Special Category States Research Articles

Assessing the Fiscal Implications of Flood Disasters in India: Insights for General and Special Category States

Abstract This study provides a comprehensive analysis of the fiscal consequences arising from flood disasters in India, with a specific focus on the challenges encountered by General Category States (GCS) and Special Category States (SCS). Recognizing India's vulnerability to floods due to its diverse geographical and climatic landscape, the research emphasizes the need for a coordinated disaster response framework involving both central and state governments. Utilizing a panel vector autoregression (VAR) methodology alongside impulse response functions (IRFs), we reveal that flood disasters significantly impact fiscal variables over a medium-term horizon of 3–5 years. Our findings indicate that fiscal deficits widen for up to three years post-disaster, while expenditures on flood control surge in the following years. Notably, SCS face a disproportionate fiscal strain, exacerbated by their geographical disadvantages and heightened susceptibility to disasters, leading to a decline in non-tax revenue after flood shocks. The study advocates for tailored fiscal policies that enhance the resilience and recovery capacity of both GCS and SCS in addressing flood-induced fiscal challenges.

Inefficiency Analysis of Tax Efforts in Special Category States of India: Evidence from a Stochastic Frontier Model

The current article examines the tax efforts of India’s main mountainous states that have been accorded special category status by the National Development Council. These states have been under persistent budgetary pressure and are partially reliant on central funds in the form of grants in ‘aid’ and other central transfers. The present article employs the Stochastic Frontier Analysis (SFA) model to assess ‘tax effort’ of special category states. The model results implied that ‘tax effort’ rises with increase in the share of secondary sector, revenue expenditure and road infrastructure. Further, the level of debt lowers ‘tax effort’, whereas the introduction of FRBM and Goods and Service Tax Regime (GST) has raised the inefficiency in own tax mobilization. On the basis of tax effort index, computed through John Drew (JLMS) methodology, this study also indicates that Assam, Uttarakhand, and Jammu and Kashmir are in a far better position in tax efforts score compared to the north eastern special category states. JEL Codes: H2, H21, H22, H71

PUBLIC HEALTH EXPENDITURE CONVERGENCE ACROSS INDIAN STATES: NEW EVIDENCE FROM LM AND RALS-LM TESTS

This study examines the total per capita health expenditure convergence across 25 Indian states by disaggregating total per capita health expenditure into revenue and capital health expenditure. This study uses the recent Lagrange Multiplier and Residual Augmented Least Squares-Lagrange Multiplier unit root and club convergence tests. Results of unit-root tests indicate the evidence of convergence for aggregate per capita health expenditure and its compositions. The speed of convergence of total per capita health expenditure is found to be approximately 0.15%. Results from sub-panels reveal that special-category states are converging. Based on the findings, it may be appropriate for the central government to design the equalizing transfer system and revisit poor states’ per capita health expenditure patterns.

Designing Transfers Policy With Normatively Determined Revenues And Expenditures Of State Governments In India


 This study addresses an important policy issue of designing equalisation transfers from the union government of India to the states. It empirically measures the own revenue efficiency and potential of General Category and Special Category States using the frontier approach for panel data. It also analyses the effect of transfers on states’ own revenue and its components. Results indicate a strong crowding-out effect of transfers in General Category States and a strong crowding-in effect in Special Category States. Amounts of additional transfers required to provide equal level of public services for all 29 States in four alternative scenarios range between ₹1072 billion and ₹15,948 billion. The range is based on alternate benchmarks of fiscal capacities and expenditure needs. We hope that these results will be useful to policymakers and other stakeholders to design appropriate fiscal transfer strategies such that all citizens can avail a standard level of public services in India.

Equalisation Transfers Based on Spending Needs and Fiscal Capacity of State Governments in India

This study addresses an important policy issue pertaining to the determination of equalisation transfers to Indian states. It empirically estimates the effect of transfers on the expenditures of 29 Indian states using panel data methodology. It also determines transfers based on the spending needs and fiscal capacities of states. The results indicate a strong crowding-in effect of transfers on the public spending of states and the presence of the flypaper effect. Fiscal transfers relate positively to revenue expenditures in 13 out of 18 general category states and in 8 out of 11 special category states. The estimated amounts of equalisation transfers for all 29 states in four alternative scenarios, based on alternative benchmarks of fiscal capacities and spending needs, range between ₹555 billion and ₹16,048 billion. We believe these results will help policymakers and other stakeholders to design appropriate fiscal transfer strategies such that all citizens can avail a standard level of public services in India. JEL Codes: H77, H73, H72, C23

Impact of fiscal transfers policy on regional growth convergence in India

This study is an attempt to empirically analyze the effect of fiscal transfers on growth and regional growth convergence in India during 2005–2019, using the standard growth convergence model for panel data. Results indicate the growth convergence across Indian States. The regional income gaps reduced at a rate of 17.7–31.9% per annum. The fiscal transfers contribute to the growth of 22 out of 29 States and also contribute significantly to the convergence. Moreover, there is strong evidence for convergence across General Category States and across Special Category States. The average income growth is higher in Special Category States and higher in post global crisis period. It is our hope that these results will be useful to policymakers and other stakeholders to take appropriate strategies to design fiscal transfer policy such that it will speed up the convergence process in India.

National rural health mission and the interstate variations in public healthcare spending in India: A study of the Indian North-Eastern states

Background/Objectives: The North-Eastern region of India comprised of eight states of which seven states come under small states and special category states. The region has a very large rural population which is highly agrarian in nature. The performances of the states in many of the health indicators have been better than most of big Indian states yet the status of health infrastructure and health accessibility in the region are still a grave concern. The study aims to find the interstate variations before and after the implementation of National Rural Health Mission (NRHM) Act of 2005, on the public health expenditure in the North-Eastern states. Methodology: The data on public health expenditure has been obtained from the State Finance Reports of the Reserve Bank of India (RBI), on population from the office of the Registrar General & Census Commission of India and the Gross State Domestic Product (GSDP) from the Directorate of Economics and Statistics of respective state governments, Central Statistics Office. The study is of twenty-six years, 1990-91 to 2015-16. The study uses the coefficient of variation to determine the extent of interstate variations. Findings: The study found that the interstate variation in public healthcare expenditure with all the eight states in the region is on a decline. Further, the study found that post NRHM, the states have equalised their proportion of health spending. Novelty/Improvement: There have been no studies to compare the interstate disparity in public health expenditure in the North-Eastern states before and after the implementation of NRHM in recent years. Keywords: Public health expenditure; interstate variations; National rural health mission; North Eastern States; India

Intergenerational Occupational Persistence: Recent Evidence from Indian States

This article studies intergenerational occupational persistence using three recent rounds of a nationally representative sample survey from India. More than 60% of Indians are employed in the industry where their fathers are also employed. We find that individuals from Scheduled Tribes (ST) and Hindus have higher occupational persistence than those from the General Class (GEN) and Muslims, respectively. Persistence in general is higher in rural areas. We find considerable interstate and intrastate variations in the incidence across General Category States (GCSs) and Special Category States (SCSs). It has remained almost unchanged among GCSs on average, whereas it has decreased gradually for SCSs. Large inter-regional disparity exists within states between rural and urban areas and between capital and non-capital districts. Such disparity is found to be higher among GCSs. Bihar, Madhya Pradesh, Chhattisgarh and Jharkhand are the GCSs with large and increasing occupational persistence. Nagaland, Arunachal Pradesh, Meghalaya and Mizoram are the SCSs with persistence of above 70%. Using a probit estimation analysis, we find family background (father’s education in rural area and ownership of productive assets) to have a significant and consistent influence on intergenerational persistence compared to own education. Results in general indicate that background factors play a stronger role than education does in the choice of occupation among Indians.

Goods and Services Tax efficiency across Indian States: panel stochastic frontier analysis

In public finance, estimation of tax potential of a government—either federal or provincial—has immense importance to understand future streams of tax revenue. Tax potential depends on tax capacity and tax effort (TE) and, therefore, joint estimation of both the functions is desirable. There are several frameworks to estimate tax capacity and tax efficiency (tax effort); in the present paper, time-variant-truncated panel Stochastic Frontier Approach (SFA) is adopted to estimate the functions jointly for the period 2012–13 to 2019–20. The findings of the study could be useful for policy and especially for the sitting Fifteen Finance Commission. The results of the study show that GST capacity of states depends on size and structural composition of the economy. Introduction of GST has reduced states’ GST capacity and the impact is restricted to scale only. The study has used data from GST Network (GSTN) database for the post-GST period and given all other factors at their levels, GSTN data show lower GST capacity for high-income states and higher capacity for low-income states. The relationship between per capita income (PCI) of states and tax efficiency is non-linear and as PCI rises, TE falls and thereafter it rises. Minor states (special category states and UTs with legislative assembly) have lower tax efficiency. Delhi and Goa have the highest GST gap and on average major states could increase their GST collection by 0.52 percent of GSVA and minor states by 1.15% if they increase their tax efforts.

Cyclicality of public health expenditure in India: role of fiscal transfer and domestic revenue mobilization

The motivation for the exploration of the cyclical behaviour in public health expenditure is derived from the level of heterogeneity in public health services associated with a low level of fiscal space among the Indian states. The fiscal space for health literature argues that the growth of public health expenditure is influenced by the conducive macroeconomic environment such as sustained economic growth and increases in overall government revenue. Examining the role of fiscal space components on the cyclical behaviour of public health expenditure has remained unnoticed in the earlier literature, especially in the Indian context. Therefore, the study attempts to examine the cyclical behaviour in public health expenditure with respect to both output and revenue fluctuation by controlling fiscal transfer and lagged fiscal deficit, using system generalized method of moment regression approach. The cyclicality of public health expenditure is examined for all 28 states, general category states, and special category states separately for the period 2000–2016. The empirical results show that public health expenditure is pro-cyclical in both boom and recession period in India. The results find that economic growth, tax revenue, and central transfers have a positive and significant effect on public health expenditure among the Indian states. It also confirms that health is a necessity in India. It finds that central fiscal transfers play a significant role in the special category states than the general category states in order to finance the health sector. This study suggests that more focus should be given for the enhancement of fiscal space for health sector through revenue mobilization and smooth flow of central fiscal transfers among the Indian states.

Govind Bhattacharya, Special Category States of India

Govind Bhattacharya, <i>Special Category States of India</i>

Public Indebtedness in Punjab State of India: A Critical Review

A neoteric phenomena which has put the Indian economy under unbearable pressure is ballooning borrowings because of unceasing expenditure by the governments. In India, rising debt to GDP ratio has accentuated the problem of outpacing revenue expenditure which led to the implementation of FRBM Act, 2003 and after that indebtedness among states has declined. So, this paper focuses on the analysis of public indebtedness of non special category states of India and to access the level of indebtedness, debt to GDP ratio is taken. The state that has emerged as one of the weakest in tackling with the situation of growing indebtedness is Punjab over the period of 2000–2017 along with West Bengal because of rise in revenue expenditure especially the non-development component, stagnant growth in state's own tax revenue and sliding non-tax revenues. States like Odisha, Chhattisgarh, Andhra Pradesh, Madhya Pradesh and Bihar have low Debt to GSDP ratio and are spending more on developmental activities whereas the Punjab state is spending very less amount on developmental activities and more interest payments which can lead to the further deteriorate the financial health of the state.

GST Pass-through Across Indian Sates: Evidence from Difference-in-Differences

This article analyses whether there exists any short-term inflationary pressure on Indian economy post Goods and Services Tax (GST) implementation. It was found that the introduction of GST showed no significant effect on the rate of change of consumer price index (CPI). Though, the effect of the GST implementation on consumer prices in India showed no significant change in the short term, the impact needs to monitored and observed for the long term, because the current state of economic conditions may have led to a delayed pass-through of the GST increase into consumer prices. To estimate the pass-through effect on prices due to GST implementation from 1 July 2017, various graphical and statistical methods are used to ascertain whether there has been any significant pass-through of GST on CPI– ordinary least squares (OLS) regression, and difference-in differences (DID) estimation technique has been used. The impact of post- and pre-implementation of GST has been analysed through DID by segregating the data set on the basis of treatment and control groups. The non-special category states have been taken as the treatment group and remaining special category states as control group. The results indicate that there is no significant evidence of upward bias in the CPI post GST implementation; these conventional estimates hold true for all states that were segmented based on revenue distribution and contribution to gross domestic product (GDP). JEL: D78, H20, H22

Regional Incentives and Location Choice of New Firms in India: A Nested Logit Model

This research paper attempts to develop an appropriate econometric model for regional incentives and location choice of new firms in India. The alternative econometric models of location choice include ordinary least squares, multinomial logit model, Poisson (count) model, conditional logit model and nested logit model. The present study utilised two-level Nested logit model, a discrete choice regression technique, to estimate the influence of regional incentives on the location choice of new firms in India. In considering what groupings of location choices to use for the upper nest of the tree structure, we simply categorised areas into designated and non-designated status, as defined by policy. We divided the area in two nests or subgroups, or regions: the Special Category States or the Beneficiary States (Jammu and Kashmir, Himachal Pradesh and Uttarakhand) which have been granted special investment incentives package and the Control Group or the Non-Beneficiary Neighbouring States (Haryana, Punjab and Uttar Pradesh) which were given no regional incentives. We have considered only firms established between 2002–2003 and 2010–2011. The independent variables considered for the analysis include investment incentives (dummy variable), manufacturing agglomeration, market potential and land cost. The nested logit model was estimated with full information maximum likelihood estimation using Stata software. The estimation validated the importance of regional fiscal incentives and manufacturing agglomeration as the most important determinants of industrial location.

Industrial Location Policy in India

The article provides a broad overview of the industrial location policy in India since Independence. In India, the glaring regional imbalances and inequalities have arisen through a complex set of historical, socio-economic, demographic and cultural factors. The pre-reform approach to industrial location policy involved top-down identification of lagging areas and targeting them with interventionist and regulatory measures. In the post-reform period, the process of liberalisation has curtailed the role of government as industrial owner and location regulator, and restricted policy space. Thus, the focus shifted to a targeted approach and subnational strategies. Package for industrial development are in operation for the special category states, namely northeastern states, Jammu and Kashmir (J&amp;K), Himachal Pradesh and Uttarakhand. In other regions, the development of industries adopted a cluster development approach. However, the peripheral lagging regions continue to stagnate despite the industrial location policy having tried virtually everything. The persistently growing regional disparity in post-reform period is a matter of grave concern. JEL Classification: R3, L5

Federal Finance in India: An Analysis of Discretionary Transfers

The essence of federalism lies in proper division of powers and functions among various levels of government to ensure adequate resources for their functioning. Although a formula-based practice has been mandated by the Indian Constitution through the setting up of the Finance Commission of India, there are several breaks in the practice. Some of the Central transfers are formula-based but there is considerable discretion in allocating other classes of transfers. In the era of Coalition politics there has been increasing disquiet, especially by the states ruled by opposition parties about alleged partisan behaviour by the Centre in the allocation of discretionary transfers. The present paper makes an attempt to examine the level, composition and disparity in per capita discretionary transfers from the Centre to the states; and explore the determinants of discretionary transfers. Two time points, viz. 2001-02 and 2011-12 are considered since the study has used census data for some variable. The empirical results show that there is significant diversity in the level of discretionary transfers to states. However, the disparity is not due to political factors. The states with higher fiscal deficit have got more discretionary transfers than the states having lesser deficit. Special category states get higher discretionary transfers as it is inherent in the structure of such transfers.

State Fiscal Problems and Role of Central Assistance : The Case of North Eastern States of India

This paper examined the fiscal problems and role of the central assistance in the context of fiscal management at the sub-national level, particularly with reference to special category states in India like the North Eastern states. Observing the status of fiscal autonomy, fiscal dependency, the mismatch between revenue receipts and expenditure, the study examined how the Central Plan Assistance, which has been received on the basis of gap filling approach has been used by these states for non plan revenue expenditure. The paper observed that there should be policy initiatives so that the North Eastern states are able to increase their own revenue and at the same time, the Central government should not only devolve resources ; rather, there should be a mechanism regarding how to control their non plan revenue expenditure so as to make the plan assistance available only for developmental expenditure.

Determinants of Industrial Location Choice in India: A Polychoric Principal Component Analysis Approach

This research paper attempts to identify the factors determining industrial location choice in India, which is essential for formulation of an effective industrial location policy. There are two broad approaches to identify the determinants of firms’ location decisions. One is ‘Modelling’ approach or ‘Revealed Preference’ approach or an econometric analysis of empirical patterns to identify revealed preference based on the characteristics of the region. The second approach is the ‘Stated Preference’ (or Industrial Location Survey) approach. Survey research typically identifies one or more key respondents and asks them about the factors, which influenced their location decision choice. The present research paper is based on the Industrial Location Survey approach. It attempts to analyse the primary survey data collected in the solicited research study sponsored by the Planning Commission, Government of India. The primary study consisted of a sample survey in the Special Category States or the Beneficiary States viz. Jammu and Kashmir, Himachal Pradesh and Uttarakhand; and the Control Group or the Non-Beneficiary Neighbouring States viz. Haryana, Punjab and Uttar Pradesh. The data from the questions concerning importance of location factors was derived using Likert rating scale. The Polychoric Principal Component Analysis is used to identify the key factors in industrial location. The analysis validates the importance of fiscal incentives in industrial location.

Economic and political determinants of central fiscal transfers in India: A dynamic panel analysis of state level data

This article empirically examines economic and political determinants of the aggregated as well as the channel-specific Central transfers to states in a developing country like India. An annual panel data set for 22 Indian States for the period of 1980-81 to 2010-11 is used for this purpose. Considering non-availability of continuous data for the study period, States like Arunachal Pradesh, Chhattisgarh, Goa, Jharkhand, Mizoram and Uttaranchal are not considered in the study. Dynamic panel regression equations are specified to analyze the determinants of Central transfers. Various components of Central transfers are alternatively regressed on a set of economic-demographic and political variables like per-capita gross state domestic product, population, literacy rate, area, fiscal dependency, loyal voter, State election year dummy, political alignment and bargaining power. State-specific dummies are included in all models to control for the unobserved time-invariant State specific effects. Linear time trend (year) is also included in all equations, as some of time series variables used are found to be trend stationary. System generalized methods of moments (GMM) estimator with heteroskedastic corrected robust standard error is used to obtain coefficients. Post-estimation tests like the Sargan test for over-identifying restrictions and Arellano Bond autocorrelation tests at first differenced error are used for verifying the validity of model. The results suggest that all categories of Central transfers are affected by political factors, besides economic-demographic variables. The states having partisan alignment with the Centre and greater political bargaining power tend to receive larger per capita central transfers. While loyal voter variable has significant and positive effect on per capita discretionary grant, state election year dummy never emerges to be statistically significant. This indicates that the transfers in Indian case are mainly targeted to core voters than to create swing. Among the economic variables, potential influence arises from the fiscal requirement and level of service provisions in the state. Findings of the study are observed to be robust and immune to change of specifications from linear to log-linear and omission of special category states from the data set. Recommending formula-based transfers, bringing all components of transfers into formula net, objective assessment of non-plan revenue deficit grant and co-ordination among resource recommending agencies in designing weights and criteria would help to check political influence.

Revenue Mobilization Effort of Special Category States: The Case of Assam in North-east India

Liberal resource transfer from the centre to economically backward states in India has ensured overcoming the mismatch between revenue generated and expenditure commitments of the states. From the point of view of long-term fiscal sustainability of states, however, greater effort to generate enough resources as per the potential of individual states is important, which makes the issue of revenue effort significant. Based on secondary data, this article is an attempt to analyze revenue mobilization efforts of the Government of Assam during 1991–2010. By examining the issues of arrears of uncollected tax and non-tax revenue, cost of collection of different taxes and duties, and cost recovery of different services, the study confirms low-revenue efforts on the part of the state government. The time series regression analysis between ‘per-capita own tax revenue’ and ‘per capita GSDP of the state’ and ‘per-capita revenue expenditure of the state in the previous year’ also confirms low-revenue efforts, necessitating the need of extra tax effort on the part of the state government. JEL Classification: H20, H27, C4