4.1 IMPROVING SUB-NATIONAL FISCAL RESPONSIBILITY IN THE FEDERAL CONTEXT OF INDIA

Second generation theories of federalism, such as those of ‘market-preserving ’ federalism suggest that, given favourable conditions, decentralization and federalism can provide better incentives to governments to support market development and economic prosperity than centralization. The main preconditions are (i) a nationwide common market, (ii) competition among sub-national units and (iii) no expectation of central bailouts on the part of the sub-national governments. The improvement occurs through minimization of inefficient government interventions which may drive away valuable factors of production, as well as through strong links between revenues and expenditures. In the absence of bailouts, these create better incentives for economic prosperity that would yield greater revenues and thus allow higher expenditures. The superior performanc