Federalism in India: Political Economy and Reform

The objective of this paper is to examine the nature of India’s federal system, the reforms that have occurred over the last ten years, and what remains to be done. We begin by briefly describing the key federal institutions in India, focusing particularly on the mechanisms for center-state transfers. These transfers are quite large, and are the major explicit method for dealing with inequalities across constituent units of the federation. We then examine the evidence on how India’s political economy has affected the practical workings of the transfer mechanisms. We next describe recent and potential reforms of the center-state transfer system, in the context of evidence of widening interstate economic disparities. This is followed by a consideration of broader actual and possible reforms in India’s federal institutions, including tax assignments and local government reform. We conclude by relating our discussion to other dimensions of economic reform in India.