Election-year budgets

Govt must adhere to the consolidation path

Several commentators, including in these pages, have argued that the Union government should not deviate from the fiscal consolidation path. Their fear is not unfounded. As the latest South Asia Development Update of the World Bank highlighted, there is a tendency to increase spending and budget deficits at the time of elections. This issue is particularly relevant for the region at the moment because seven out of eight countries in South Asia are due to hold parliamentary or presidential elections in 2023 and 2024. Thus, given the relatively fragile state of public finances in the region, an increase in deficits owing to elections could put further pressure. Clearly, India is not immune to the phenomenon and various programmes being initiated in poll-bound states point to the risks.

The literature reviewed in the study points to three key reasons why incumbents tend to increase expenditure in an election year. First, they adopt expansionary fiscal policy to directly benefit voters, hoping to increase their chances of re-election. Second, expansionary fiscal policy can also be adopted to push overall economic growth to show the strengths of the government. Third, though somewhat unlikely in the Indian context, incumbents issue more debt to reduce the scope of manoeuvring for the successor in case election results are expected to be unfavourable. The data analysed by the study shows that the primary fiscal deficit in South Asia tends to increase, on average, by 0.5 percentage point of gross domestic product (GDP) just before national elections. The study found that fiscal positions deteriorated significantly in South Asian countries around several elections. It is worth noting in this context that some of the spending commitments are hard to reverse at a later stage.

The literature review in the Indian context, covering the period from the 1960s to the mid-2000s, but restricted to subnational elections, showed a significant increase in expenditure around elections in areas such as infrastructure spending and farm debt waivers. State-run banks also tend to increase agricultural lending during the time of elections. A number of welfare schemes are being announced as India is heading towards a busy election season. In fact, the impact of some of the policy changes being implemented or promised, such as the reversal to the old pension scheme, may be difficult to quantify in the short run but will have significant implications over the long run.

However, the urge to spend more or forgo revenue is not limited to incumbents in states. The Union government, for instance, has increased capital expenditure significantly this year to push overall economic growth. It can certainly be argued that India needs more investment in infrastructure, particularly when private investment is weak, but it is also correct that the pace of fiscal consolidation has slowed as a result. The Union government in the run-up to the last Lok Sabha elections had also announced income support for farmers and concession for income-tax payers. Given the level of fiscal deficit and public debt, it would be well advised to not deviate from the fiscal consolidation path. A deviation will make attaining the medium-term target of reducing the fiscal deficit to below 4.5 per cent of GDP by 2025-26 extremely difficult. Sustained higher interest payment not only limits the government’s ability to support growth, but higher fiscal deficit and public debt also increase macroeconomic risks, particularly in an uncertain global environment.