Growing Concerns Over Populist Spending in India

By Krishna N. Das and Aftab Ahmed

NEW DELHI (Reuters) – After setbacks in the general election, Indian Prime Minister Narendra Modi’s coalition is increasing cash handouts, debt waivers, and other benefits, despite previously criticizing such policies.

Analysts warn that this surge in handouts, alongside proposals from opposition parties, could destabilize India’s fiscal balance and impede urban infrastructure spending and development projects.

The Bharatiya Janata Party (BJP), led by Modi, lost its majority in the April-June national elections but continues to govern with unstable allies. Opinion polls indicate potential losses in upcoming provincial elections in Maharashtra, Haryana, and Jammu and Kashmir, which could further diminish Modi’s popularity.

Maharashtra, the wealthiest state, has raised its fiscal deficit target to 2.6% of GDP, up from 2.3% earlier, introducing cash handouts for women and free electricity for some farmers—costing approximately 960 billion rupees ($11.45 billion) this fiscal year, or 2.2% of state GDP, according to Emkay Global.

Haryana has also waived water dues for farmers, reduced cooking gas prices for the impoverished, and implemented allowances for unemployed youth.

With inflation, unemployment, and rural distress dominating the general election, these issues remain central as state elections approach. Madhavi Arora, an economist at Emkay, notes the worrying trend of populist promises across the political landscape.

Opposition promises include free power to households and monthly allowances for women. Modi previously condemned such freebies as detrimental to national development, asserting that they undermine infrastructure projects.

Polling agency founder Yashwant Deshmukh suggests that politicians rely on giveaways amidst economic disparity, especially lacking emotive issues like tensions with Pakistan that benefited the BJP in the 2019 elections.

Analysts note that the BJP’s Hindu nationalism may not resonate as strongly and that while handouts have been used previously for votes, the party is now matching or exceeding opposition promises.

An unnamed BJP official stated the party is adapting to public feedback post-general election setback, ensuring a balance of populism without jeopardizing public finances.

Modi has enacted several populist measures, including reversing tax benefit reductions and introducing a pension plan for federal employees, costing around 62.5 billion rupees ($745 million) this fiscal year. Recent budgets of five states, including BJP-ruled Maharashtra, indicate an average fiscal deficit of 3.2% of GDP, slightly higher than previous targets mainly due to increased spending on populist measures, according to Elara Securities.

Overall, analysts observe a divergence between state and federal spending priorities, predicting gradual consolidation of India’s fiscal deficit, with limited improvements anticipated. Christian de Guzman from Moody’s comments that while fiscal blowouts are unlikely, significant revenue measures will be challenging to implement given the government’s weakened position post-election.