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Contributions to the exchequer funds by state level public sector enterprises: does political alignment matter?

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Abstract

Regular payments or contributions to states’ exchequer funds are mandated for state level public sector enterprises (SLPEs) in most states in India. However, in the absence of a regular mechanism to ensure timely payments, the contributions are abysmally poor. In most SLPEs, the situation is driven by the presence of soft budget constraints and strong financial support from the state governments. The current study analyses the effect of political factors on the contribution that SLPEs make to the state governments’ exchequer funds. Using different econometric methods, the study finds that SLPEs located in assembly constituencies that are politically aligned with the state government, make frequent and larger contributions to the exchequer funds. Surprisingly, the subsidies provided to the SLPEs by state governments are not driven by political alignment between the state government and the constituency where the enterprise is located. In fact, subsidies compensate for the contributions to the extent that there is no effect of political alignment on net contributions (contributions–subsidies) by SLPEs to state governments. Finally, political alignment has a strong influence on the relative share of contributions made by SLPEs to state governments vis-à-vis the centre. These results are robust across different model specifications.

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Notes

  1. Source: http://www.bbc.com/news/world-south-asia-13692575 (Last accessed date: August 24, 2017).

  2. Source: http://archive.indianexpress.com/news/all-political-parties-are-corrupt-believe-86---indians-transparency-international-survey/1139640/ (Last accessed date: August 24, 2017).

  3. If it steps down the party with the second highest number of votes is given a chance to form the government and so on.

  4. We have to track elections for 4 years before the period of analysis (2007–2009). For instance, if state A has its elections in 2008, then the political variables for the year 2007 will be the variables relevant to the previous government that came to power at most as early as 2003. Hence, we collect political data for all state level elections between 2003 and 2009.

  5. Kumar (2017) focuses on the private sector. However, the distortion will not be less for public sector enterprises. The double agent problem in state owned enterprises (citizens are owners who select the government -agent 1 which in turn appoints the manager-agent 2) makes these enterprises more susceptible to political interference and external business environment.

  6. Source: http://indiatoday.intoday.in/story/india-psu-exchequer-manmohan-singh-investment-special-dividend/1/225955.html (Last accessed date: August 24, 2017).

  7. Source: http://indianexpress.com/article/business/business-others/finmin-asks-central-psus-to-pay-30-dividend-issue-bonus-shares/ (Last accessed date: August 24, 2017).

  8. Source: http://www.odisha.gov.in/finance/pdf/2016/3980.pdf (Last accessed date: August 24, 2017).

  9. Source: http://www.livemint.com/Industry/S9m31VoY9xzEN6h1qieuwO/16-of-22-public-sector-banks-skip-dividend-in-FY16-on-mounti.html (Last accessed date: August 24, 2017).

  10. Source: http://www.financialexpress.com/opinion/why-narendra-modi-govt-has-to-be-careful-about-reviving-psus/269549/ (Last accessed date: August 24, 2017).

  11. Calculated from the dataset.

  12. See Table 2 row 2 for the exact definition of the measure.

  13. Since the second stage is conditioned on the first stage dependent variable taking a unit value, the number of observations in the second stage will reduce considerably.

  14. The two parts model is directly comparable to the sample selection model suggested by Heckman (1979) in which two stages are used: probit model in the first stage and an OLS in the second stage. However, Heckman’s model is applied when some observations of the data are not known in the first stage where as Cragg’s two part models are applied when the dependent variable takes a value ‘zero’ for many observations. Further, two parts model is more suitable in the present context because it is more robust to violations of the normality assumptions. STATA 12 is used for the analysis. The command tpm helps in obtaining the two part model results with corrected standard errors.

  15. Source: http://www.telegraphindia.com/1140826/jsp/nation/story_18761900.jsp#.WD56urJ961s (Last accessed date: August 24, 2017).

  16. Since the data on subsidies provided by the centre to SLPEs is not given, I do not include subsidies in the analysis of relative contributions.

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  1. Centre for Development Studies, Flat 2A, Prasanth Nagar, P.O. Medical College, Trivandrum, 695011, Kerala, India

    Ritika Jain

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Jain, R. Contributions to the exchequer funds by state level public sector enterprises: does political alignment matter?. Const Polit Econ 29, 93–113 (2018). https://doi.org/10.1007/s10602-017-9253-y

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