FEDERAL FISCAL RELATIONS IN INDIA - ISSUE OF HORIZONTAL TRANSFERS

Devising optimal criteria for federal fiscal transfers to reduce fisca l imbalances across the states has always been a demanding job in Indi a. In particular, two aspects that have become perennial sources of co ntroversy are: the disintegrated componentwise approach, and the near- subjective assignment of weights to factors determining the horizontal shares of states Given that the reduction of horizontal fiscal inequi ty is an important objective of the federal transfers, the study propo ses a fiscal behavioural model to help identification of the criteria and derive weights for deciding the revenue shares, based on their obs erved degree of association with the fiscal balance of states. The app roach is illustrated by estimating the model using panel data.