Populist Budgets don't win elections: Will Jaitley heed lessons of history?

Populist Budgets before a general election have worked only once, the first time, in 1970

Arun Jaitley has been a good finance minister so far. But the fiscal deficit target of 3.2 per cent of gross domestic product (GDP) is not going to be met this year.

Never mind, it's no big deal. A few points this way or that makes no difference because accurate measurement is nearly impossible anyway. Too many revisions take place.

But by how much will it increase by in 2018-19? We don't know yet. But we can hazard a guess: By a full per cent at least, ending up somewhere near or over five per cent when the final Budget numbers come in — three years later.

This is what always happens to the fiscal deficit in the year preceding a general election. Politicians like to spend even more of your money to get re-elected. They do this even though the evidence shows that it doesn't help. Just consider the record.

Since 1971, not counting the short-lived BJP one of 1998, only two sitting governments have been re-elected. One was in 1984 and another was in 2009.

Of these, the first happened because of the sympathy vote after Indira Gandhi had been assassinated. The second happened because UPA-I had spent taxpayer money generously throughout its five years, and not just in its fifth year. That was Sonia Gandhi's contribution to the Indian economy.

From this, we can see that the strategy of a populist Budget before a general election has worked only once, the first time, in 1970. Indira Gandhi had gone into full socialist mode and gulled the voters in the election of March 1971 with her rhetoric.

No lessons learned 

In 1979, Charan Singh presented a highly populist Budget. But he only just managed to retain his own seat. The government was defeated.

The 1984 Budget was exactly the same. The total allocation for rural development was doubled. The allocation for rural landless employment was quadrupled. Yes, quadrupled.

The next election year was 1989 but since Rajiv Gandhi wanted to hold the election in 1988, the 1988 Budget was also a very populist one. In the event, he decided not to do that and this resulted in two successive populist Budgets.

In 1989, the finance minister went berserk and announced a barge load of schemes and expenditures for employment, education, health, sanitation, irrigation and so on. But the Congress was defeated.

Exactly the same thing happened in 1996. I will not go into the details. Again, the Congress lost.

In 1997, Prime Minister Inder Gujral tried the Pay Commission trick for the 1998 election, but to no avail. The 1999 general election was a freak event — the result of a confidence vote that the government lost by one vote. So the Budget was spared. 

In 2004, the BJP repeated the mistake of its predecessors. Although the election was over a year away in February 2003, paras 14-62 and 71-86 of the Budget speech were devoted wholly to the electorate. Voters were not impressed, and it also lost.

It will be interesting to see how far Jaitley deviates from the norm of going populist in the 2018-19 Budget. The Modi government has already committed the cardinal mistake of not keeping the voter happy throughout its term, as UPA-I did. Can it make up for it by one lavish spendfest next year?

Irrational governments

Hence the question: Why do governments keep repeating their mistakes? Why do successive Indian governments think that Budgets in an election year must be populist and full of lollipops for the voters?

There can be only one conclusion: Governments, who are supposed to be the ultimate in rationality, are actually irrational. Rationality is defined as someone who does not commit the same mistake twice, and certainly not many times over.

This, at any rate, was the definition given by a little-known economist from the Carnegie-Mellon University called John Muth. He wrote a paper back in the very early 1960s which has come to be recognised as the cornerstone of the rational expectations theory in economics.

He should have but didn't get the 'Nobel' prize. But many years later, the man who developed his theory, Robert Lucas, did.

Such is life.