Fiscal federalism in India: Evidence from state revenues and transfers

Abstract

This study examines the dynamics of fiscal federalism in India by analysing state-level revenue generation and intergovernmental fiscal transfers. Using secondary data from sources such as the Reserve Bank of India’s State Finances: A Study of Budgets, Union and State Budget documents, Finance Commission reports, and NITI Aayog databases for the period 2022–23 to 2024–25, the study evaluates disparities in fiscal capacity across selected Indian states. A descriptive and empirical approach is employed to analyse patterns in own tax revenue, share in central taxes, non-tax revenue, and grants. Inequality in fiscal capacity is measured using the Gini coefficient and Theil index, while correlation analysis is applied to examine relationships among key fiscal variables. The results reveal significant inter-state disparities in revenue mobilization and fiscal autonomy. Economically advanced states such as Maharashtra, Karnataka, and Gujarat demonstrate stronger internal revenue generation and greater fiscal self-reliance, whereas states such as Bihar and Uttar Pradesh exhibit higher dependence on central transfers and grants. Inequality measures indicate moderate to high disparities in tax revenues and fiscal transfers, with grants showing the highest level of concentration. Correlation results further confirm a strong positive relationship between total tax revenue and own tax revenue, alongside a negative association between states’ revenue autonomy and dependence on central tax devolution. The findings highlight persistent structural asymmetries in India’s fiscal federal framework, where fiscal decentralization coexists with continued vertical and horizontal imbalances. The study underscores the need for policy reforms aimed at strengthening states’ revenue mobilization capacity, rationalizing intergovernmental transfer mechanisms, and promoting a more balanced system of cooperative federalism. By integrating empirical fiscal analysis with policy insights, the study contributes to the evolving literature on fiscal federalism and provides evidence-based recommendations for improving equity and efficiency in India’s intergovernmental fiscal relations.