Global Journal of Management and Business Research, B: Economics and Commerce, Volume 22 Issue 4

How Political Stability Affects Economic Growth in India Abstract- This paper attempts to answer the question – ‘Whether the economic growth in India is affected by stability at the Central and States level political stability?’ A Political Stability Index (PLSI) is constructed using four political stability measures at Central and States level for both the Houses of the Legislatures. This index, the independent variable, is tested on two dependent economic growth variables Per Capita Income and Gross Capital Formation. The time for the study is 1981-2017 (37 years) at India (Central) level and 1991- 2015 (25 years) at the States level according to the availability of data with a lag period of 1 year, as policies bear results, the following year. The analysis very modestly supports the hypothesis at the Central level. However, the impact is more robust at the States level, evident from continuous governmental stability of many States. Principal Component Analysis method is used to construct the index and then Regression Analysis is used to measure the impact on dependent variable. I. I ntroduction or the last half century, the early years of each decade saw a major turning point in the world economy and markets. Each country began with a global mania for some big idea, some new change agent that reshaped the world economy and generated huge profits. It was the boom of the major economies around the world. The 2010s brought in the era of emerging markets: Brazil, Russia, India, China and South Africa. These poor economies were growing rapidly as well as erratically from 4 percent to 12 percent a year. However, this was so far the fastest growth spurt to be ever experienced across the world (Sharma, 2012). Thus, the question of political regimes came forward, as each of these five newly emerging economies has a different political system. The newly emerging economies portrayed a different political system – from authoritarian China to socialist Russia to democratic South Africa, Brazil to a multi-party parliamentary system in India. Thus, it becomes imperative to assess the impact of political system and its stability on economic growth. The political system of a nation is described in its Constitution. Constitutions establish the governance structures of nation states, provinces, and supranational organizations such as the European Union. In designing constitutions, arguably the most important issue is to determine the extent to which collective decision-making should be centralized (Bodenstein and Ursprung, 2001). Political stability plays a very important role in achieving economic growth. Many studies have been undertaken to determine the impact of political stability on economic growth. Most of the studies have attempted to establish this relationship by taking countries from a particular region or countries having similar pattern of governance (Alesina et al, 1992; Feng, 1997; Barro, 1994; Bildirici, 2004; Salvi, 2005; Jhee, 2006; Hazama, 2009; Aisen and Veiga, 2011; Acemoglu and Robinson, 2012; Nomor and Iorember, 2017). In a country like India, the federal structure of political system ensures that the Constitution is well guarded and abided by the rule-makers. With the multitude of parties that exists in India, coalition government becomes necessary. In the economic literature the interest in the relationship between political instability and economic performance is very well established. This leads to inefficient public expenditure, deficit and debt accumulation, distorted investment and ultimately lower economic growth. However, the large amount of contributions in the political science literature on coalition politics suggest that a few other mechanisms could be active and that the definition of political instability should also account for the interaction between the executive and the legislature (Carmignani, 2001). The question that we try to answer here is – whether the economic growth that takes place in India is affected by stability at the central and states level political situation. II. T heoretical U nderpinning This section provides the theoretical justification for the analysis of political stability and economic growth in India with its federal structure in background. In India, Salvi (2005) attempted to establish a relationship between political stability and economic growth with Lok Sabha election results (Lower House of the Parliament). However, Rajya Sabha (Upper House of the Parliament) results have been left out of the scope. India has a federal structure and both the Houses play an important role in passing of a Bill, which ultimately becomes a Law. Hence, in order to estimate the political F 17 Global Journal of Management and Business Research Volume XXII Issue IV Version I Year 2022 ( ) B © 2022 Global Journals Dr. Shreya Raval α & Dr. Prakash Salvi σ Author σ : D.G. Ruaprel College, Mahim, Mumbai – 400098. e-mail: prakashsalvi.eco@gmail.com Author α : PhD holder, Mumbai School of Economics and Public Policy, Kalina, Mumbai – 400098. e-mail: shreyab77@gmail.com