Modi's thrifty populism is working for now, but may have a cost in future

By Mihir Sharma

A few months from now, Prime Minister Narendra Modi will face India’s electorate and ask them to grant him a third term. In 2019, when he increased his majority in Parliament, most analysts suggested he was buoyed by a wave of nationalism following a military confrontation with Pakistan.
 

Others, however, believed voters were responding to Modi’s perceived commitment to expanding India’s welfare state. If that were the case, you might expect his government’s spending plans for the coming year, to be announced on Feb. 1, would include big increase in welfare spending in order to lock up this year’s elections as well.

I wouldn’t be so sure. The fact is that Modi has been pretty tight with India’s purse strings while in office. Subsidies for food, fuel, and fertilisers did indeed rise in his second term, driven largely by the pandemic and the Ukraine war. But, once you adjust for economic growth, the government actually paid out about the same last year as when Modi took power just under a decade ago.

Over the years, Modi has instead spent the extra money available to him on infrastructure. Even during the pandemic, the Indian government broadly resisted the temptation to offer large-scale income support. While transfers did increase, that was driven by existing employment guarantee schemes and by a decision to open up public granaries to Indian households.

Meanwhile, the government has kept the fiscal deficit mostly under control, even though some might want it to be brought down more sharply since Indian debt as a proportion of gross domestic product has spiked upwards in recent years.

No word of this conservatism has been allowed to infect Modi’s political messaging. On the contrary, his campaigns emphasize what he has done for the poor. The slogan his Bharatiya Janata Party has been using of late is “Modi’s Guarantee”: a promise that, whatever giveaways the opposition might offer, Modi will be a more reliable provider of goodies than any of his competitors.

How has he gotten away with such a strategy? Why is there a general belief that Modi has been building up India’s welfare state, even as he, in fact, cuts such spending whenever he can?

The BJP’s jealously guarded dominance of the political and media narrative helps. Across the length and breadth of India, posters with Modi’s face are ubiquitous on giant publicity posters for various public programmes. The federal government is so determined to ensure Modi gets personal credit for every rupee spent that there are even reports it holds back funds from state governments that are insufficiently enthusiastic about putting up Modi’s photograph at grain distribution centers.

Some of Modi’s success is also due to the choice of programmes that receive funding. A lot of money has been saved by phasing out fuel subsidies, for example, which generated surprisingly little political backlash. Meanwhile, cash has been spent on subsidies for home-building, food distribution, or cooking gas connections. Launching new programmes that are more personally targeted allows for better branding, and a closer link to the prime minister in particular.

About $29 billion has been spent, for example, on houses under a programme that translates from Hindi as the Prime Minister’s Accommodation Plan. About eight million homes have been completed. That’s a drop in the ocean of India’s housing deficit, sure. But pretty much everyone in the country will have seen a government-supported house with the logo of the “prime minister’s” plan on it.

Modi is sometimes described as a populist. If so, unlike some other populists, he has managed his populism without breaking the bank. It seems like the best of all possible worlds for a politician: He’s enjoying the popularity that comes with opening the money tap, without actually spending too much.

He shouldn’t celebrate too soon. Some components of welfare contribute to growth, entrepreneurship and job creation more than others — investment in human capital, in particular. India is at the tail end of a demographic boom and it is vital that its young people receive the best possible education, and that its workforce be healthy.

Previous governments ramped up education spending sharply. Under Modi, spending on education has in fact decreased as a share of expenditure. It’s a similar story with healthcare. New Delhi’s budget allocates only 0.35 per cent of GDP to health, although it its own target was to spend 2.5 per cent of GDP on public health by 2025.

Populism on the cheap may not cost you much money. In the long run, however, it may cost you growth and jobs.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper