Can Decentralization Limit Government Growth? A Test of the Leviathan Hypothesis for the Indian Federation

Decentralization in India has only recently gained momentum,particularly with the 73^rd and 74^th amendments in 1992, whichextended constitutional recognition to local governments. Againstthis backdrop, this article examines the Leviathan hypothesisput forth by Brennan and Buchanan for the Indian economy. Thehypothesis asserts that total government intrusion into theeconomy should be smaller when taxes and expenditure are decentralized.A caveat to the Leviathan hypothesis is the Collusion hypothesis,which suggests that the disciplining impact of decentralizationcan be nullified if revenue decentralization does not keep pacewith expenditure decentralization and if there is an increasein dependence on intergovernmental grants. Empirical testingfor the Indian federation vindicates both hypotheses, thus suggestingthat a two-pronged strategy is required if government growthis to be checked. More effort must be made to strengthen localbodies. This must be accompanied by a close look at intergovernmentaltransfers and by an attempt to restrict their growth.