Do Indian States Mimic,Compete or Interact in Local Public Spending? A Spatial Econometric Analysis

This paper analyses spatial interaction in public spending decisions across 22 Indian states during the period 1980–1981 to 2014–2015. In particular, we estimate interactive hypotheses for different proximities of states using a spatial panel data approach. The empirical results support strong spatial interaction and yardstick competition in public spending. Interactive behavior among the states has been found to be consistent and conditional on per capita income, fiscal transfers, infrastructure, literacy and population density. Interaction arising from yardstick competition significantly affects public spending decisions. The present study realizes the need for a well‐developed and comprehensive network to strengthen the interdependence in public spending among the states for higher welfare gain.