Central governments show fiscal prudence in Lok Sabha election years

Emkay Research study shows fiscal deficit trend much healthier than in FY19

Contrary to popular perception, central governments in the last 25 years have mostly shown fiscal prudence in election years, with lower fiscal deficits than in the preceding three years, an analysis of past elections by Emkay Research showed.
 

“Our study of the last five election cycles indicates that in general, barring the global financial crisis year, central governments have been consolidating in the year just preceding an election,” the report titled “Evolving Politics of Economics in India,” said. 
 

In FY24, the report said the fiscal deficit trend was much healthier than in FY19. FY19 saw the fiscal deficit already exceeding the budgeted target by November at 115 per cent of the Budget Estimate. In contrast, during the current year, the deficit is at 51 per cent of the target. “FY24 is currently on track to meet the fiscal deficit target, and the trend is also much more stable. So, it reflects the improved spending pattern and better revenue generation under the current government,” the report said.

 

In FY04, fiscal deficit declined to 4.4 per cent compared to an average 5.8 per cent in the previous three years. FY09 has been an aberration with fiscal deficit rising to 6.1 per cent compared to an average 3.3 per cent in the previous three years. This is due to pay commission hikes and higher payouts under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). In election year FY14, fiscal deficit eased to 4.5 per cent of GDP from an average 5.2 per cent of GDP in the preceding three years despite “taper tantrum-led compulsions.”  
 

Similarly, in the three years preceding FY24, the average fiscal deficit was higher due to Covid expenditure.
 

The government has set a target of 5.9 per cent of GDP for FY24, compared to the 7.4 per cent of GDP average of the previous three years.  
 

The report also said that reduced power tussle at the Centre and states has provided comfort to the present government. It can now continue with fiscal discipline through a less-populist approach and continued emphasis on asset creation.
 

“The capital to revenue expenditure ratio is budgeted at a 20-year high of 28.6 per cent in FY24, reflecting the government’s priorities as well as its ability to stay on course due to the strength of its electoral mandate,” the report added.  
 

It highlighted that the influence of a strong political mandate on economic policy is clearly visible in the current government.
 

The Emkay report said the current government’s expenditure mix has improved with higher capital expenditure to revenue expenditure ratio at 28 per cent in FY24 from 13 per cent in FY19. “Far better revenue generation (aided by better compliance and tax reforms) has also ensured that the fiscal impulse does not get too negative on net despite consolidation,” it added.