A political economy of sub-national government spending in India

Research on state government spending in India shows that difference in political cohesiveness of the ruling political entity affects its spending choices. However, the evidence is not completely conclusive and there is a lack of a theoretical model backing the analysis. Also, economists and political scientists seem to prefer different econometric methods. To address these issues, I build a theoretical model of state government spending and test the resulting predictions using different econometric approaches thereby lending robustness to results. Based on the data for 17 Indian states over 20 years, I find that politically less cohesive governments spend more on education and less on agriculture than their more cohesive counterparts. There is some evidence on electoral cycles in health expenditure and a BJP or a Congress government means reduced social expenditure. Further, the lower are the credit constraints, as measured by higher credit deposit ratio, the lower is the probability of having a coalition government.