What is the relationship between political competition and petroleum taxes in subnational India? Since fuel demand generally tends to be inelastic, higher prices may hurt economically vulnerable yet electorally important constituents. State sales taxes comprise a substantial share of petrol and diesel retail prices, often accounting for nearly half of what consumers pay at the pump. Therefore, it would be politically prudent for leaders to provide relief for voters by making fuel more affordable, especially during politically competitive periods. We use a subnational level panel dataset covering 29 Indian states from 1978 to 2019, using both new and diverse measures of political competition while addressing endogeneity concerns using an excludable instrument, the share of successful turncoat s. We find strong empirical support for our theoretical expectations. Furthermore, our results show that political competition leads to lower petroleum taxes when combined with institutional and political characteristics that vary across states and over time (e.g., scheduled elections, coalition governments, cabinet size, and the length of the Chief Minister’s tenure). Our findings show that subnational leaders in India are responsive to the needs and demands of the citizenry when faced with political competition regarding fuel taxes. • This paper examines the relationship between political competition and petroleum taxes in subnational India. • Subnational level panel data covering 29 Indian states from 1978 to 2019 is utilized. • We use new measures of political competition and an instrument—successful turncoats’ share—to address endogeneity concerns. • Findings show Indian state leaders respond to citizen demands on fuel taxes when political competition intensifies. • Political competition leads to lower petroleum taxes when combined with institutional and political characteristics that vary across states.
Adhikari et al. (Wed,) studied this question.