Indian Fiscal Federalism: Political Economy and Issues for Reform

India is a federal state where the institutions of fiscal federalism have been determined by a complex political, social and economic history, in addition to the guidelines imposed by its constitution and legal institutions. The institutional structure, within which tax, transfer and public spending programs are designed and implemented, can be an important tool for, or major impediment to, economic reform and development. Therefore, understanding how the fiscal federal structure works in India and the constraints given by its political economy are important inputs for analyzing the likely effects of reform. In this paper we begin the development of a model of fiscal federalism in the Indian case that allows for self-interested government decisions, political pressure, and imperfect instruments of control. We show how costly influence activities may depend on the federal fiscal structure in place in India.