Intergovernmental Fiscal Transfers and Tax Collection of Indian States: Estimation from Panel Data Models

This study tries to empirically estimate the effects of the composition of intergovernmental transfers on tax collection across the Indian states by using panel regression model. As intergovernmental transfers constitute almost 47 per cent in total revenue of the states, it could play a vital role in states’ own tax collection. The impact of different channels of federal transfers on tax capacities is examined among 25 Indian states over the period from 1991-92 to 2017-18. The study also attempted to capture the asymmetric effect of various forms of transfers, but findings reveal that only state plan grant has a significant effect on its own tax collection. The empirical evidence suggests that the composition of intergovernmental transfers has a dampening effect on states’ own tax revenue. Apart from transfers’ variables, the study incorporates socio-economic and certain political variables to estimate states’ own tax collections.