Federal Politics and Budget Deficits : Evidence from the States of India

Khemani, Stuti

World Bank, Washington, DC

关键词: BORROWING;    BUDGET DEFICITS;    BUDGETARY INSTITUTIONS;    CABINET OF MINISTERS;    CENTRAL GOVERNMENT;   

DOI  :  10.1596/1813-9450-2915
RP-ID  :  WPS2915

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

This paper tests two predictions impliedby models of the common-pool game in federations wheresubnational governments are more likely to have higherdeficits because they do not internalize the macroeconomiceffects of fiscal profligacy. The first is that subnationalgovernments that belong to the same political party as thecentral government have lower spending and deficits becausethey are more likely to be influenced to internalize themacroeconomic effects of additional local spending; and thesecond is that subnational governments that are moredependent on intergovernmental transfers have higherspending and deficits. We find that in 15 major states ofIndia over the period 1972-1995, states in fact havesubstantially higher spending and deficits (higher by about10 percent of the sample average) when their governmentbelongs to the same party as that governing at the center;and that intergovernmental grants tend to have acounter-intuitive negative effect on spending and deficits.The additional deficit of affiliated states is financedalmost entirely by additional loans from the centralgovernment (as opposed to the market) leading to ourinterpretation that similar political considerationsinfluence the distribution of deficits across states as theydo other intergovernmental grants. We argue that theevidence from India, contrasted with broader internationalevidence, indicates that the effect of fiscal institutionsin a federation is sensitive to underlying politicalincentives. This underscores the overall importance ofpolitical institutions in determining the consolidatedgovernment deficit, relative to specific rules ofintergovernmental transfers.