Session 5: Political Economy

The Political Economy Session was chaired by Dr. E. L. S. N. Bala Prasad (Commercial Taxes Department, Government of Bihar). Prof. Sisir Debnath (ISB), and Dr. Rathin Roy (Director, NIPFP) also joined the session as discussants.

Prof. Nishit Prakash, University of Connecticut, presented the preliminary design of the ongoing IGC research “Political Change and Crime reduction in Bihar“.

Improvements in law and order and crime reduction in the last ten years have been addressed as one of the main driver of Bihar’s economic growth, reinforcing the theory that rigorous enforcement of property rights, therefore a decrease cost in economic transactions foster wellbeing and economic activity.

The design investigates whether law and order restoration in Bihar contributed and the magnitude of the contribution to the State’s latest economic growth and to identify those policies that have been more effective in solving the growth binding constraints.

Indeed, Bihar’s trends in crime, theft and ransom shrunk after 2005, when economic growth took off. Though, the direction of causality and the bias effect due to omitted factors in explaining the crime-growth relation might undermine this explanation. In facts, investments in infrastructure or political changes might have also played a fundamental role on both institutions improvements and economic growth.

The author is currently collecting district and sub-district level data as well as unbiased indicators and will be presenting soon the preliminary findings.

Prabhat Barnwal (Columbia University) presented the study “Leakage in Fuel Subsidies Evidence from Direct Benefit Transfer for LPG (DBTL) policy in India’ on how effective it was in controlling subsidy diversion, effect on recorded household LPG consumption and on black-market prices of LPG.

The identification strategy for estimating the causal effect of DBTL policy rests on phase wise rollout of the DBTL. The paper finds that introduction of DBTL policy is effective in reducing domestic LPG purchase (and thus the subsidy burden) by about 12 to 18% based on household transaction data. Since it includes impact on total domestic LPG refills (subsidized as well as non-subsidized), estimates indicate significant reduction in subsidy diversion. In addition, supporting evidence from survey data show that the impact on leakage is reflected well in LPG black market; DBTL roll back brings down black-market prices by about 15% in the DBTL districts.

The author concludes that introduction of DBTL policy is effective in reducing subsidy burden by controlling leakage. If effectively implemented, DBTL may save more than Rs.6000 Cr ($1 billion). However, frictionless implementation of DBTL must be paid due attention before government considers reintroduction.

By Filippo Sebastio, Country Economist, IGC Bangladesh