Focus
Against the backdrop of the Covid-19 pandemic, the paper explores the empirical evidence for flypaper effects in the ecological fiscal space in India. Using the panel data models, we analyse whether the impact of intergovernmental fiscal transfers or a state’s own revenue determines the expenditure commitments on ecology at the state level. The econometric analysis shows that the aggregate intergovernmental fiscal transfers rather than a state’s own income determine the ecological expenditure at sub-national government levels. The evidence for the efficacy of flypaper effects either stem from bureaucratic fiscal behaviour or the fiscal illusion of the economic agents about the exogeneity of ecological fiscal space. The results hold when the models are controlled for ecological outcomes and demographic variables. However, at the disaggregated levels of intergovernmental fiscal transfers – grants and tax devolution – the evidence for flypaper effects is mixed. This result has policy implications and provides empirical evidence to the Ministry to Finance about the efficacy of intergovernmental transfers on ecological expenditure at the State government level. The paper was presented at the International Institute of Public Finance Meetings 2021, at University of Iceland, Reykjavik (online), 18 August 2021, and also in the NIPFP-IIPF international conference on Public Finance, 29 June 2021. This paper was published as Working Paper at the Levy Economics Institute of Bard College, New York, in January 2022.
