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Do political determinants affect the size and composition of public expenditure? A study of the Indian states

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Abstract

This study examines whether there exists a systematic link between the size and composition of public expenditure and the political determinants across the Indian states. Three types of political determinants—forms of governments, government’s ideology, and electoral cycle—are identified and three sets of hypotheses are designed linking these characteristics with three different measures of public expenditure. The hypotheses are tested using a panel dataset of 14 Indian states spread over 27 fiscal years, from 1980–1981 to 2006–2007. The overall findings of the study suggest that the relationship between expenditure measures and political determinants across the Indian states validates the proposed hypotheses even after controlling for the traditional and other unobservable determinants. These findings are robust to various forms of sensitivity analysis.

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Notes

  1. The major studies in this area of research are by Cameron (1978), Ram (1987), and Musgrave and Musgrave (1989).

  2. Major studies along this dimension include studies by Roubini and Sachs (1989), De Haan and Sturm (1994), Harrinvirta and Mattila (2001), Perotti and Kontopoulos (2002), and Ricciuti (2004).

  3. The coalition governments are also known as divided governments or fragmented governments or weaker governments. These different names of the coalition government are used interchangeably in this study.

  4. The major studies attempted in this direction are by Cameron (1978), Van Dalen and Swank (1996), Harrinvirta and Mattila (2001), and Tavares (2004).

  5. See Harrinvirta and Mattila (2001) and Ricciuti (2004).

  6. For instance, see Perotti and Kontopoulos (2002) who have identified five types of ideological positions.

  7. Pre-1980–1981 elections were dominated by the Indian National Congress (INC) party at both centre and states.

  8. During this period, governments fell pre-maturely; the president’s rule was imposed frequently and unconstitutionally to serve the political interests (Dua 1979); and unprecedented constitutional amendments were made on a regular basis (Austin 2003).

  9. President’s rule (or central rule) in India refers to a situation when a state legislature is suspended or dissolved, and placed under direct federal rule. During the imposition of president’s rule in a state, the ruling party at the centre also rules in that state. Article—356 of the Indian constitution deals with the issue of imposing president’s rule in detail.

  10. This is a measure used by Laakso and Taagepera’s (1979) which assigns an increasing weight to parties that contribute higher proportions of the seats while forming a government. This index is the sum of the squared proportions of the seats of parties that form government (see Appendix 1 for the methodology). Studies by Mukherjee (2003) and Ricciuti (2004) have also used this measure. The same methodology is also used to measure ‘effective number of parties in the opposition’.

  11. See Appendix 2, Table 3, to know the years of assembly election and the parties that have formed government at the state level since 1975. The table shows that not many state governments were able to complete the normal tenure of 5 years after the assembly elections of the late 1970s. This is indicative of the political uncertainty that had arisen since then. This is one of the reasons why we have ignored the elections that were held before 1980. Ideological codes of ruling political parties are presented in the Appendix 2, Table 4.

  12. Van Dalen and Swank (1996) for ideology and Drazen and Eslava (2010) for electoral cycle are among the few exceptions which have considered sector-specific disaggregate expenditure measures.

  13. See Roubini and Sachs (1989) and Harrinvirta and Mattila (2001) for this line of argument.

  14. Notable recent examples of populist schemes in India are as follows: supplying free electricity to farmers in the state of Andhra Pradesh, creating rural employment through Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), creating awareness for education through Sarva Shiksha Abhiyan (SSA), improving public health services through National Rural Health Mission (NRHM), and competition among parties, both at the centre and states, to supply rice at a very subsidized price.

  15. See Ferejohn (1974) and Tanzi and Davoodi (1997) for such arguments.

  16. Van Dalen and Swank (1996) and Tavares (2004) have documented such evidence.

  17. Boix (1997) has reviewed the literature on partisan economic policy management and found such practices in OECD countries.

  18. For instance, Drazen and Eslava (2010) have found that spending on interest payments, transfer to retirees, and payments to temporary workers increases significantly in the Colombian municipalities during such years.

  19. Drawing evidence from the developing countries, Khemani (2004) in the Indian states and Drazen and Eslava (2010) in the Colombian municipalities have reported the presence of such practices.

  20. These states are Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.

  21. The one-quarter time period is chosen arbitrarily. Changing the length of the time period to two quarters does not affect the findings (See Sect. 6.3).

  22. Index of ideology ranges between 1 and 5. Appendix 1 deals with the construction of this index in detail and the codes of all parties are displayed in Appendix 2, Table 4.

  23. Among the control variables, the first three variables are annual measures and the last two are decadal measures. Following the standard practices of the literature, the data points for the missing years of the decadal measures are filled by interpolating decadal indicators with the help of the simple growth rate formula.

  24. The variable EC is not applicable to the weighted average scheme. Elections do not always precede changes in government. There are numerous occasions when the governments in the Indian states have changed without elections. The weighting scheme is also not applicable for the group of control variables as they do not change with the government.

  25. Beck and Katz (1995) have developed this estimation method. They have used Monte Carlo analysis to show the supremacy of this estimation method over other available methods.

  26. See Dollery and Worthington (1996) for a comprehensive survey of this strand of literature.

  27. To serve the basic purpose of this study, only the endogenous political determinants of the Indian state are considered initially. Since the centre-state political nexus is an exogenous determinant to the system, it is ignored in the original analysis. This exercise is undertaken only to check the robustness of the baseline results.

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Acknowledgments

We thank two anonymous referees for their helpful comments. We also thank the conference participants at National Institute of Public Finance and Policy (NIPFP), New Delhi, and Jawaharlal Nehru University (JNU), New Delhi, for their useful feedback.

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Authors and Affiliations

  1. National Institute of Public Finance and Policy (NIPFP), New Delhi, 110067, India

    Bharatee Bhusana Dash

  2. Department of Economics, University of Hyderabad, Hyderabad, 500046, India

    Angara V. Raja

Authors
  1. Bharatee Bhusana Dash
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  2. Angara V. Raja
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Correspondence to Bharatee Bhusana Dash.

Additional information

The usual disclaimer applies: all errors are ours.

Appendices

Appendix 1

  1. (a)

    Ideology: All the parties that have ever headed a government in the Indian states over the time period of the study are considered. The spread of the index is from point 1 to 5:

    1. 1.

      When a right-wing party holds the government;

    2. 2.

      When a right-centric party holds the government;

    3. 3.

      When a centric party holds the government;

    4. 4.

      When a left-centric party holds the government;

    5. 5.

      When a left-wing party holds the government.

    There are few occasions, when governments have changed in the middle of a fiscal year. Some adjustment is required to be made in the index. For such occasions, the adjusted index is as follows:

    • IOI ≤ 1.5: When a right-wing party holds the government;

    • 1.5 < IOI < 2.5: When a right-centric party holds the government;

    • 2.5 ≤ IOI ≤ 3.5: When a centric party holds the government;

    • 3.5 < IOI < 4.5: When a left-centric party holds the government;

    • IOI ≥ 4.5: When a left-wing party holds the government

  2. (b)

    ENPG (effective number of parties in the government): this is defined as follows:

    $$ {\text{ENPG}} = \frac{1}{{\sum {S_{i}^{2} } }} $$

    where S i represents ith party’s share in the government (i.e. the number of seats that the ith party holds/total number of seats the government holds in the legislature). For a single-party government, the numerical value of this index is 1 and increases as the number of parties increase in a government. The formula and the interpretation remain the same for the calculation of ENPO (effective number of parties in the opposition).

  3. (c)

    Support to government: it measures what kind of majority a government enjoys in the legislature. It is defined as follows:

    $$ {\text{Support}} = \frac{{(P - N_{1} )}}{{N_{2} }} \times 100 $$

    where N 1 is the minimum number of seats required to win in the legislature for a party or set of parties to form the government (i.e. by the rule of simple majority). N 2 = N−N 1, where N is the total strength of the legislature (N 2 is the rest of the seats in the legislature, which are won by the opposition parties). P is the number of seats the government has actually won in the legislature. Hence, this variable varies between 0 and 100. It is Zero, when the government enjoys an exact simple majority in the legislature, and 100, when all the seats are won by the government.

  4. (d)

    Heller (2005) defines fiscal space as ‘room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy’ (p. 32). For the Indian states, Nooruddin and Chhibber (2008) have measured the fiscal space as the difference between total revenue receipts and the primary expenditure commitments on the revenue account (i.e. civil administration, including pensions and other retirement benefits; police; and debt servicing). They also have included the loans that the Indian states receive from the Centre on the revenue side as the Indian states can obtain more resources from the Centre particularly in the form of loans. Therefore, fiscal space is defined as follows:

    $$ {\text{FS}} = [\{ {\text{TR}} - ({\text{CivAdm}} + {\text{Police}} + {\text{DebtService}}) + {\text{CenLoans}}\} /{\text{TR}}] \times 100 $$

    where FS is fiscal space and TR is total revenue receipts. This measure of fiscal space is used by Nooruddin and Chhibber (2008), and we have multiplied it by hundred to express in percentage.

Appendix 2

See Tables 3, 4, 5, 6, 7 and 8.

Table 3 Years of assembly election and government formation
Full size table
Table 4 Ideological codes of the Indian political parties
Full size table
Table 5 Descriptive statistics of variables and data sources
Full size table
Table 6 The impact of political determinants on expenditure: introduction a new variable of interest
Full size table
Table 7 The impact of political determinants on expenditure: changed selection criterion of the fiscal years
Full size table
Table 8 The impact of political determinants on expenditure: alternative estimation method (FGLS)
Full size table

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Dash, B.B., Raja, A.V. Do political determinants affect the size and composition of public expenditure? A study of the Indian states. Int Rev Econ 60, 293–317 (2013). https://doi.org/10.1007/s12232-013-0173-5

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