Political economy of sub-national spending in India

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.