Fiscal transfers and natural calamities: Does political alignment matter?

Fiscal transfers from the central government serve as an important mechanism for state governments to mitigate adverse impacts of extreme climate events. This article demonstrates that higher allocations are made to states that are politically aligned with the Centre. Further, the scope for such partisan politics is greater in case of slow onset events such as droughts, as compared to floods that manifest relatively quickly.

Natural calamities¹ such as drought and floods are not uncommon in India, with almost all states affected by one or the other form of such hydro-meteorological risks every year. During 1995-2020, the average annual occurrence of drought across the country increased by over 60%. This increasing trend is likely to get further accelerated with potential changes in climate. The severity of these and other climate risks is also expected to increase on account of climate change.

There is considerable understanding and knowledge about the management of these widely (and frequently) experienced climate risks in India. Several institutional interventions have emerged over time to control both the physical and financial impacts of such events. Among the various risk management strategies, fiscal transfers from the central government serve as an important mechanism for state governments to effectively address the adverse impacts of a natural calamity. However, there is often a significant gap between the relief sought by the states to cope with the hydro-meteorological risks and the assistance provided by the Centre. This gap was close to 80% in case of drought, and 70% for floods, on average.²

Several factors including over-estimation of damages by the affected state can influence the gap between the relief assistance sought and provided. Additionally, political favouritism in the context of fiscal transfers from the Centre to affected states, could also be playing a significant role. However, the nature of climate risk may or may not provide scope for the central government to exhibit favouritism towards politically aligned states.

A limited number of studies explore the three-way link between natural calamities, fiscal transfers, and partisan politics. In the context of the US, Garrett and Sobel (2003) have shown that the states that are politically important to the President have had greater access to disaster funds compared to those that are not politically aligned. Analysing the economic impacts of floods in India, Parida (2020) asserts that states that are politically aligned with the Centre incur lower damages, possibly due to favourable funding received from the Centre.

In recent research, we study these aspects through an empirical analysis of total and non-plan (that is, grants allocated for non-plan purposes, including statutory grants and relief on account of natural calamities) fiscal grants from the Centre to different states over three decades ( 1980-2009) the occurrence of drought and floods across states over this period, and political alignment between the central and state governments (Pattanayak and Kumar 2022, Kavi Kumar and Pattanayak 2022).

Drought, co-partisanship, and grants

Droughts are events that may occur due to high temperature and low rainfall conditions (called hot drought) or due to low temperature and low rainfall conditions (called cold drought). For the purpose of our analysis, the drought index was calculated following Yu and Babcock (2010) by focusing on kharif (monsoon) season and rice crop. Data on grants that are allocated to states owing specifically to natural calamities, are sparsely available. We consider total grants as well as its sub-component – non-plan grants – as proxy measures of grants for natural calamities.

The Centre-state co-partisanship variable can be divided into two categories: (a) Co-partisanship where the same political party is ruling in the state and the Centre; and (b) Co-partisanship where different political party (say, regional/state party) is ruling in the state but with some form of alignment – through outside support or coalition government – with the party in power at the Centre. Accordingly, the co-partisanship indicator variable takes values 0, 1, and 2, where 0 represents no Centre-state co-partisanship, 1 represents co-partisanship as in (a), and 2 represents co-partisanship as in (b) above.

The relationship between drought and grant allocation through the lens of co-partisan politics can be seen in Figure 1 below. The graph shows the widening gap in grant allocation between states that are politically aligned with the Centre vis-à-vis those that are not, in response to drought intensity. The relationship holds true irrespective of the nature of drought.

Figure 1. Relationship between drought index, grants, and co-partisanship

Note: (i) Orange dots correspond to co-partisanship (co-partisanship indicator takes value 1 or 2) and green dots to non-co-partisanship (co-partisanship indicator takes value 0). Best fit lines are color coded similarly. (ii) The scatter plot shows the relationship between (de-meaned and de-trended) values of the (log of) total grants and those of the drought index.

We find that having alignment with the Centre fetches about 6% higher total grants for states compared to when there is no alignment, in a non-drought or normal year. However, in a drought year, aligned states receive 9% higher total grants than those that are not aligned. Further, incremental total grants allocation in response to drought is higher when states are ruled by political parties that provide outside support to the party/coalition ruling at the Centre versus when states are ruled by the same political party that is in power at the Centre. This could be viewed as the presence of an appeasement effect in the central allocation of grants.

In the non-drought years, allocation of non-plan grants – which as mentioned above, could be a better proxy for allocations made in response to the natural calamities – across aligned as well as non-aligned states were similar. While non-plan grants do not increase in response to drought in the absence of co-partisanship, politically aligned states get about 16% incremental non-plan grant allocation (compared to that for the non-aligned states) in response to drought.

The nature of disaster plays a role

While all natural calamities cause adverse social and economic impacts, they differ in terms of their characteristics such as pace of manifestation and the sectors they adversely affect. For example, drought would largely impact agricultural activities, whereas floods would have more widespread impact. Our analysis suggests that favouritism in grant allocation exhibited by the Centre towards the affected states is pronounced in case of droughts (as discussed above), but it is relatively muted in case of floods. Onset of flood events is quicker to unfold as compared to slow or gradual events such as droughts. They allow very limited response time by the government towards: (i) the assessment of flood induced damages; and (ii) the announcement of the amount to be disbursed as a part of relief measures to address the flood impact. Such a small window requiring quick response from the government also coincides with significantly high scrutiny from different stakeholders (such as the media and the public), thus limiting the possibility of favouritism in grant allocation towards the aligned states. Our results hold true in case of both total grants and non-plan grants.

Figure 2 summarises the above findings in case of drought (left panel) and floods (right panel). The figure plots the ‘residual’ values of total grants against four categories emanating from two indicator variables. The two variables define respectively the ‘natural calamity grants receipt status’ (‘received’ if state received natural calamity assistance and ‘not-received’ otherwise), and the status on co-partisanship (‘aligned’ if the state government is aligned with Centre and ‘non-aligned’ otherwise).

As shown in the figure, in case of drought, non-aligned (aligned) states receive lower (higher) total grants than the average (bar 1 and 2 versus bar 3 and 4). Further, states facing natural calamities receive higher grants relative to those that do not (bar 2 versus 1 and bar 4 versus 3). More importantly, politically aligned states receive statistically significant higher grants than the non-aligned states while facing drought condition (bar 4 versus 2). However, this pattern is not evident in case of grant allocation made to states affected by floods – that unfold relatively quickly and require faster response from the central government.

Figure 2. Disaster assistance, political alignment, and grant allocation

Notes: (i) In the left panel (Drought), the residual values of total grants are obtained after parsing out the influence of floods, along with the state- and year-specific unobserved factors. Similarly, in the right panel (Floods), residuals are obtained after parsing out the influence of drought, along with state- and year-specific unobserved factors. (ii) The statistically significant (p < 0.05) difference in total grants allocation – between the aligned and the non-aligned states – while facing drought but not while facing floods is supported by regression-based tests as well as two-sample t-tests of mean differences.

Concluding remarks

Given the heterogeneity in the future climate and disaster risks and the associated economic impacts, partisan politics induced grant allocation may exacerbate the adverse effects of climate risks and the development prospect of states. Further complexity is introduced when certain type/nature of disaster risk provides greater scope for partisan politics in grant allocation than other types of disaster risk.

Notes:

In line with the literature on climate change, we use the terms, ‘natural calamities’, ‘hydro-meteorological risks’, ‘climate risks’, ‘natural disasters’, interchangeably. Further, the discussion and analysis in this article are confined to two widely reported events, namely droughts and floods.
It may be noted that the data on relief assistance sought by the states and provided by the Centre is not well documented in India. The reported data, sourced from Parliamentary questions, thus spans different time periods for the two hydro-meteorological events under consideration.