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Fiscal Effects of Foreign Aid in a Federal System of Governance: The Case of India

Authors:Vinaya Swaroop
Non-Bank Author:Shikha Jha
Web Address:Public Services

Fiscal Effects of Foreign Aid in a Federal System of Governance: The Case of India." Shikha Jha and Vinaya Swaroop. Journal of Public Economics 77(3):307-330, 2000.

This paper models fiscal effects of foreign aid in a federal system of governance. Our main innovation is to incorporate the inter-governmental fiscal link in examining economic fungibility of foreign aid. The model is applied to the expenditure decisions of the central government of India. The two main findings are: (i) Foreign aid intended for development purposes merely substitutes for spending that the government would have undertaken anyway; the funds freed by aid are spent on non-development activities, and (ii) In passing earmarked external assistance to states, the central government makes a reduction in its transfers to states. These findings indicate that the central government=s expenditure choices are unaffected by external assistance. The implication for donors is that even though their projects may be associated with very high rates of economic return, they could be assisting the central government in financing something very different at the margin. For the state governments, the finding indicates that they may not be reaping the full benefits of externally procured assistance.  

Access to Dataset
  • Fiscal Effects of Foreign Aid Country Level Regressions (MS Excel file, 29kb)

  • Fiscal Effects of Foreign Aid State Level Regressions (MS Excel file, 81kb)

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