Terms of Trade | What drives competitive populism in India? – Hindustan Times

Indias top bureaucrats are worried about political parties resorting to competitive populism and announcing fiscally unsustainable schemes to win votes in state elections. Reports suggest that they voiced these concerns to the Prime Minister in a meeting on April 2.

We did not need secretaries of the government of India to highlight the growing tendency towards competitive populism in India. Political parties are increasingly promising all sorts of things to voters from restoration of the old pension scheme for government employees to cash and two-wheelers for students who enter or finish college and free pilgrimage to senior citizens.

Is this new wave of competitive populism going to lead to a fiscal disaster in the country? Who exactly is responsible for this kind of behaviour? And can a political consensus be built to prevent such spending by state governments?

How big a problem is competitive populism in India?

This is not an easy question to answer. A state can spend money on providing free food over and above what the Public Distribution System (PDS) entitlements provide for, or it can spend money giving scooters to students who have entered college. There are enough examples of political parties making such promises in India.

And there is bipartisan support for this kind of politics. For example, both the Communist Party of India (Marxist) or CPI (M) led government in Kerala and the Bharatiya Janata Party (BJP) government in Uttar Pradesh banked heavily on the free ration scheme in the elections held in 2021 and 2022. The Congress accused the BJP of copying its demand of giving free scooters to women students in the recently held Uttar Pradesh elections.

While a fiscal hawk will scoff at both kinds of spending, especially if the state is hard-pressed for resources, the actual economic impact of such programmes is likely to be quite different. Additional food entitlements are likely to generate tailwinds for aggregate demand as the recipient households will be able to spend the money they would have had to spend on food on other items. Such a scheme is also targeted towards the most needy. The same cannot be said about gifting scooters to students. That money would have had a better use somewhere else. Similarly, farm loan waivers are a sub-optimal use of money towards throwing palliatives at what is a structural problem and often at the cost of long-term spending in agriculture.

This qualitative difference in the effect of various populist schemes also underlines the pitfalls of reading too much into headline numbers on categories such as social service spending by state governments. Building a comprehensive quantitative and qualitative database of what and where exactly state governments are spending on populist schemes, and how it is affecting the macroeconomy and society is a project which can keep even a large think tank busy for the next couple of years.

What drives this political behaviour?

The lack of clarity on the second question is the biggest reason why some of these schemes have attracted economists who use randomized controlled trials (RCTs) to understand policy decisions and their impact in India.

While the RCT method has been duly recognised with a Nobel Prize to Abhijit Banerjee, Esther Duflo and Michael Kremer in 2019, there is an illustrious list of economists who have spoken against the dangers of relying too much on RCTs to make large policy decisions. The short point is, economists, on their own, are unlikely to arrive at an agreement on the impact or efficacy of such policies.

This brings us to the question of why are politicians doing this? The clichd answer that they do not care about fiscal prudence will not suffice, because state governments have to adhere to a more stringent fiscal norm than the Centre in India. When read with the fact that states have been left with very little tax sovereignty after the roll-out of Goods and Services Tax (GST), this is an even more intriguing question.

At the risk of oversimplification, one can say that the best answer to this question was given by Prime Minister Narendra Modi in a campaign speech during the recently held Uttar Pradesh elections. Speaking at a rally on February 20, Modi referred to a social media video, where an old woman was pledging loyalty to the BJP because she had tasted Modis salt (ration) and therefore wont ditch him. While this can sound like usual election rhetoric to some, political scientists have been arguing that the BJP has been making a concerted effort to centralise welfare delivery which also leads to greater attribution for giving these benefits to none other than the Prime Minister.

This extraordinary centralisation of power, not just institutionally but also within the BJP, implies that the voter is increasingly likely to attribute (that is, give credit for) the delivery of economic benefits to Modi rather than the state-level leader. This contrasts with much of the 2000s, where, after a spate of fiscal decentralisation, several state-level leaders built their reputations on the ability to deliver benefits Neelanjan Sircar, a senior fellow at the Centre for Policy Research argued in a March 2021 Economic and Political Weekly article.

While Sircar argues that this process has also weakened the welfare credentials of chief ministers from the BJP and its allies too, and they will most likely look to establish their credentials not in welfare delivery but in Hindu mobilisation, it is not surprising that the anti-BJP parties have been trying to outdo the BJP by promising more populist schemes. Promises such as restoration of old pensions scheme and cash transfers by anti-BJP parties need to be seen in this light.

As is obvious, competitive populism by regional political forces is a last-ditch attempt to push back against the BJP which is the new national political hegemon in India. To meet such challenges, the BJP also indulges in competitive populism at the level of states, not to speak to decisions such as implementing PM-Kisan, which gives 6,000 to every farmer in India, from the Centre a decision taken after the BJP lost crucial state elections just before the 2019 Lok Sabha elections.

Realpolitik suggests that regional parties are unlikely to prioritise long-term economic health over political survival. And that perhaps answers the third question.

Every Friday, HTs data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.

The views expressed are personal

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Terms of Trade | What drives competitive populism in India? - Hindustan Times