The economics of electoral promises

What political parties offer to persuade voters changes with time. So, if the promise of 24/7 power helped in the past, now it’s free power to all. Free power up to a limit arguably helped Aam Aadmi Party (AAP) win Delhi. Predictably, the party has taken the idea to other states. But now other parties have also started offering the same. Punjab, where it is a formidable challenger, AAP has promised to pay Rs 1,000 per month to all women in the state. The Shiromani Akali Dal, on the other hand, has announced Rs 2,000 per month for women heads of poor families. The Congress party chief in the state, meanwhile, has offered free gas cylinders, besides Rs 2,000 to women homemakers.

Populist demand and decisions, to be fair, are not new, but it’s worth debating what they mean for the economy in the long run. There is nothing to stop political parties, for instance, from making promises to transfer higher sums. The Congress party, in fact, offered Rs 72,000 per year to 20 per cent of the poorest families in the country during the 2019 general elections. There is nothing wrong with cash transfers to a targeted group. In fact, it is said to be a far superior way of delivering support compared to subsidies. However, income support in the Indian context is not seen to be substituting other subsidies. On the contrary, other subsidies like the promise of free power will add to the overall expenditure and increase fiscal pressure. 

The growing acceptability of income support and other promises being made by political parties, in a way, reflects the system’s inability to create income opportunities at the scale required. As reported elsewhere, compared to five years ago, the total number of people employed in four out of five poll-bound states was lower in December 2021. Even at the national level, India’s employment ratio is one of the lowest in the world. The female labour force participation rate too is one of the lowest, which perhaps explains the idea of promising cash transfers to women. A big risk in the medium term would be that in the absence of a large-scale increase in employment opportunities, the political pressure to provide support in one form or the other would rise significantly. Broad changes in the economy currently underway could also exacerbate the problem. 

In a 2017 paper, Populism and the Economics of Globalization, which focused on economic sources of populism in the context of globalisation, economist Dani Rodrik noted that factors such as changes in technology and the rise of winner-take-all markets, among other things, have also contributed to the trend. This is again a risk. India is celebrating its tech start-up boom and the rising number of unicorns, which is encouraging. But this is happening at a time when labour force participation has shrunk. This is not a sustainable position and will increase policy complications. The pandemic has only worsened the fault lines. The response to the lack of a desired level and quality of growth can surface in different ways, which would affect longer-term economic prospects. States mandating reservations for locals in private sector jobs is one such example. The withdrawal of well-intended farm laws is another. It’s well-known that the present condition in states such as Punjab and Haryana is unsustainable, but most opposition parties backed farm protests. 

The broader risk in this context is that an increase in subsidies or other forms of support would leave so much less for the government to spend on capacity-enhancing heads such as roads and schools. As a recent report in this newspaper showed, promises of cash transfer in Punjab may cost up to Rs 12,000 crore per year. The state is expected to spend Rs 4,662 crore on health and family welfare in the current fiscal year. At the national level, however, the expenditure on subsidies declined in recent decades. As economists Sudipto Mundle and Satadru Sikdar showed in a 2019 paper, Subsidies, Merit Goods and the Fiscal Space for Reviving Growth: An Aspect of Public Expenditure in India, the incidence of implicit and explicit subsidies declined from 12.9 per cent of gross domestic product (GDP) in 1987-88 to 10.3 per cent in 2015-16. The estimate does not include cash transfer schemes such as under the Mahatma Gandhi National Rural Employment Guarantee Act and Pradhan Mantri Kisan Samman Nidhi. Data compiled by the Fifteenth Finance Commission also showed that the Central government’s expenditure on subsidies as a percentage of revenue declined in recent years. 

Although expenditure has now gone up because of the pandemic, it is important that the broader trend is not allowed to be reversed. Therefore, the government would require a more structured approach. Competing promises of sops in elections are undesirable and can have severe unintended consequences. India needs a debate as to what percentage of general government revenue can be used for subsidies and cash transfers. Both the Centre and states can then collectively finance support programmes to enable efficient use of resources. The above-mentioned paper on subsidies also notes that rationalising non-merit subsidies and other reforms can free up fiscal space worth 6 per cent of GDP. This would go a long way in addressing India’s developmental needs and promoting inclusive growth. Besides, India’s tax-to-GDP ratio is very low, which directly affects government expenditure and needs urgent attention. The upcoming Budget session would be an opportunity to cover some distance in this debate.