Increasing populism

The trend will elevate macroeconomic risks

Political parties in the five poll-bound states are expanding the nature and scope of pre-poll promises, with long-term fiscal consequences. An analysis of the promises made in Chhattisgarh, for instance, shows that both the Congress and the Bharatiya Janata Party (BJP) are not very different in their approach. The promises made in the state include cash transfers to landless agricultural labourers, cheaper gas cylinders, and free education. The BJP has also promised a monthly allowance to married women. However, the biggest announcement in this regard came from Prime Minister Narendra Modi on Saturday that the Union government had decided to extend the distribution of free foodgrains to over 800 million eligible people across the country for the next five years. Annual expenditure on the scheme is currently estimated at about Rs 2 trillion. What is concerning is that the announcement has not only set the tone for the states going to the polls this month, but also next year’s Lok Sabha elections.

The distribution of free foodgrains started during the pandemic under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). After multiple extensions, the government decided to combine the scheme with the distribution of foodgrains under the National Food Security Act (NFSA) for a year, starting January 2023. Accordingly, instead of distributing rice and wheat at Rs 3 and Rs 2, respectively, under the NFSA, the government made it free. It should have simply discontinued the PMGKAY because the scheme was essentially a temporary measure to provide relief during the pandemic, and the economy had returned to normal. Notably, the debate before the pandemic was centred on how the government can increase prices under the NFSA to contain food subsidies. But by making it free, the government went exactly in the opposite direction, and a reversal was always difficult. At the time of the announcement in December 2022, this newspaper, for instance, had argued: “…it is hard to imagine, politically, that the government would be able to withdraw the provision of free foodgrain at the end of 2023, just a few months before the general elections”. Now an extension for five years will give it a near-permanent status.
 

Cues from the promises being made in the state elections suggest that the approach is unlikely to change before the Lok Sabha elections, as demonstrated by the extension of free foodgrain distribution. However, in terms of policy and fiscal management, adding permanent expenditure — difficult to touch politically — will reduce the government’s capacity to manoeuvre, with long-term economic implications. In principle, there is no policy dispute that the government should support people with low levels of income. However, fiscal resources should be used in a targeted way to increase effectiveness. This is particularly important at India’s level of development because it needs to spend on a variety of areas, including the social sector, to build capacity. Increasing expenditure on subsidies and freebies at this stage would weaken India’s fiscal position, considering already elevated levels of public debt and the general government deficit. The Union government is targeting to contain the fiscal deficit at 5.9 per cent of gross domestic product this financial year and aims to reduce it to less than 4.5 per cent by 2025-26. Thus, the fiscal deficit is likely to remain elevated over the medium term and an increase in committed expenditure could delay fiscal consolidation, heightening macroeconomic risks.