Party Politics and Fiscal Discipline in a Federation: Evidence from the States of India

Theoretical and empirical analysis suggests that federations are prone to fiscal indiscipline, because of intergovernmental bargaining over the allocation of national resources. What role do political parties play in mediating this bargain? If the national government is dominated by a single political party, does the party discipline those states where its affiliates are in power? If the national government consists of a coalition of political parties, do states ruled by coalition partners bargain for higher deficits? This article provides evidence on these questions from India, a large federation in the developing world that serves as a valuable laboratory for this purpose. The authors find that those state governments that belong to the same party as that leading the national government run higher than average deficits; correspondingly, states governed by rival political parties have lower deficits, even if these parties are members of a coalition government at the center.