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Political economy of sub-national spending in India

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  • Parag, Waknis

Abstract

Many states in India have time and again elected a multiparty or a coalition government. Research so far has shown that these differences in political cohesiveness of the ruling political entity has influenced the spending choices of the state governments. However, the evidence is not completely conclusive. Different authors have used different measures of political fragmentation deriving opposite results for their effect on state government spending. There are also differences in the way economists and political scientists have dealt with the issue econometrically. This is coupled with a lack of a theoretical model of choice of public spending under alternative political regimes in the Indian context. I address these gaps in the literature by first building a theoretical model of spending policies of a state government. In this model, extensiveness and intensity of credit constraints influences equilibrium voting policies and hence the spending policies of governments in power. The resulting predictions are then comprehensively tested using data on seventeen Indian states over the period of twenty years. The econometric analysis provides substantive evidence for the importance of political factors in determining government spending. Specifically, we find that that politically less cohesive governments tend to spend more on education than their more cohesive counterparts. There is also some evidence on electoral cycles in health expenditure. Further, the analysis supports the model’s underlying notion of credit constrained voters determining the spending policies of the government via the degree of political cohesiveness of the government in power.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36813.

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Date of creation: 20 Feb 2012
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Handle: RePEc:pra:mprapa:36813

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Keywords: political economy; government spending; credit constraints and voting; differentiated election platforms; coalition governments in India;

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  1. Tandon, Sharad, 2012. "Economic reform, voting, and local political intervention: Evidence from India," Journal of Development Economics, Elsevier, vol. 97(2), pages 221-231.
  2. Kausik Chaudhuri & Sugato Dasgupta, 2006. "The political determinants of fiscal policies in the states of India: An empirical investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 42(4), pages 640-661.
  3. Parag Waknis, 2011. "Endogenous Monetary Policy: A Leviathan Central Bank in a Lagos-Wright Economy," Working papers 2011-20, University of Connecticut, Department of Economics.
  4. Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2011. "Has India emerged? Business cycle facts from a transitioning economy," Working Papers 11/88, National Institute of Public Finance and Policy.
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