Decentralisation and Political Business Cycle: Fund Utilization of the MP-LADS in India

The Members of Parliament Local Area Development Scheme (MP-LADS) came in effect in 1993, closely followed by the 73rd Amendment to the Constitution, along with the wave of democratic decentralisation process in India. The MP-LADS allows for a fixed amount, non-lapsable Rs. 2 crores per year for each Member of the Parliament (MP), at the discretion of the MPs to carry out developmental works of capital nature in their respective constituencies. In last 14 years, more than 8 times of the annual expenditure on higher education by the central government has been spent on the MP-LADS. This paper examines whether there is any political business cycle in spending funds under the MP-LADS, its extent, and determinants. We find that there are political business cycles in spending by the MPs, and its extent varies across Lok Sabha constituencies. The extent of political business cycle is lower in case of leftist MPs compared to that in case of centrist and rightist MPs. Higher degree of competition faced in the last election by an MP induces him/her to misuse the scheme more severely, and younger MPs seems to be less inclined to generate political business cycle in spending. We also find that higher level of awareness of general citizens and better law and order conditions in states restricts MPs from misusing funds to gain political mileage.