The Evolution of Fiscal Decentralization in China and India: A Comparative Study of Design and Performance

Abstract

In this article, we compare and contrast the design and performance of China and India’s intergovernmental fiscal systems. We find that there are remarkable similarities in the design and performance of China and India’s intergovernmental fiscal systems. More specifically, both countries have highly decentralized expenditures assignments and highly centralized revenue assignments. As a result, sub-national governments in both countries must rely on fiscal transfers to finance their assigned functions. Finally, there is considerable off the books and hidden borrowing by sub-national governments in both countries. We also find that there are considerable and growing disparities in the rate of expenditure decentralization among sub-national governments within each country. Lack fiscal discipline and growing fiscal disparities among sub-national governments create risks to future economic growth and to social cohesion, absent policy reforms to address these issues.