Populism: The only game in town

As political parties indulge in competitive populism, why do voters accept it?

The results of the ongoing state Assembly elections will be out in about 10 days. Expectedly, it will be sliced and diced by political analysts, particularly in the case of Madhya Pradesh, Chhattisgarh, and Rajasthan, to gauge the possibilities for the 2024 Lok Sabha election. The Bharatiya Janata Party (BJP) and the Congress are in direct contest in these states. However, irrespective of the outcome, from an economic standpoint, it is becoming clear that the political discourse is getting increasingly populist, which is worrying. In fact, it may be difficult for voters to choose because there isn’t much difference among competing parties. From cash transfers to cheaper cooking gas cylinders to higher support prices for farm products, all have been promised. A law guaranteeing minimum support price has also been pledged in Rajasthan. The most innovative promise, though it may not have fiscal implications, is an Indian Premier League team for Madhya Pradesh!

To be sure, a bit of populist spending is not unique to India. A recent World Bank study looked at political budget cycles in both advanced and developing countries. In the context of South Asia, it noted that the primary deficit, on average, tends to widen by 0.5 per cent of gross domestic product (GDP) around national elections. Incumbents tend to adopt an expansionary fiscal policy to either directly benefit voters or increase spending to show higher economic growth — both aimed at increasing their chances of returning to power. In the Indian context, the existing literature review, restricted to subnational elections between the 1960s to mid-2000s, showed a significant increase in expenditure during state elections. Given the trend of increasing populist promises, it would be worthwhile to study how government expenditure and its composition change after elections. A senior minister in Karnataka has been quoted saying that the implementation of poll guarantees is affecting development work.

Such promises, however, are not limited to states. The Union government recently extended the distribution of free foodgrain to about 810 million beneficiaries for the next five years. The government started distributing free foodgrain to the beneficiaries of the National Food Security Act (NFSA) during the pandemic, which was a laudable step as it provided relief to the most vulnerable sections of the population. After multiple extensions, the scheme was amalgamated with the NFSA for a year and the distribution of free foodgrain was to end this year. However, it has now been extended for five years. It has been argued that the extension will not have a significant impact on the Budget, which may well be correct in the immediate short run. However, the real debate should be on policy direction.

Further, the impact of electoral promises and decisions made by governments may not be limited to immediate fiscal outgo. Some states have reverted to the old pension scheme (OPS), reversing an important reform. A recent study by economists at the Reserve Bank of India showed that the fiscal burden of states in the case of OPS could increase to as much as 4.5 times the National Pension System, with the annual additional burden increasing to 0.9 per cent of GDP. A return to OPS effectively means that the state will tax all its citizens to pay a privileged few. It is clear that most such decisions and promises are not based on the actual needs of the citizens, or targeted to the most vulnerable sections of society. This results in inefficient government spending and hurts the very section that actually needs support.

Increasing populist spending will inevitably leave much less for capacity-enhancing capital expenditure. As a result, the state will have less to spend on roads, schools, and hospitals. The issue is more salient at this stage because India’s public debt and general government Budget deficit are at elevated levels, and expenditure on populist schemes will delay fiscal consolidation, with longer-term implications for financial stability and growth. The Union government, for example, is targeting to contain the fiscal deficit at 5.9 per cent of GDP in the current financial year, and it needs to be brought down at the earliest.

While it is understandable why political parties indulge in competitive populism, the intriguing bit is why voters accept it. Voting decisions, to be sure, depends on a number of factors and it is not clear to what extent populist promises influence them. For instance, the Congress party’s big promise of a basic income to a section of the population in the 2019 Lok Sabha elections did not yield much. The extent to which it actually affects voting decisions can perhaps be explained by what behavioural economists call the “present bias”, where people prefer immediate payoffs. In fact, the longer-term potential payoff of fiscal discipline could be uncertain. Since it’s not easy for voters to foresee the potential benefits of fiscal discipline in the long run, it becomes difficult to break the cycle.

One possible way out could be that the 16th Finance Commission, which is to be constituted, makes a comprehensive assessment of subsidies and other handouts, both at the Union and state level to present a composite picture. It may choose an appropriate definition of merit and non-merit subsidies, and highlight the total outgo, along with the opportunity cost. Irrespective of the terms of reference, the Commission can carry out this exercise as part of the overall fiscal assessment. A detailed study would not only help both the Union and state governments streamline public expenditure but also enable informed public debate, which can potentially push policy in the right direction.