Spatial convergence in public expenditure across Indian states

Abstract

India, a quasi-federal structure specifies the provisions of federal transfers to sub-national governments to cushion their inadequate expenditure capacity. Observing this provision of federal transfers and large disparities in real per-capita expenditure, the present study explores evidence of convergence in total real per-capita expenditure and its three categories: education, health and development expenditure across Indian states. Results show that there exists conditional convergence in all expenditure categories. Federal transfers are helping to equalize the level of per-capita expenditure across sub-national governments. It is important to note that, not all types of federal transfers have equal impact on expenditure growth due to their varying distribution criteria. Formula transfers, devolved based on a composite formula, seem to be expenditure augmenting more than discretionary components of the federal transfers. The former category also ensures faster convergence as compared to the latter. Literature on strategic interaction among different jurisdiction indicates that public expenditure in one jurisdiction is not independent of public expenditure of neighbouring jurisdictions. Using the spatial econometrics approach, this study analyses such spill-over effect in public expenditure. Econometric estimates suggest significant spatial spill-overs which extend beyond the borders of state and effect expenditure growth in other states. Results are robust to various model specifications.