Indian politicians are handing out electoral giveaways they cannot afford

Freebies power India’s electoral victories, but can Indian states afford them?

Over the years, handouts have taken different forms in the competitive political landscape of the world’s largest democracy. Voters are attracted to everything from televisions to televisions. bike Sometimes even gold jewelry – blurring the lines between welfare economics and pre-poll populism.

In recent years, cash transfers, especially targeted at women, have become a popular tactic for various political parties to win elections.

landslide victory in eastern states last week bihar – India’s poorest state – was helped in part by a cash handout of 10,000 rupees ($112; £85.18) to women in Prime Minister Narendra Modi’s coalition. A record number of women are voting in elections.

Modi’s party launched similar financial support schemes for women in other states such as Maharashtra ahead of last year’s general election. Opposition parties have also promised to implement similar plans in some states before the elections.

economists like Jean Drez All in favor of this giveaway. He said that while it was important to distinguish between “useful” and “wasteful” handouts, it was only by delivering on promises during elections that India’s poor would get anything from their political representatives.

Modi, on the other hand, has warned in the past about the dangers of “revdi culture” – likening election giveaways to the random distribution of sweets – although his party has its own record on the issue. India’s Supreme Court has also tried to curb the distribution of such “irrational freebies” during the 2023 elections.

While there is widespread agreement that targeted subsidies are needed to challenge the use of handouts as electoral bait, Indian elections are increasingly dominated by an unaffordable, poll-driven free economy that states cannot afford.

Bihar is facing considerable fiscal pressure, with the state’s deficit, or gap between revenue and expenditure, at 6 per cent of gross domestic product (GDP), according to research by brokerage Emkay Global.

Despite this, the state announced a pre-election plan worth 4% of GDP, exceeding its capital expenditure – funds that could have been used to create jobs and long-term assets that would help the state grow.

Emkay Global says this is just one example in a series of countries that practice indiscriminate electoral populism.

“Even good (fiscally prudent) countries are now subject to the grip of the free economy,” the brokerage said. As a result, the 3% cap on states’ fiscal deficits to GDP set to curb off-budget spending is now effectively a floor.

Some estimates suggest that 21 of India’s 29 states have cross The disproportionate cost of election-driven spending is one reason for the 3% deficit target.

The unsustainable nature of this populism was illustrated by the BJP-led alliance’s Ladki Bahin (Beloved Sister) financial aid package, which led to a 0.4% increase in Maharashtra’s deficit, according to Emkay Global. It forced the government to cancel some of its promises after the polls closed.

The Reserve Bank of India also views the increasing burden of such subsidies on national debt as a key emerging issue.

according to Reserve Bank of India (RBI)Although India’s overall state debt-to-GDP ratio fell to around 28.5% by March 2024 compared with levels over the past decade, it is still well above the recommended threshold of 20%, and rising subsidy burdens pose new pressures.

“Sharp increase in subsidy disbursement, driven by farm loan waivers, free/subsidized services such as farm and household electricity, transport, gas cylinders, and cash transfers to farmers, youth and women, is an area that is under initial pressure,” the Reserve Bank of India said in its state finance report for 2024-25.

“Countries need to control and rationalize their subsidy spending so that such spending does not crowd out more productive spending.”

The warning comes as the private sector continues to curb investment in new job-creating factories and the government is forced to slow capital spending on infrastructure in favor of tax cuts and giveaways to spur middle-class consumption.

But with the freebies so successful in Bihar and more state elections on the horizon, the warning is unlikely to be heeded.

“This (Bihar) election result reinforces the wave of freebies that have swept across states over the past two years, and with Tamil Nadu, Kerala and, crucially, West Bengal going to the polls next year, one can expect the race to the bottom to continue,” Emkay Global economists Medhavi Arora and Harshal Patel said in a report.

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