Intergovernmental Transfers: Rationale, Design and Indian Experience

Intergovernmental transfers have been employed in all federations to achieve a variety of political and economic objectives. However, an emphasis on economic objectives helps to focus the analysis on the ideal design of the transfer schemes and the departures from this can then be analyzed in terms of various non-economic (political) objectives. In this paper, we present the economic rationale for transfers, analyze their appropriate design to fulfill the stated economic objectives and, within this conceptual framework, evaluate some aspects of the prevailing transfer systems in India. We highlight some of the vertical and horizontal fiscal imbalances in the Indian federal system, and discuss how a transfer system might deal with them.