An Empirical Analysis of Asymmetry and Threshold Effect of Intergovernmental Grants in India: A Panel Data Analysis

The present study empirically examines the effect of intergovernmental grants on the expenditure of state government in India. Using a panel data set during 1980-1981 to 2009-2010, the flypaper effect was found in the case of total and revenue expenditure and also an evidence of an asymmetric effect to change (increase or decrease) in grant variable for entire sample period. Again, to understand the flypaper and asymmetry effect in the pre- and post-reform period, this study uses the data from 1980-1981 to 1989-1990 as a pre-reform period and 1991-1992 to 2009-2010 as a post-reform period. The results of the panel regression model and two-stage least squares (2SLS) method show that there is an absence of flypaper effect except capital expenditure in the pre-reform period, whereas there exists an evidence of flypaper effect except capital expenditure in the post-reform period. Similarly, the responses of all the expenditure accounts are found to be asymmetric except capital expenditure. Further, in order to find the non-linear effect, this study employs Hansen (1999) threshold regression model to measure the threshold effect of intergovernmental grants on total expenditure of state government. The threshold regression results indicate that lower-income state grants have a stronger flypaper effect than middle- and higher-income states.