Political budget cycles in federal systems: The case of India

This paper examines Political Budget Cycles in federal systems, focusing on how a central incumbent allocates discretionary transfers across states in response to electoral incentives. We develop a theoretical model predicting that average discretionary transfers increase during federal election periods. While swing states consistently receive higher transfers due to their electoral competitiveness, the election-period increase is larger for non-swing states. This occurs because non-swing states are targeted primarily during federal elections: allocating transfers to them in state elections is not advantageous for the federal incumbent, as it has little effect on the probability of winning those state elections. To test these predictions, we compile a panel dataset of Indian states from 2006 to 2022. Using fixed effects specifications, we find evidence consistent with the theoretical model: discretionary transfers are significantly higher in federal election periods, swing states receive more discretionary transfers in non-election periods, and the election-period increase in discretionary transfers is more pronounced for non-swing states.