Federal Politics and Budget Deficits : Evidence from the States of India
This paper tests two predictions implied by models of the common-pool game in federations where subnational governments are more likely to have higher deficits because they do not internalize the macroeconomic effects of fiscal profligacy. The firs...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2002/10/2874487/federal-politics-budget-deficits-evidence-states-india http://hdl.handle.net/10986/19248 |
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okr-10986-192482021-04-23T14:03:42Z Federal Politics and Budget Deficits : Evidence from the States of India Khemani, Stuti BORROWING BUDGET DEFICITS BUDGETARY INSTITUTIONS CABINET OF MINISTERS CENTRAL GOVERNMENT CENTRAL GOVERNMENTS CENTRAL TRANSFERS COALITIONS CONSERVATISM CONSTITUENCIES CONSTITUENCY CONSTITUTION DEBT DECENTRALIZATION DEMOCRACY DISTRICTS ECONOMIC CONDITIONS ECONOMIC REFORM ECONOMIC SHOCKS ELECTORAL COMPETITION EXECUTIVE GOVERNMENT EXPENDITURE EXPENDITURE RESPONSIBILITIES EXTERNALITIES FEDERAL GOVERNMENT FEDERALISM FEDERATIONS FISCAL FISCAL DECENTRALIZATION FISCAL DEFICIT FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL POLICIES FISCAL POLICY FISCAL PROBLEMS GOVERNMENT SPENDING GOVERNMENT'S BUDGET INSTITUTIONAL ANALYSIS INSTITUTIONAL RELATIONS INSURANCE INTERGOVERNMENTAL TRANSFERS LEGAL INSTITUTIONS LEGISLATIVE ASSEMBLIES LEGISLATURE LEGISLATURES LOCAL AUTHORITIES LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING LOWER HOUSE MACROECONOMIC STABILITY MINISTERS NATIONAL ELECTIONS NATIONAL GOVERNMENTS NATIONAL LEVEL PARTY AFFILIATION POLITICAL CONTROL POLITICAL DECENTRALIZATION POLITICAL INSTITUTIONS PROVINCIAL GOVERNMENTS PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC GOODS PUBLIC RESOURCES PUBLIC SPENDING RESERVE BANK OF INDIA RESOURCE ALLOCATION SOFT BUDGET CONSTRAINTS STATE FISCAL POLICY STATE GOVERNMENT STATE INCOME SUBNATIONAL DEFICITS SUBNATIONAL GOVERNMENT SUBNATIONAL GOVERNMENTS TAX VOTING This paper tests two predictions implied by models of the common-pool game in federations where subnational governments are more likely to have higher deficits because they do not internalize the macroeconomic effects of fiscal profligacy. The first is that subnational governments that belong to the same political party as the central government have lower spending and deficits because they are more likely to be influenced to internalize the macroeconomic effects of additional local spending; and the second is that subnational governments that are more dependent on intergovernmental transfers have higher spending and deficits. We find that in 15 major states of India over the period 1972-1995, states in fact have substantially higher spending and deficits (higher by about 10 percent of the sample average) when their government belongs to the same party as that governing at the center; and that intergovernmental grants tend to have a counter-intuitive negative effect on spending and deficits. The additional deficit of affiliated states is financed almost entirely by additional loans from the central government (as opposed to the market) leading to our interpretation that similar political considerations influence the distribution of deficits across states as they do other intergovernmental grants. We argue that the evidence from India, contrasted with broader international evidence, indicates that the effect of fiscal institutions in a federation is sensitive to underlying political incentives. This underscores the overall importance of political institutions in determining the consolidated government deficit, relative to specific rules of intergovernmental transfers. 2014-08-01T21:28:16Z 2014-08-01T21:28:16Z 2002-10 http://documents.worldbank.org/curated/en/2002/10/2874487/federal-politics-budget-deficits-evidence-states-india http://hdl.handle.net/10986/19248 English en_US Policy Research Working Paper;No. 2915 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research South Asia India |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
BORROWING BUDGET DEFICITS BUDGETARY INSTITUTIONS CABINET OF MINISTERS CENTRAL GOVERNMENT CENTRAL GOVERNMENTS CENTRAL TRANSFERS COALITIONS CONSERVATISM CONSTITUENCIES CONSTITUENCY CONSTITUTION DEBT DECENTRALIZATION DEMOCRACY DISTRICTS ECONOMIC CONDITIONS ECONOMIC REFORM ECONOMIC SHOCKS ELECTORAL COMPETITION EXECUTIVE GOVERNMENT EXPENDITURE EXPENDITURE RESPONSIBILITIES EXTERNALITIES FEDERAL GOVERNMENT FEDERALISM FEDERATIONS FISCAL FISCAL DECENTRALIZATION FISCAL DEFICIT FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL POLICIES FISCAL POLICY FISCAL PROBLEMS GOVERNMENT SPENDING GOVERNMENT'S BUDGET INSTITUTIONAL ANALYSIS INSTITUTIONAL RELATIONS INSURANCE INTERGOVERNMENTAL TRANSFERS LEGAL INSTITUTIONS LEGISLATIVE ASSEMBLIES LEGISLATURE LEGISLATURES LOCAL AUTHORITIES LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING LOWER HOUSE MACROECONOMIC STABILITY MINISTERS NATIONAL ELECTIONS NATIONAL GOVERNMENTS NATIONAL LEVEL PARTY AFFILIATION POLITICAL CONTROL POLITICAL DECENTRALIZATION POLITICAL INSTITUTIONS PROVINCIAL GOVERNMENTS PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC GOODS PUBLIC RESOURCES PUBLIC SPENDING RESERVE BANK OF INDIA RESOURCE ALLOCATION SOFT BUDGET CONSTRAINTS STATE FISCAL POLICY STATE GOVERNMENT STATE INCOME SUBNATIONAL DEFICITS SUBNATIONAL GOVERNMENT SUBNATIONAL GOVERNMENTS TAX VOTING |
| spellingShingle |
BORROWING BUDGET DEFICITS BUDGETARY INSTITUTIONS CABINET OF MINISTERS CENTRAL GOVERNMENT CENTRAL GOVERNMENTS CENTRAL TRANSFERS COALITIONS CONSERVATISM CONSTITUENCIES CONSTITUENCY CONSTITUTION DEBT DECENTRALIZATION DEMOCRACY DISTRICTS ECONOMIC CONDITIONS ECONOMIC REFORM ECONOMIC SHOCKS ELECTORAL COMPETITION EXECUTIVE GOVERNMENT EXPENDITURE EXPENDITURE RESPONSIBILITIES EXTERNALITIES FEDERAL GOVERNMENT FEDERALISM FEDERATIONS FISCAL FISCAL DECENTRALIZATION FISCAL DEFICIT FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL POLICIES FISCAL POLICY FISCAL PROBLEMS GOVERNMENT SPENDING GOVERNMENT'S BUDGET INSTITUTIONAL ANALYSIS INSTITUTIONAL RELATIONS INSURANCE INTERGOVERNMENTAL TRANSFERS LEGAL INSTITUTIONS LEGISLATIVE ASSEMBLIES LEGISLATURE LEGISLATURES LOCAL AUTHORITIES LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING LOWER HOUSE MACROECONOMIC STABILITY MINISTERS NATIONAL ELECTIONS NATIONAL GOVERNMENTS NATIONAL LEVEL PARTY AFFILIATION POLITICAL CONTROL POLITICAL DECENTRALIZATION POLITICAL INSTITUTIONS PROVINCIAL GOVERNMENTS PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC GOODS PUBLIC RESOURCES PUBLIC SPENDING RESERVE BANK OF INDIA RESOURCE ALLOCATION SOFT BUDGET CONSTRAINTS STATE FISCAL POLICY STATE GOVERNMENT STATE INCOME SUBNATIONAL DEFICITS SUBNATIONAL GOVERNMENT SUBNATIONAL GOVERNMENTS TAX VOTING Khemani, Stuti Federal Politics and Budget Deficits : Evidence from the States of India |
| geographic_facet |
South Asia India |
| relation |
Policy Research Working Paper;No. 2915 |
| description |
This paper tests two predictions implied
by models of the common-pool game in federations where
subnational governments are more likely to have higher
deficits because they do not internalize the macroeconomic
effects of fiscal profligacy. The first is that subnational
governments that belong to the same political party as the
central government have lower spending and deficits because
they are more likely to be influenced to internalize the
macroeconomic effects of additional local spending; and the
second is that subnational governments that are more
dependent on intergovernmental transfers have higher
spending and deficits. We find that in 15 major states of
India over the period 1972-1995, states in fact have
substantially higher spending and deficits (higher by about
10 percent of the sample average) when their government
belongs to the same party as that governing at the center;
and that intergovernmental grants tend to have a
counter-intuitive negative effect on spending and deficits.
The additional deficit of affiliated states is financed
almost entirely by additional loans from the central
government (as opposed to the market) leading to our
interpretation that similar political considerations
influence the distribution of deficits across states as they
do other intergovernmental grants. We argue that the
evidence from India, contrasted with broader international
evidence, indicates that the effect of fiscal institutions
in a federation is sensitive to underlying political
incentives. This underscores the overall importance of
political institutions in determining the consolidated
government deficit, relative to specific rules of
intergovernmental transfers. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Khemani, Stuti |
| author_facet |
Khemani, Stuti |
| author_sort |
Khemani, Stuti |
| title |
Federal Politics and Budget Deficits : Evidence from the States of India |
| title_short |
Federal Politics and Budget Deficits : Evidence from the States of India |
| title_full |
Federal Politics and Budget Deficits : Evidence from the States of India |
| title_fullStr |
Federal Politics and Budget Deficits : Evidence from the States of India |
| title_full_unstemmed |
Federal Politics and Budget Deficits : Evidence from the States of India |
| title_sort |
federal politics and budget deficits : evidence from the states of india |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2002/10/2874487/federal-politics-budget-deficits-evidence-states-india http://hdl.handle.net/10986/19248 |
| _version_ |
1764439602121146368 |