The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Already in precarious shape, the financial health of India’s states took a turn for the worse in the late 1990s when state deficits and debt rose sharply. While India is among the world’s most decentralized economies, greater decentralization is not the root cause of this situation. Panel estimation techniques find evidence that the trend rise in deficits reflects problems of transfer dependence and moral hazard that undermine states’ incentives to control deficits.