Will the government switch to a more populist form of spending?

A view of the Rapid rail train on June 26, 2023 in Ghaziabad, India. Image: Sakib Ali/Hindustan Times via Getty Images
 
Loosening one’s purse strings has more often than not been a sure-shot way to win over a fickle electorate. In light of his government retaining power with a diminished mandate, it remains to be seen if the new Narendra Modi-led government goes down this path.

A switch to a more populist form of spending—with higher subsidies, some handouts and loan waivers—could strain the path to fiscal consolidation that the government had embarked on. The fiscal glide path it proposed promised a fiscal deficit of 4.5 percent of GDP by 2025-26. (The number of FY24 came in at 5.8 percent.) Any slippage from this number at a time when interest rates are high globally would be likely punished by the bond markets.

A key factor in understanding how much the government would have to bend is in looking at the composition of the government. As things stand, it is heavily dependent on the Telugu Desam Party (TDP) as well as the Janta Dal United (JDU) with 16 and 12 MPs respectively. “These two are skilled at coalition politics and some provisions will have to be made for demands for special packages for Bihar and Andhra Pradesh,” says Pronab Sen, former chief statistician of India. “How it plays out is difficult to say, but the government has some headroom with the RBI dividend it recently received,” he adds.

If either the TDP or the JDU walk out of the government, their reliance on smaller parties like the Shiv Sena or Lok Janshakti Party would rise dramatically. That is an eventuality the government would want to avoid at all costs. It would also be hard for the government to draw parties from the I.N.D.I.A alliance and so it would think very hard before saying no to the demands of its two largest partners.

There are some ways out though. In the past, so-called populist schemes have been renamed by the Modi-government and continued. For instance, the Right to Food Act that was brought in by the UPA government was eventually modified and became the Pradhan Mantri Garib Kalyan Yojana. It provides free food grains to 800 million beneficiaries.

Second, funds may be promised, but the implementation may slow down. This is the problem most infrastructure spends in India had faced in the past. Funds would not be released and construction would slow down. It is possible that if money is to be diverted elsewhere, then the government’s plan to spend Rs11 lakh crore on infrastructure could see some curtailment. It would also depend to a large extent on which of the partners, if any, gets key ministries like the railways, roads, ports and telecom.

Also read: Joblessness and rising food prices: Real challenges for BJP and its allies

Even with the emphasis on balancing spending over the last decade, it needs to be noted that India’s fiscal metrics are weaker than its Asian peers. “The pace of India’s fiscal consolidation post-pandemic has not outperformed other emerging markets in Asia-Pacific,” according to a note by credit rating agency Moody’s. It also states that India’s fiscal metrics remain worse than pre-pandemic levels.

Given that the TDP is a reform-oriented party, it is possible that some funds may simply be repurposed. For instance, the emphasis on national highways may move to state and rural roads. Water programmes in villages may receive a boost. Small and medium enterprises, which have suffered post-pandemic, may see easier access to credit. These, according to Sen, may not necessarily be a bad thing. “The mandate this government has received shows that some change in tack is needed,” he says.