Restricted and unrestricted fiscal grants and tax effort of panchayats in India

Raghbendra Jha, Hari K. Nagarajan, Anirudh Tagat

Research output: Contribution to journalArticlepeer-review


The impact of restricted and unrestricted fiscal grants on tax effort of panchayats is examined using nationally representative panel data on finances. Three pathways are proposed through which these impacts accrue: wages, profits, and incentives. In order to deal with the simultaneities of grants received and taxation, a system of equations is estimated simultaneously, where the first stage equations predict the grants. The results show that a wage impact on taxation exists, but is very small and the productivity impact of grants on taxes is negligible. This means that incentive effects associated with the specifics of the intergovernmental fiscal system in the states are the main determinant of village taxation. Several policy conclusions are advanced.

Original languageEnglish
Pages (from-to)68-75
Number of pages8
JournalEconomic and Political Weekly
Issue number32
Publication statusPublished - 10 Aug 2019


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