Intergovernmental transfers as tactical instrument: empirical evidence from fourteen major Indian states

Abstract

In any federation where intergovernmental transfers form a major chunk of revenues for sub-national governments; determinants of allocation shares have always been a salient issue. This paper makes an empirical attempt to investigate whether there are any political motives behind the distribution of central funds among sub-national governments in case of India. We find that in aggregate terms relatively higher per capita transfers are channelled towards states inhabited by large swing voters to gain/maintain control over such states. The significance of the coefficients of interaction terms between swing; alignment and election year dummies reveals that in case of discretionary transfers; during election years; swing states are receiving disproportionately larger shares while during non-election years core states are favoured disproportionately. It gives an empirical insight into the manner whereby central political party targets both core and swing states for political returns in terms of higher votes. Normative considerations were also found relevant as states with higher rural population were found to receive higher per capita transfers. Representation and alignment were found to be insignificant determinants of allocation shares.