Center-State Political Transfer Cycles in India

This paper attempts to answer two basic questions -- first, whether an election affects the transfers to the states through different component heads such as - grants from the center, loan from the center, finance commission transfer and grants in aids. Secondly, whether different transfer variables and the characteristics of the incumbent government will be able to create the possibility of retaining the power? Using the Arellano-Bond dynamic panel-data estimation methods (GMM) on a balanced panel data from 1980-2010 for 16 Indian states, we find that the right wing and coalition government is less likely to transfer the resources to the states. However, the state level ruling party which is either the same party at the center or ally get more transfers from the center than a non-coalition ruling party. Unlike the political budget cycles in the most literatures, the political transfer cycle is visible in the post-election period, which supports the possibility that while the announcements and promises are made before the election, the actual realization is observed only after the election. This may also be on account of attracting votes in the legislative assembly elections at the state level. The paper is extended to the logit and probit specifications of the model. It is found that; higher voters’ turnout in the state is more likely to win the election. Further, inflation reduces the possibility of winning the election, whereas more experienced government has a higher probability of winning the election. Moreover, our result also show that, the right wing government is more likely to win the election as they also behave more opportunistically and the coalition government where states are its allies lowers the possibility of winning the election.