Determining fiscal equalization transfers for elementary education to Indian States

Abstract

This study attempts to determine the fiscal equalization transfers for elementary education using data for 27 Indian States from 2011–12 to 2017–18 and panel data methodology, based on a model adapted from Australia’s expenditure equalization mechanism. It is found that States with larger fiscal capacity tend to spend more on elementary education and the existing transfers mechanism has failed to compensate the lagging States. Using the estimated values from the expenditure model and two benchmarks: all States’ average and top three States’ average, per student expenditure on elementary education, the State specific finance gap and total transfers need are computed. The results reveal that Bihar, West Bengal, Uttar Pradesh, Jharkhand, Madhya Pradesh and Maharashtra have a relatively large expenditure gap. Given the magnitude of the Centre's budget, the estimated additional transfers seem to be feasible. The findings of the study will be useful for policymakers and other stakeholders to create appropriate fiscal transfers strategies that can enable all Indian States to provide a standard level of elementary education.

Keywords:

• Fiscal equalization
• Australian transfer mechanism
• elementary education
• public education expenditure
• Indian States
• panel data methods

JEL CODE:

• I22
• H52
• H72
• H77
• J18

Acknowledgements

The first author acknowledges the University Grants Commission of India for providing Ph.D. Research fellowship. Both authors thank the anonymous referees of the journal for their valuable comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Majority of the transfers were unconditional with a small proportion being conditional/specific. Generally, the approach used by the FCs have been to equalize content by designing tax devolution that incorporates fiscal capacity distance. Occasionally, it considers expenditure side equalization in the revenue deficit grants. But the procedure is not consistent and robust.

2 The Right to Education Act (RTE), 2009 was implemented to provide free and compulsory elementary education to children aged between 6 and 14 years.

3 SSA is a centrally sponsored scheme introduced to universalised elementary education in India. In 2011–12, the centre- state resource sharing arrangement for SSA was 50–50.

4 We tried dummies for political parties in the initial estimation, but dropped them in the final estimation as they are not significant.

5 Transfer Requirement = [Benchmark Expenditure (−) Expenditure estimated by the model] (×) [Elementary school student population].

6 Feasibility of resource allocation is contingent on revenue side equalization, which is beyond the scope of this paper.

7 State wise calculations during 2011–12 to 2016–17 are available with authors on request.