Contributions to the exchequer funds by state level public sector enterprises: does political alignment matter?

Abstract

Regular payments or contributions to states’ exchequer funds are mandated for state level public sector enterprises (SLPEs) in most states in India. However, in the absence of a regular mechanism to ensure timely payments, the contributions are abysmally poor. In most SLPEs, the situation is driven by the presence of soft budget constraints and strong financial support from the state governments. The current study analyses the effect of political factors on the contribution that SLPEs make to the state governments’ exchequer funds. Using different econometric methods, the study finds that SLPEs located in assembly constituencies that are politically aligned with the state government, make frequent and larger contributions to the exchequer funds. Surprisingly, the subsidies provided to the SLPEs by state governments are not driven by political alignment between the state government and the constituency where the enterprise is located. In fact, subsidies compensate for the contributions to the extent that there is no effect of political alignment on net contributions (contributions–subsidies) by SLPEs to state governments. Finally, political alignment has a strong influence on the relative share of contributions made by SLPEs to state governments vis-a-vis the centre. These results are robust across different model specifications.