Disaggregated impact of intergovernmental transfers on government expenditure in India: a study of general and special category states

Purpose The main objective of this study is to investigate the determinants of net government expenditure of selected “22 Indian States” and public debt from the period 1991 to 2023. The study also examines the comparative effect of central transfers between India's special category states (SCS) and general category states (GCS). Design/methodology/approach This study employs several Cross-Sectional Dependency (CSD) tests for the homogeneity of the sample units. To account the CSD among the units, the study employs the second-generation CIPS unit root test for the stationarity process of the variables. The Kao and Pedroni cointegration are employed to test the long-run cointegration of the variables. Finally, for the result estimation, the highly celebrated autoregressive distributed lag (ARDL) in the panel framework is employed along with the cross-sectional-ARDL, fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) estimator in the robustness analysis. Findings These results demonstrate that all the determinants contribute to net government expenditure positively both in the short and in the long run are able to vary in statistical significance. Moreover, the study results show that central transfer's effect is much higher in the SCS than in the GCS. Research limitations/implications Although the study's emphasis on 24 Indian states may seem selective, the sample was selected to guarantee data availability and comparability over time. These states represent a diverse mix in terms of economic structure, development levels and policy environments, thereby providing a meaningful basis for analysis. However, the findings may not be entirely generalizable to all Indian states or Union Territories. Future research could expand the sample to include additional states or extend the analysis to more recent time periods, subject to data availability. Such extensions would enhance the robustness and external validity of the conclusions drawn in this study. Moreover, this study focuses on quantitative analysis, future work could incorporate qualitative methods such as state-level case studies or stakeholder interviews to further illuminate the mechanisms behind observed fiscal behaviour. Originality/value To the best of our awareness, this investigation represents the initial effort to explore the primary determinants of net government spending in India at the state level. Exploring the comparative effectiveness of central transfers in SCS and GCS further contributes to the study's novelty.