhibits high regional disparities. Under this scenario, we estimate whether institutions, in the form of anti-corruption efforts by the states, interact with fiscal decentralization and affect divergence across states of India. We find that fiscal decentralization reduces the disparity across states, and the effect of fiscal decentralization is stronger under efforts to control corruption by state vigilance bodies. The results are robust across different specifications of fiscal decentralization and alternate estimation methods accounting for endogeneity. From the policy perspective, in order to harness the potential benefits of decentralization to reduce regional income disparities, governments should focus on improving the quality of institutions through control on corruption at the sub-national level.

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Fig. 1

Source: Handbook of Statistics on Indian States, Reserve Bank of India

Fig. 2
Fig. 3
Fig. 4

Source: Authors. *The map indicates only those states that have been considered for this study

Fig. 5

Source: EPWRF India Time Series Statistics

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Notes

  1. The National Development Council of India has characterized the states into special category states (SCS) and non-special category states (NSCS). Special category states include the following features:1. hilly and difficult terrain, 2. low population density and/or sizeable share of tribal population, 3. strategic location along borders with neighboring countries, 4. economic and infrastructural backwardness, and 5. non-viable nature of state finances. Till now, 11 states are part of SCS (Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura, Jammu and Kashmir, Assam, and Nagaland). The NSCS are Andhra Pradesh, Bihar, Chhattisgarh Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal. Since the special category states get preference in terms of financial transfers from the Central government, only non-special category states have been included in our analysis.

  2. These states are Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal.

  3. See studies Chaudhuri, K., & Dasgupta, S. (2006), Dash, B. B., & Raja, A. V. (2012), Dash, B. B. (2014), Ganaie, A. A. et al. (2018), Bhat S.A. et al. (2018).

  4. General government includes the central government, the state government, and the local government.

  5. https://data.imf.org/?sk=1C28EBFB-62B3-4B0C-AED3-048EEEBB684F.

  6. We thank an anonymous referee who highlighted this feature related to corruption control efforts.

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Authors and Affiliations

  1. VIT-AP School of Business, Vellore Institute of Technology University, Amaravati, Andhra Pradesh, India

    Nupur Nirola

  2. Department of Economic Sciences, Indian Institute of Technology, Kanpur, India

    Sohini Sahu & Atrayee Choudhury

Authors
  1. Nupur Nirola
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  2. Sohini Sahu
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Correspondence to Sohini Sahu.

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The authors express their sincere gratitude to Professor Martin Andersson- the Editor-in-chief, and two anonymous referees, for their helpful comments and suggestions.

Appendix

Appendix

See (Tables

Table 8 Revenue decentralization, regional disparity, and corruption control: Income-wise
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Table 9 Fiscal autonomy, regional disparity, and corruption control: Income-wise
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Table 10 Expenditure decentralization, regional disparity, and corruption control: Robustness check
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Table 11 Revenue decentralization, regional disparity, and corruption control: Robustness check
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Table 12 Fiscal autonomy, regional disparity, and corruption control: Robustness check
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12).

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Nirola, N., Sahu, S. & Choudhury, A. Fiscal decentralization, regional disparity, and the role of corruption. Ann Reg Sci 68, 757–787 (2022). https://doi.org/10.1007/s00168-021-01102-w

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