Political Variables and Subnational Debt in India

The effect of India’s high level expenditures on interest payments on the debt has received a great deal of attention in the literature on fiscal decentralization (Purfield 2004). Such literature maintains that disproportionately large subnational expenditures on interest payments on the debt reduce fiscal space for growth enhancing forms of public expenditure (Heller 2005) or that it increases electoral volatility (Nooruddin and Chhibber 2008). However, the political economy literature on the causes of subnational debt in India (Rao and Singh 2007, Lahiri 2000, Khemani 2002, Banerjee and Sumanthan 2007) continues to underanalyze the causal impact of political variables. Saez and Sinha (2009) attempted to redress this problem, but their study solely focused on a range of developmental fiscal expenditure types (e.g., education, health). This paper extends their analysis to a very important non-developmental fiscal expenditure type: a state’s interest payments on debt. Using an original dataset, called POLXDEBT-India, the paper will evaluate the explanatory power of some key political variables —political ideology, effective number of parties, alternation of power, timing of an election— in serving as a predictor of variation in the expenditure levels on interest payments on debt across India’s states. The author will show that the timing of a state assembly election in India appears to be the best predictor for variation in the levels of interest payments on debt.