ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Ecological Fiscal Transfers and State-level Budgetary Spending in India

Analysing the Flypaper Effects

The empirical evidence of flypaper effects in the ecological fiscal spending in India is examined. Using the panel data models, it is analysed whether the intergovernmental fiscal transfers, or the states’ own income, determine the expenditure commitments on ecology at the state level. The econometric results show that the intergovernmental fiscal transfers rather than the states’ own income determine ecological expenditure at subnational levels in India. The results hold when the models are controlled for ecological outcomes and demographic variables.

This article was presented at the International Institute of Public Finance (IIPF) 2021 meetings organised by the University of Iceland. Thanks are due to the discussant of the article and the session participants of IIPF meetings for their valuable comments and suggestions.

With the progress of fiscal decentralisation, many countries have focused on environmental commitments at the subnational government level. The “principle of subsidiarity” says that the responsibility for providing a particular service should be assigned to the jurisdiction “closest to people.” Such decentralised decisions in climate change commitments are getting attention worldwide ex post Paris accord on climate change. However, the inter-jurisdictional competition to attract mobile capital by trading (lowering) environmental regulations lead to “race to the bottom” and “pollution havens.” Empirical evidence reveals this continuous tension between the “principle of subsidiarity” and the “race to the bottom.”

In the intergovernmental fiscal framework, three functions of environmental quality have been developed. The first considers environmental quality as a pure “international” public good for which a global solution is required, irrespective of its location. The second case considers environmental quality as a pure “local public good.” The “principle of subsidiarity” is directly applicable to this second case. The third case, which is most common in practice, deals with the effects of inter-jurisdictional externalities, including water and air pollution.

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Updated On : 10th Apr, 2023
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