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The author would like to thank Tony Annett, Kalpana Kochhar, and Axel Schimmelpfennig for their helpful comments and suggestions, and Jaroslava Kypetova for her work in the international data on decentralization. Finally, warm thanks to Corinne Danklou for her editorial assistance.
The only exception is sales taxes due to intensified collection effort before the planned introduction of state level VAT.
Using a between-effects OLS regression using the period average between 1985 and 2000.
The Fifth Pay Commission recommended a 30 percent increase in civil servant salaries and a corresponding reduction in the work force. Only the pay increase was implemented.
SFCs’ capital adequacy ratio is negative (22 percent), and nonperforming assets range from 30 percent to 90 percent. The combined power sector losses are 1 percent of GDP.
Except Kerala, Punjab, and Uttar Pradesh.
Population, area, the incidence of poverty, per capita income levels, and the number of local government units in a state were insignificant.
Subnational fiscal imbalances widened in the transition economies as revenue collapsed in the move to a market-based system.
Revenue autonomy is approximated by the ratio of tax revenue to total subnational revenue.
In Denmark and Hungary shared taxes are distributed on a derivation basis.
See Rao and Singh (2000).
The index developed by Rodden (2002) assesses the extent to which higher levels of government place constraints on subnational borrowing and whether subnational governments can tap financing via their ownership of public enterprises and banks.
Except when transfers are excluded. The inability of states to fund their own-expenditure without central government transfers results in higher state-level deficits.
Agri represents the share of agriculture in GSDP and poverty represents the share of the states’ population living below the nationally defined poverty line.
TD is unlikely to be endogenous because the states’ share of central is fixed at five-year intervals by the Finance Commission while grants are allocated by a formula that assigns a total weight of 95 percent to state-specific characteristics.
In the random effects model, the first-stage regressions found that the following variables were significant: TD, TDt-1, centralloanst-1, and staterev.
Owing to the small cross-section size, the model was tested using a variety of techniques to check the consistency of the results.
Model 4 was also run using pooled OLS and fixed effects estimators and the results were similar to those presented for the random effects model in Table 6.
The model was rerun for 1997-2000 and the results are similar to those presented for model 5.
This is achieved by using first differences to remove fixed-effects in the error terms, and instrumental variable estimation, where the instruments are the lagged explanatory variables (in differences) and the dependent variable lagged twice.
The corresponding ratio for the deficit to GSDP is 0.4 percent.
In contrast to preliminary OLS regressions in IMF (2003) we do not find robust empirical evidence that states who progressed further with economic reform experienced greater fiscal stress.