Fiscal Transfers, Natural Calamities and Partisan Politics: Evidence from India

Abstract

Do some sub-national governments receive higher transfers from the Central government than others? Which channels exist for the Central government to practice partisan politics? Taking note of the significant gap between the relief sought by the states in the context of natural calamities such as drought and the assistance given by the Centre, the present study attempts to contribute to the vast literature on fiscal transfers from the Centre to different states in India with particular focus on partisan politics. The empirical analysis based on total and non-plan fiscal grants from the Centre to different states and an index of drought over the past three decades suggests that grant allocation in response to drought is higher for the politically aligned states. Compared to the aligned states the non-aligned states received lower total grants in a non-drought year. Further, if an average intensity drought were to occur, marginal grant allocation in response to drought for the non-aligned states vis-à-vis the aligned states was upto ~9% (~16%) lower for total (non-plan) grants. The results also show that the extent of favouritism exhibited by the Centre differs between states ruled by same political party and those ruled by parties extending outside support to the Central government. Over time favouritism in grant allocation in general has become apparent, while drought as a channel through which such favouritism manifested earlier has become less important in the later years. This study presents an important link in the broader literature on political economy of disaster management.