Can Decentralization Limit Government Growth? A Test of the Leviathan Hypothesis for the Indian Federation

Abstract

Decentralization in India has only recently gained momentum, particularly with the 73-super-rd and 74-super-th amendments in 1992, which extended constitutional recognition to local governments. Against this backdrop, this article examines the Leviathan hypothesis put forth by Brennan and Buchanan for the Indian economy. The hypothesis asserts that total government intrusion into the economy should be smaller when taxes and expenditure are decentralized. A caveat to the Leviathan hypothesis is the Collusion hypothesis, which suggests that the disciplining impact of decentralization can be nullified if revenue decentralization does not keep pace with expenditure decentralization and if there is an increase in dependence on intergovernmental grants. Empirical testing for the Indian federation vindicates both hypotheses, thus suggesting that a two-pronged strategy is required if government growth is to be checked. More effort must be made to strengthen local bodies. This must be accompanied by a close look at intergovernmental transfers and by an attempt to restrict their growth. Copyright 2002, Oxford University Press.