IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v44y2022i3p701-721.html
   My bibliography  Save this article

The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India

Author

Listed:
  • Mahambare, Vidya
  • Dhanaraj, Sowmya
  • Mittal, Pragati

Abstract

Farm debt waivers which are meant to be a one-time settlement of loans have become common in India. This paper finds, after controlling for variables related to farming distress, that the timing of waiver announcements by state governments between 2001-02 and 2018–19 is associated with the timing of elections. This points toward a pattern of policy manipulation that suggests election-year targeting of the largest special interest group in India, namely farming households. The debt waivers, either announced as policies by incumbent governments prior to upcoming elections or as election pledges by political parties which are fulfilled after winning elections, are unanticipated shocks to government revenue expenditure. We find that the waivers are associated with an increased revenue deficit, which is accommodated by a nearly 1/3rd cut in capital outlay to control the fiscal deficit, given the presence of a fiscal rule. Given its path dependence, lower capital expenditure also reduces the quality of government spending in subsequent years.

Suggested Citation

  • Mahambare, Vidya & Dhanaraj, Sowmya & Mittal, Pragati, 2022. "The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India," Journal of Policy Modeling, Elsevier, vol. 44(3), pages 701-721.
    • Handle: RePEc:eee:jpolmo:v:44:y:2022:i:3:p:701-721
    DOI: 10.1016/j.jpolmod.2022.05.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893822000254
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2022.05.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Brender, Adi & Drazen, Allan, 2005. "Political budget cycles in new versus established democracies," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1271-1295, October.
    2. Sudha Narayanan & Nirupam Mehrotra, 2019. "Loan Waivers and Bank Credit: Reflections on the Evidence and the Way Forward," Vikalpa: The Journal for Decision Makers, , vol. 44(4), pages 198-210, December.
    3. Yener Altunbaş & John Thornton, 2017. "Why Do Countries Adopt Fiscal Rules?," Manchester School, University of Manchester, vol. 85(1), pages 65-87, January.
    4. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
    5. Shanna Rose, 2006. "Do fiscal rules dampen the political business cycle?," Public Choice, Springer, vol. 128(3), pages 407-431, September.
    6. Eric Dubois, 2016. "Political business cycles 40 years after Nordhaus," Public Choice, Springer, vol. 166(1), pages 235-259, January.
    7. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-2220, December.
    8. Hibbs, Douglas A., 1977. "Political Parties and Macroeconomic Policy," American Political Science Review, Cambridge University Press, vol. 71(4), pages 1467-1487, December.
    9. Pinaki Chakraborty & Bharatee Bhusana Dash, 2017. "Fiscal Reforms, Fiscal Rule, and Development Spending: How Indian States Have Performed?," Public Budgeting & Finance, Wiley Blackwell, vol. 37(4), pages 111-133, December.
    10. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.
    11. Bonfatti, Andrea & Forni, Lorenzo, 2019. "Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities," European Journal of Political Economy, Elsevier, vol. 60(C).
    12. Brender, Adi, 2003. "The effect of fiscal performance on local government election results in Israel: 1989-1998," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2187-2205, September.
    13. Cesi Cruz & Philip Keefer & Julien Labonne & Francesco Trebbi, 2018. "Making Policies Matter: Voter Responses to Campaign Promises," NBER Working Papers 24785, National Bureau of Economic Research, Inc.
    14. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    15. Pradeep Chhibber, 1995. "Political parties, electoral competition, government expenditures and economic reform in India," Journal of Development Studies, Taylor & Francis Journals, vol. 32(1), pages 74-96.
    16. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 1-16.
    17. Min, Brian & Golden, Miriam, 2014. "Electoral cycles in electricity losses in India," Energy Policy, Elsevier, vol. 65(C), pages 619-625.
    18. Storm, Servaas, 1994. "The macroeconomic impact of agricultural policy: A CGE analysis for India," Journal of Policy Modeling, Elsevier, vol. 16(1), pages 55-95, February.
    19. Drazen, Allan & Eslava, Marcela, 2010. "Electoral manipulation via voter-friendly spending: Theory and evidence," Journal of Development Economics, Elsevier, vol. 92(1), pages 39-52, May.
    20. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 651-678.
    21. Mahdavi, Saeid, 2004. "Shifts in the Composition of Government Spending in Response to External Debt Burden," World Development, Elsevier, vol. 32(7), pages 1139-1157, July.
    22. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    23. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, December.
    24. Dilip Mookherjee & Pranab K. Bardhan, 2000. "Capture and Governance at Local and National Levels," American Economic Review, American Economic Association, vol. 90(2), pages 135-139, May.
    25. Saptarshi Mukherjee & Krishnamurthy Subramanian & Prasanna Tantri, 2018. "Borrowers' Distress and Debt Relief: Evidence from a Natural Experiment," Journal of Law and Economics, University of Chicago Press, vol. 61(4), pages 607-635.
    26. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
    27. Mr. Sanjeev Gupta & Miss Estelle X Liu & Mr. Carlos Mulas-Granados, 2015. "Now or Later? The Political Economy of Public Investment in Democracies," IMF Working Papers 2015/175, International Monetary Fund.
    28. Gene M. Grossman & Elhanan Helpman, 1996. "Electoral Competition and Special Interest Politics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(2), pages 265-286.
    29. Martin Kanz, 2016. "What Does Debt Relief Do for Development? Evidence from India's Bailout for Rural Households," American Economic Journal: Applied Economics, American Economic Association, vol. 8(4), pages 66-99, October.
    30. Khemani, Stuti, 2004. "Political cycles in a developing economy: effect of elections in the Indian States," Journal of Development Economics, Elsevier, vol. 73(1), pages 125-154, February.
    31. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Post-Print hal-01291401, HAL.
    32. Akram, Vaseem & Rath, Badri Narayan, 2020. "What do we know about fiscal sustainability across Indian states?," Economic Modelling, Elsevier, vol. 87(C), pages 307-321.
    33. Hauptmeier, Sebastian & Sanchez-Fuentes, A. Jesus & Schuknecht, Ludger, 2011. "Towards expenditure rules and fiscal sanity in the euro area," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 597-617, July.
    34. Yashobanta Parida & Devi Prasad Dash & Parul Bhardwaj & Joyita Roy Chowdhury, 2018. "Effects of Drought and Flood on Farmer Suicides in Indian States: An Empirical Analysis," Economics of Disasters and Climate Change, Springer, vol. 2(2), pages 159-180, July.
    35. Girish Bahal, 2020. "Estimating the Impact of Welfare Programs on Agricultural Output: Evidence from India," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 982-998, May.
    36. Bram Gootjes & Jakob Haan & Richard Jong-A-Pin, 2021. "Do fiscal rules constrain political budget cycles?," Public Choice, Springer, vol. 188(1), pages 1-30, July.
    37. Alberto Alesina & Matteo Paradisi, 2017. "Political budget cycles: Evidence from Italian cities," Economics and Politics, Wiley Blackwell, vol. 29(2), pages 157-177, July.
    38. Chaudhuri, Kausik & Rao, R. Kavita, 2004. "Output fluctuations in Indian agriculture and industry: a reexamination," Journal of Policy Modeling, Elsevier, vol. 26(2), pages 223-237, February.
    39. William D. Nordhaus, 1975. "The Political Business Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(2), pages 169-190.
    40. Till Cordes & Mr. Tidiane Kinda & Ms. Priscilla S Muthoora & Miss Anke Weber, 2015. "Expenditure Rules: Effective Tools for Sound Fiscal Policy?," IMF Working Papers 2015/029, International Monetary Fund.
    41. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).
    2. Linda G. Veiga & Georgios Efthyvoulou & Atsuyoshi Morozumi, 2018. "Political Budget Cycles: Conditioning Factors and New Evidence," NIPE Working Papers 21/2018, NIPE - Universidade do Minho.
    3. George Petrakos & Konstantinos Rontos & Luca Salvati & Chara Vavoura & Ioannis Vavouras, 2022. "Toward a political budget cycle? Unveiling long-term latent paths in Greece," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(5), pages 3379-3394, October.
    4. Dirk Foremny & Ronny Freier & Marc-Daniel Moessinger & Mustafa Yeter, 2018. "Overlapping political budget cycles," Public Choice, Springer, vol. 177(1), pages 1-27, October.
    5. Le Moglie, Marco & Turati, Gilberto, 2019. "Electoral cycle bias in the media coverage of corruption news," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 140-157.
    6. Bonfatti, Andrea & Forni, Lorenzo, 2019. "Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities," European Journal of Political Economy, Elsevier, vol. 60(C).
    7. Klein, Fabio Alvim & Sakurai, Sergio Naruhiko, 2015. "Term limits and political budget cycles at the local level: evidence from a young democracy," European Journal of Political Economy, Elsevier, vol. 37(C), pages 21-36.
    8. Andrea Bonfatti & Lorenzo Forni, 2016. "Do fiscal rules reduce the political cycle? Evidence from Italian municipalities," "Marco Fanno" Working Papers 0208, Dipartimento di Scienze Economiche "Marco Fanno".
    9. Margarita Katsimi & Vassilis Sarantides, 2015. "Public investment and reelection prospects in developed countries," Southern Economic Journal, John Wiley & Sons, vol. 82(2), pages 471-500, October.
    10. Florian Dorn, 2021. "Elections and Government Efficiency," ifo Working Paper Series 363, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    11. Ziogas, Thanasis & Panagiotidis, Theodore, 2021. "Revisiting the political economy of fiscal adjustments," Journal of International Money and Finance, Elsevier, vol. 111(C).
    12. Florian Haelg & Niklas Potrafke & Jan-Egbert Sturm, 2022. "The determinants of social expenditures in OECD countries," Public Choice, Springer, vol. 193(3), pages 233-261, December.
    13. Andrew Q. Philips, 2016. "Seeing the forest through the trees: a meta-analysis of political budget cycles," Public Choice, Springer, vol. 168(3), pages 313-341, September.
    14. Foremny, Dirk & Freier, Ronny & Moessinger, Marc-Daniel & Yeter, Mustafa, 2014. "Overlapping political budget cycles in the legislative and the executive," ZEW Discussion Papers 14-099, ZEW - Leibniz Centre for European Economic Research.
    15. Clemens Fuest & Klaus Gründler & Niklas Potrafke & Fabian Ruthardt, 2021. "Read My Lips? Taxes and Elections," EconPol Working Paper 71, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    16. Baldi, Guido & Forster, Stephan, 2019. "Political Budget Cycles: Evidence from Swiss Cantons," EconStor Preprints 195930, ZBW - Leibniz Information Centre for Economics.
    17. Vítor Castro & Rodrigo Martins, 2018. "The Electoral Dynamics of Human Development," Journal of Development Studies, Taylor & Francis Journals, vol. 54(1), pages 191-211, January.
    18. Bram Gootjes & Jakob Haan & Richard Jong-A-Pin, 2021. "Do fiscal rules constrain political budget cycles?," Public Choice, Springer, vol. 188(1), pages 1-30, July.
    19. Savu, A., 2021. "The Local Political Economy of Austerity: Lessons from Hospital Closures in Romania," Cambridge Working Papers in Economics 2120, Faculty of Economics, University of Cambridge.
    20. Vergne, Clémence, 2009. "Democracy, elections and allocation of public expenditures in developing countries," European Journal of Political Economy, Elsevier, vol. 25(1), pages 63-77, March.

    More about this item

    Keywords

    Farm debt waivers; Agriculture policy; Political budget cycle; Electoral promises; Fiscal rules;
    All these keywords.

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:44:y:2022:i:3:p:701-721. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.