Fiscal transfers based on inputs or outcomes? Lessons from the Twelfth and Thirteenth Finance Commission in India.

Background: There is limited empirical evidence about the efficacy of fiscal transfers for a specific purpose, including for health which represents an important source of funds for the delivery of public services especially in large populous countries such as India.
Objective: To examine two distinct methodologies for allocating specific-purpose centre-to-state transfers, one using an input-based formula focused on equity and the other using an outcome-based formula focused on performance.
Materials and Methods: We examine the Twelfth Finance Commission (12FC)'s use of Equalization Grants for Health (EGH) as an input-based formula and the Thirteenth Finance Commission (13FC)'s use of Incentive Grants for Health (IGH) as an outcome-based formula. We simulate and replicate the allocation of these two transfer methodologies and examine the consequences of these fiscal transfer mechanisms.
Results: The EGH placed conditions for releasing funds, but states varied in their ability to meet those conditions, and hence their allocations varied, eg, Madhya Pradesh received 100% and Odisha 67% of its expected allocation. Due to the design of the IGH formula, IGH allocations were unequally distributed and highly concentrated in 4 states (Manipur, Sikkim, Tamil Nadu, Nagaland), which received over half the national IGH allocation.
Discussion: The EGH had limited impact in achieving equalization, whereas the IGH rewards were concentrated in states which were already doing better. Greater transparency and accountability of centre-to-state allocations and specifically their methodologies are needed to ensure that allocation objectives are aligned to performance.
(© 2017 The Authors. The International Journal of Health Planning and Management published by John Wiley & Sons Ltd.)