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Politics Wins over Economics in India

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Received wisdom has it that public expenditure levels in any economy are determined by economic and demographic parameters.


Thus, you would find higher expenditure on health and primary education in a country/state that has a higher percentage of its population in the younger age groups. However, recent literature on the determinants of expenditure allocation suggests political factors play a major role in influencing expenditure.


To anyone following the intricacies of coalition politics at the Centre, this is not particularly insightful. The clout enjoyed by Chandrababu Naidu under the NDA government, of the DMK under UPA-I and now of Mamata Banerjee under UPA-II, is there for all to see.


But anecdotal evidence is one thing; research is a different ball game altogether. By corroborating and sanctifying anecdotal evidence, it gives it new legitimacy. And this is precisely what has been attempted by a recent paper by the National Institute of Public Finance and Policy (NIPFP). The paper looks at the link between political factors and expenditure allocation among Indian states to see whether the allocation is significantly influenced by government-specific political characteristics.


Coalitional governments are usually perceived as weaker governments as such governments often fail to make and implement stricter fiscal policies due to various reasons such as multiple party interests, lack of majority, disagreement among multiple decision-makers, and are subject to interest group capture at various levels.


Since the future of coalition governments is relatively uncertain compared to single-party governments, such governments are expected to end up with myopic fiscal policies, which may be undesirable from the long-term perspective.


Ideologically, left-wing governments do not seem to be much concerned about the long-term fiscal and economic outcomes. Similarly, the literature on electoral cycles predicts that fiscal policies change just before the year of election and become redistributive kinds.


The literature on fiscal illusion predicts that policymakers assume that voters overestimate the benefits of current expenditure in short run and underestimate the future tax burden that will be needed to finance current expenditure. Hence, just before the year of election, the incumbent political parties are expected to follow more of populist political tactics and the budgetary composition is expected to be shifted more towards current expenditure.


The authors take five types of political determinants - government fragmentation, strength of the opposition, majority of the government, ideology of the government and electoral cycle - into account and develop three sets of hypotheses linking political determinants with expenditure allocation.


They conclude that political determinants explain the variations in expenditure allocation across the Indian states significantly even in the presence of the traditional determinants. Per-capita income and population size are the only control variables that remain significant for all categories of expenditures.


Fiscal space matters only for current and total expenditure. Among the demographic characteristics, poverty rate emerged significant only for capital and total expenditure, whereas dependency rate was not significant.


Contrary to expectations, the electoral cycle does not seem to be playing a significant role in influencing public expenditure though the rise of coalition governments is one of the major driving forces underlying increased public spending by states in recent decades. The ideology of a government also seems to be contributing significantly to this increase, but mainly through increasing current expenditure.


The authors argue that in the era of competitive politics and coalition government, where governments are seen to be playing redistributive tactics throughout their tenure of governance, years just before election are no more treated differently.


Well-supported governments are found to be associated with increasing capital expenditure, whereas government spending on investment are found to be declining in the presence of a weaker opposition. Results on fiscal space suggest that additional revenue only boosts public consumption, not public investment.


As research finally catches up with practical wisdom, one could well sigh as say, "So what is new?"


(Political Determinants of the Allocation of Public Expenditures: A Study of the Indian States, Bharatee Bhusana ash and Angara V Raja, March 2012)




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