Public Expenditure Quality of States for Education and Health, Does Rationalisation of Grants Matter?

While the award period of the Fifteenth Finance Commission (FC-XV) has begun, the issues associated with fiscal autonomy of States and their spending priorities consequent upon the significant compositional shift in intergovernmental fiscal transfers as recommended by the Fourteenth Finance Commission (FC-XIV) continue to remain a centre of debate and discussion in the literature on India’s fiscal federalism. The present paper adds to the existing literature on this topic in that it attempts to examine the impact of this compositional shift in intergovernmental fiscal transfers on the quality of public expenditures of States for two most basic services, namely, elementary education and rural healthcare which remain amongst the top most priorities of the Central Government in terms of allocations under Centrally Sponsored Schemes. The analysis of this paper reveals that the majority of States have generally performed better in terms of their public expenditure effectiveness and efficiency indices as compared to adequacy index, though most of the States depicted an increase in their public expenditure adequacy indices from pre-rationalisation period to post-rationalisation period. The trend analysis as well as the regression estimation results seem to suggest a positive impact of compositional shift in intergovernmental fiscal transfers in favour of untied grants on States’ public expenditure adequacy. This, however, has to be complemented by good governance at the State level in order to realise the full impact of Central transfers to States.