January 12–13, 1999
Co-hosted by the World Bank and
The Institute of Southeast Asian Studies
Abstracts of Papers Presented
Decentralization and Intergovernmental Fiscal Relations in India
Rakesh Mohan, National Council of Applied Economic Research
The paper reviews the institutions for subnational (state and local) public investment in India. At the state level, investments are largely financed by loans and grants from central government, which are allocated by the finance and planning commission. State governments are allowed to borrow, but require the authorization of central government if they have any outstanding debt to it. Since this is the case in all states (most central government grants are allocated in the guise of loans), the point is moot. The major fault of the current system is the absence of links between the viability of a project and its financial cost, and between investment and maintenance decisions. The situation at the local level is similar, though made worse by the uncertain status of local governments. Recent constitutional amendments have improved this situation, though local governments remain creatures of the states. The paper recommends reforming the current investment financing system notably through increased recourse to private finance (local bond market).