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Political Cycles, Political Institutions and Public Expenditure in India, 1980–2000

Abstract

In Western democracies it is held that parties and their positions affect how politicians choose to make public expenditure and investment. This article examines the public policy choices of politicians in India, a large well-established democracy with remarkable subnational variation. Public expenditure, from education and health to agriculture and irrigation, is analysed. Counterintuitive findings – that election timing and political factors play a strong role in the subnational states, and that party competition increases investment in education – are explained by highlighting the role economic and political uncertainty plays in politicians’ choices. Building a ‘Polanyi’ argument enhanced by a supply-side mechanism highlights the importance of compensation and insurance and the imperatives of political stability for subnational politicians, who attempt to maximize re-election chances in an uncertain environment.

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1 This literature goes by the name of political business cycle (PBC) theory and partisan theories. The salient contributions include: Kramer Gerald, ‘Shorter-term Fluctuations in US Voting Behavior’, American Political Science Review, 65 (1971), 131143; Tufte Edward, ‘Determinants of the Outcomes of Midterm Congressional Elections’, American Political Science Review, 69 (1975), 812826; Nordhaus William, ‘The Political Business Cycle’, Review of Economic Studies, 42 (1975), 160190; Hibbs Douglas, ‘Political Parties and Macroeconomic Policy’, American Political Science Review, 71 (1977), 14671487; Tufte Edward, Political Control of the Economy (Princeton, N.J.: Princeton University Press, 1978); Alesina Alberto, ‘Macroeconomic Policy in a Two-Party System as a Repeated Game’, Quarterly Journal of Economics, 102 (1987), 651678; Alesina Alberto, ‘Macroeconomics and Politics’, National Bureau Economic Research Macroeconomics Annual, 3 (1988), 1361; Alesina Alberto and Rosenthal Howard, Partisan Politics, Divided Government and the Economy (Cambridge: Cambridge University Press, 1995); and Alesina Alberto, Roubini Nouriel and Cohen Gerald, Political Cycles and the Macroeconomy (Cambridge, Mass.: MIT Press, 1997). For an excellent review, see Franzese Robert J. Jr, ‘Economic and Partisan Cycles in Economic Policies and Outcomes’, Annual Review of Political Science, 5 (2002), 369421.

2 Olson Mancur, ‘Dictatorship, Democracy, and Development’, American Political Science Review, 87 (1993), 567576; and Bardhan Pranab, The Political Economy of Development in India, expanded edn (Delhi: Oxford University Press, 1998).

3 Franzese , ‘Electoral and Partisan Cycles in Economic Policies and Outcomes’, pp. 369371.

4 Muller Wolfgang and Strøm Kaare, Policy, Office, Or Votes? How Political Parties in Western Europe Make Hard Decisions (Cambridge: Cambridge University Press, 1999).

5 For instance, testing of the PBC and subsequent models has been most developed for presidential or congressional elections in the United States, followed by testing for OECD and European countries. See, e.g., Kramer , ‘Shorter-term Fluctuations in US Voting Behavior’; Hibbs Douglas, The American Political Economy: Macroeconomics and Electoral Politics (Cambridge, Mass.: Harvard University Press, 1987); Alesina Alberto, Londregan John and Rosenthal Howard, ‘A Model of the Political Economy for the United States’, American Political Science Review, 87 (1993), 1223; and Alesina and Rosenthal , Partisan Politics, Divided Government. Further testing of PBC has yielded results in OECD or European countries. See, e.g., Alesina Alberto and Roubini Nouriel, ‘Macroeconomic Policies and Elections in OECD Democracies’, Economics & Politics, 4 (1992), 130, who test for OECD countries; Lewis-Beck Michael, Economics and Elections: The Major Western Democracies (Ann Arbor: University of Michigan Press, 1988), who tests for Germany, France, Italy, Spain and the United Kingdom; and Madsen H., ‘Electoral Outcomes and the Macroeconomic Policies: The Scandinavian Cases’, in P. Whitley, ed., Models of Political Economy (London: Sage, 1980), pp. 1546, for Denmark, Norway and Sweden.

6 A few notable exceptions are Khemani Stuti, ‘Political Cycles in a Developing Economy’, Journal of Development Economics, 73 (2004), 125154; Chhibber Pradeep and Nooruddin Irfan, ‘Do Party Systems Count? The Number of Parties and Government Performance in the Indian States’, Comparative Political Studies, 37 (2004), 152187; and Leblang David, ‘The Political Economy of Speculative Attacks in the Developing World’, International Studies Quarterly, 46 (2002), 6991.

7 Chhibber Pradeep, Shastri Sandeep and Sisson Richard, ‘Federal Arrangements and the Provision of Public Goods in India’, Asian Survey, 44 (2004), 339352, find that citizens hold the relevant state governments responsible for the provision of local public goods in India.

8 India has twenty-eight subnational states and, since her independence in 1947, held fourteen regular national elections in sixty years with one brief authoritarian interlude (1975–77), which illustrates India’s extensive experience with democratic institutions and elections. Regular elections are also held for provincial state assemblies, called vidhan sabhas, as well as for local governments, called panchayat raj (lit. rule by communal tribune) institutions.

9 Across India, the share of provincial expenditure on social services declined from 52.93 per cent in 1980–89 to 35.45 per cent in 1990–99; while the share of expenditure on economic services declined from 44 per cent to 30 per cent for the same period.

10 The literature on the provision of local public goods in India, an interesting case for testing some of these competing accounts (see below for more details on case selection), is relatively scanty. Some studies of decision-making on expenditure mostly focus on the national level (see, e.g., Basu Anuradha, Public Expenditure Decision-Making: The Indian Experience (New Delhi: Sage, 1995)).

11 Many of India’s states are ruled by ideologically driven parties, such as the Communist Party of India (Marxist) (CPI-M), Telugu Desam Party (TDP), Dravida Munnettra Kazhagam (DMK), and the All India Dravida Munnettra Kazhagam (AIDMK).

12 Keech William, Economic Politics: The Costs of Democracy (Cambridge: Cambridge University Press, 1995); Boix Carles, Political Parties, Growth and Equality: Conservative and Social Democratic Strategies in the World Economy (Cambridge: Cambridge University Press, 1998); Garrett Geoffrey, Partisan Politics in the Global Economy (Cambridge: Cambridge University Press, 1998); Iversen Torben, Contested Economic Institutions: The Politics of Macroeconomics and Wage Bargaining in Advanced Democracies (Cambridge: Cambridge University Press, 1999); Roberts William Clark , Capitalism, Not Globalism: Capital Mobility, Central Bank Independence and Political Control of the Economy (Ann Arbor: University of Michigan Press 2002); Franzese Robert J., Macroeconomic Policies of Developed Democracies (Cambridge: Cambridge University Press, 2002); Bernard William and Leblang David, ‘Democratic Institutions and Exchange Rate Commitments’, International Organization, 53 (1999), 7197.

13 The distinctive nature of this approach is discussed in more length in Snyder Richard, ‘Scaling Down: The Subnational Comparative Method’, Studies in Comparative and International Development, 36 (2001), 93111.

14 Polanyi Karl, The Great Transformation: The Political and Economic Origins of Our Time (Boston, Mass.: Beacon Press, 1944). Polanyi notes: ‘In the last resort, impaired self-regulation of the market led to political intervention. When the trade cycle failed to come round and restore employment, when imports failed to produce exports, when bank regulations threatened businesses with panic, when foreign debtors refused to pay, governments had to respond to the strain. In an emergency the unity of society asserted itself through the medium of intervention.’ (p. 206.)

15 Garrett , Partisan Politics in the Global Economy, p. 4.

16 See Sinha Aseema, ‘The Changing Political Economy of India: A Historical Institutionalist Approach’, India Review, 3 (2004), 2563.

17 See, e.g., Saez Lawrence, Federalism Without a Centre: The Impact of Political and Economic Reform on India’s Federal System (New Delhi: Sage Publications, 2002). Also, see Jenkins Rob, Democratic Politics and Economic Reforms in India (Cambridge: Cambridge University Press, 1999); Rudolph Lloyd and Hoeber Rudolph Susanne, ‘The Iconization of Chandrababu: Sharing Sovereignty in India’s Federal Market Economy’, Economic and Political Weekly, 36 (2001), 15411552.

18 Uppal Yogesh, ‘The Disadvantaged Incumbents: Estimating Incumbency Effects in Indian State Legislatures’ (unpublished manuscript, Youngstown State University, 2007); Nooruddin Irfan and Chhibber Pradeep, ‘Unstable Politics: Fiscal Space and Electoral Volatility in the Indian States’, Comparative Political Studies, 41 (2008), 10691091; Sridharan E., ‘Electoral Coalitions in the 2004 General Election: Theory and Evidence’, Economic and Political Weekly, 39 (2004), 54185425; Linden Leigh, ‘Are Incumbents Really Advantaged? The Preference for Non Incumbents in Indian National Elections’ (unpublished manuscript, Columbia University, 2004); Kumar Jayesh, ‘Parliamentary Elections and National Politics’, Journal of Indian School of Political Economy, 15 (2003), 633646.

19 India has experienced strong anti-incumbency advantage with regular alternation of power in the last fifteen years or so.

20 Bergstrom Theodore and Goodman Robert, ‘Private Demands for Public Goods’, American Economic Review, 63 (1973), 280296, pioneered the empirical application of the median voter model to explain the supply of public goods.

21 Oates Wallace and Schwab Robert, ‘Economic Competition Among Jurisdictions: Efficiency Enhancing or Distortion Inducing?’ Journal of Public Economics, 35 (1988), 333354. Also see Besley and Coate, who model the provision of public goods from a political economy perspective based on the preferences of legislators. Besley and Coate also rely on a median voter model whereby the legislator’s preferences are shaped by the preferences of local voters; the only difference in their ‘decentralized polity’ model is that each district is to have a government that makes decisions about local public goods (Besley Tim and Coate Stephen, ‘Centralized vs. Decentralized Provision of Local Public Goods: A Political Economy Analysis’, NBER Working Papers, No. 7084, 1999).

22 Khemani , ‘Political Cycles in a Developing Economy’, pp. 125154; Chhibber and Nooruddin , ‘Do Party Systems Count?’ pp. 152187; Bardhan Pranab and Mookerjee Dilip, ‘Expenditure Decentralization and the Delivery of Public Services in Developing Countries’ (Institute for Economic Development (IED) Discussion Paper No. 90, Boston University, 1998), compare the effects of centralized and decentralized mechanisms for different types of social programmes and infrastructure delivery: anti-poverty programmes, roads, water, electricity and telecommunications.

23 Khemani Stuti, ‘Partisan Politics and Intergovernmental Transfers’ (World Bank Policy Research Working Paper, No. 3016, 2003).

24 See, e.g., Khemani , ‘Political Cycles in a Developing Economy’.

25 See, e.g., Chhibber and Nooruddin , ‘Do Party Systems Count?’

26 Lizzeri Alessandro and Persico Nicola, ‘The Provision of Public Goods Under Alternative Electoral Incentives’, American Economic Review, 91 (2001), 225239.

27 See, e.g., Chhibber and Nooruddin , ‘Do Party Systems Count? esp. pp. 173174.

28 Jaffrelot Christophe, The Hindu Nationalist Movement in India (New York: Columbia University Press, 1996); Blom Hansen Thomas and Jaffrelot Christophe, eds, The BJP and the Compulsions of Politics in India (New York: Oxford University Press, 2001); Overstreet Gene and Windmiller Marshall, Communism in India (Berkeley: University of California Press, 1959); Nossiter T. J., Marxist State Governments in India: Politics, Economics, and Society (London: Pinter Publishers, 1988); Mallick Ross, Development Policy of a Communist Government: West Bengal Since 1977 (Cambridge: Cambridge University Press, 1993); Mallick Ross, Indian Communism: Opposition, Collaboration, and Institutionalization (Delhi: Oxford University Press, 1994).

29 See, e.g., Hibbs , ‘Political Parties and Macroeconomic Policy’.

30 Boix Carles, ‘Political Parties and the Supply Side of the Economy: The Provision of Physical and Human Capital in Advanced Economies 1960–1990’, American Journal of Political Science, 41 (1997), 814845.

31 Bharatiya Janata Party, Vision Document 2004 (available from www.bjp.org).

32 Lok Sabha Elections 2004, Manifesto of the Indian National Congress (available from www.inc.org.in).

33 See, e.g., Wildasin David, ‘Income Redistribution in a Common Labor Market’, American Economic Review, 81 (1991), 757774; Shah Anwar, ‘The Reform of Intergovernmental Fiscal Relations in Developing and Emerging Market Economies’, World Bank Policy and Research Series, No. 23 (Washington, D.C.: World Bank, 1994).

34 See, e.g., Kramer G., ‘A Dynamic Model of Political Equilibrium’, Journal of Economic Theory, 16 (1977), 310334.

35 Bendor Jonathan, Mookherjee Dilip and Ray Debraj, ‘Satisficing and Selection in Electoral Competition’, Quarterly Journal of Political Science, 5 (2006), 130.

36 See e.g., Chhibber Pradeep and Nooruddin Irfan, ‘Party Competition and Fragmentation in National Elections: 1957-1998’, in Paul Wallace and Ramashrai Roy, eds, Indian Politics and the 1998 Elections: Regionalism, Hindutva, and State Politics (New Delhi: Sage Publications, 2000); Heath Oliver, ‘Party Systems, Political Cleavages, and Electoral Volatility in India: A State-wise Analysis, 1998–1999’, Electoral Studies, 24 (2005), 177199.

37 Levitt Steven and Snyder James, ‘Political Parties and the Distribution of Federal Outlays’, American Journal of Political Science, 39 (1995), 958980.

38 The electoral data from the Election Commission of India is available at http://eci.nic.in. Secondary sources include, Butler David, Lahiri Ashok and Roy Prannoy, India Decides, 2nd edn (New Delhi: Living Media India, 1991); Singh V. B. and Bose Shankar, State Elections in India, Data Handbook on Vidhan Sabha Elections, Vol. 1–5 (New Delhi: Sage Publications, 1987).

39 See Laakso Markku and Taagepera Rein, ‘Effective Number of Parties: A Measure with Application to West Europe’, Comparative Political Studies, 12 (1979), 327.

40 Many of the data points are available in the Statistical Supplement to the special issue on political parties and elections in Indian states, Journal of Indian School of Political Economy, 15 (2003), esp. 381443. However, some of these figures are in error and do not cover the entire length of state assembly elections from 1980 to 2000. The figures provided by the Statistical Supplement were double checked for accuracy and updated by the authors.

41 Ghosh Sugata, and Pal Sarmistha, ‘On Regional Inequality and Growth: Theory and Evidence from the Indian States’, Econometric Society World Congress 2000 Contributed Papers, No. 1391 (2000).

42 Before 1980, the Reserve Bank of India (RBI) disaggregated data for six social and community services (rather than the ten listed above) and five economic services (rather than the nine listed above). For instance, prior to 1980, two expenditure categories (medical and water supply) appeared under the same column heading. Prior to 1980, irrigation (which currently appears as a separate category) was subsumed under the general category of water and power development.

43 The RBI expenditure categories listed above are arbitrary and have been altered slightly over time by the RBI. In this article we will be using the full range of disaggregated expenditure data available since 1980. These disaggregated categories include ten separate entries for social and community services and nine entries for economic services. A detailed description of the dependent and independent variables can be found in the Appendix.

44 Overall, our entire database includes expenditure on nineteen separate public services.

45 The POLEX-India dataset, version 2008.1, is available at: https://eprints.soas.ac.uk/4341. We request that scholars who make use of the POLEX-India dataset, version 2008.1, use the following citation: Lawrence Saez (2008) ‘Political cycles, political institutions, and public service expenditure in India (POLEX-India) data set, version 2008.1’.

46 Besley Tim and Burgesss Robin, ‘The Political Economy of Government Responsiveness: Theory and Evidence from India’, Quarterly Journal of Economics, 117 (2002), 14151451.

47 In order to illustrate variation across states and across time, we have provided the three largest sources of state government expenditure (education, health, agriculture) across time (for each of the sixteen states in our study) in Figures 1, 2, 3 in our POLEX-India dataset. These three types of state government expenditure are arguably the most important for subnational economic development.

48 It is worth noting that even though there had been a steady decline in Kerala’s expenditure on education, in 2000 it was still higher than that for many other states.

49 Together with fiscal services, administrative services and pensions, the Reserve Bank of India classifies interest payments and servicing of debt by the state governments of India as non-developmental expenditure.

50 Figure 4 in our POLEX-India dataset, for instance, shows that state government expenditure on servicing the debt has increased steadily across all states in India, most notably in Uttar Pradesh, Orissa and West Bengal.

51 A full description of the coding for all the variables used in the aggregate level analysis can be found in the Appendix.

52 In our article, we present the results for economic data for sixteen states over a twenty-year period. Our entire database includes data for nineteen dependent variables, namely disaggregated budgetary items for each of the total developmental expenditures in India’s states. As we have explained before, the choice of the number of states was made so as to include states in existence for the longest period of time available. Although fiscal data for states precedes our 1980 cut-off point, many states included in this study were not in existence beforehand. Overall, we have traded off the length of time against range of coverage in the dependent variable to maintain a rectangular dataset. Still, we have a sufficiently large T. For the sake of clarity in the presentation of our results, we have presented regression results for a handful of dependent variables (i.e., education, health, social security, agriculture and irrigation). Other researchers may wish to conduct empirical analyses of other budgetary expenditures.

53 See Stimson James, ‘Regression in Space and Time: A Statistical Essay’, American Journal of Political Science, 15 (1985), 914947.

54 For reasons of space constraints, the resolution to this debate will obviously not be settled here. For a useful discussion about these methodological issues, see Beck Nathaniel and Katz Jonathan, ‘Nuisance vs. Substance: Specifying and Estimating Time Series Cross Section Models’, Political Analysis, 6 (1996), 134. Also see Hays Jude, chapter entitled ‘When to Use (and Not Use) Least Squares to Estimate Dynamic Panel Models’, in ‘Globalization and the Crisis of Embedded Liberalism: The Role of Domestic Political Institutions’ (doctoral dissertation, University of Minnesota, Department of Political Science, 2000). A response to Hays can be found in Beck Nathaniel and Katz Jonathan, ‘Time-Series-Cross-Section Issues: Dynamics, 2004’ (unpublished manuscript, presented at the annual meeting of the Society for Political Methodology, Stanford University, 2004).

55 Such a method is used, for instance, in Chhibber and Nooruddin , ‘Do Party Systems Count?’ for macroeconomic data for fifteen Indian states over a thirty-year period for a single dependent variable that uses fiscal data (the proportion of the state’s budget allocated to civil administration). A logistic model is then used to estimate public perceptions of the delivery of public goods based on survey data results.

56 See Beck and Katz , ‘Nuisance vs. Substance’, p. 2. Also see Beck Nathaniel and Katz Jonathan, ‘What to Do (and Not to Do) With Time-Series-Cross-Section Data’, American Political Science Review, 89 (1995), 634647.

57 Beck and Katz , ‘Nuisance vs. Substance’, p. 24.

58 Beck and Katz , ‘Nuisance vs. Substance’, p. 26.

59 See Long Scott, Regression Models for Categorical and Limited Dependent Variables (Thousand Oaks, Calif.: Sage, 1997).

60 As discussed by Sayrs, a Swamy random coefficient model has advantages in terms of its lack of bias and its efficiency relative to Seemingly Unrelated Regression (SUR) versions. Nevertheless, Sayrs points to a weakness in the robustness of the Swamy coefficients and suggests a Hsiao random coefficient model. However, as Sayrs emphasizes, a Hsiao random coefficient model requires a large N and and a large T; therefore, it would be inappropriate for analysis of our dataset. See Sayrs Lois, Pooled Time Series Analysis (Newbury Park, Calif.: Sage Publications, 1989), esp. pp. 4146.

61 Ideology of the party seems to matter only in the case of social security expenditure, which constitutes a very small portion of total expenditure (around 2 per cent). State governments led by the BJP show a marked decline in social security expenditures.

62 Reserve Bank of India, Reserve Bank of India Bulletin (monthly series, 1980–2000).

63 Journal of Indian School of Political Economy, 15 (2003), esp. 381443.

64 Journal of Indian School of Political Economy, 15 (2003), esp. 381443.

65 Election Commission of India website. Data available at www.eci.gov.in.

* Department of Politics, School of Oriental and African Studies (email: ); Department of Political Science, University of Wisconsin, Madison, respectively. Earlier versions of this article were presented at the Annual Meeting of the British Association for South Asian Studies (BASAS), 2003, the Annual Meeting of the American Political Science Association, Philadelphia, 2003, and the Modern South Asia conference hosted by the European Institute for Asian Studies (EIAS), Lund, 2004. The authors would like to thank Deya Fileva, Gizem Gürson, and Alexandra Tudoroiu for invaluable research assistance, and also the Editor of the Journal, Albert Weale, for his extensive and useful comments. Special thanks also to Roli Asthana, John Echeverri-Gent, Santanu Gupta, Jude Hays, Mushtaq Khan, Melanie Manion and the Journal’s three anonymous referees for offering invaluable comments and suggestions on earlier drafts of this study. However, the authors take full responsibility for the interpretation and analysis of the data as it appears in this article.

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