When poll sops trump fiscal prudence

Maharashtra, at 14%, has the biggest share of the nation’s economic output. Its capital Mumbai is also the commercial and financial capital of the country. From this maximum city, the nation collects a whopping disproportionate share of direct taxes comprising corporate and personal incomes. Mumbai’s real estate is more precious than gold. The state’s Jawaharlal Nehru Port is India’s busiest container port handling about 60% of all containerised cargo, and among the top five ports in terms of total tonnage in the country. It is seamlessly connected to the dedicated freight corridors, with the eastern leg already functional and western leg to be operational soon. Hence it is crucial for India’s exports. The proposed Vadhavan port at the northern end of Maharashtra will be state-of-the-art, and among the top ten ports in the world when completed. Mumbai’s 22-km trans harbour bridge, commissioned earlier this year, is a crucial link between the island city and the mainland. This will lead to resurgence in real estate activity on both sides of the bridge and give an impetus to commercial activity.

There are several roadways, metro and other infrastructure projects underway which will all add to Maharashtra’s mighty economic heft. In fact, it has the ambition of becoming India’s first one trillion-dollar sub-sovereign economy in the next few years. So naturally, forming the government in Maharashtra is a big prize for any political party. The BJP-led coalition Mahayuti achieved a stunning victory in the Assembly polls last week, winning 235 out of 288 seats. This is their third consecutive victory, a hat-trick for the BJP in three Assembly elections, in what was once a mostly Congress-ruled state.

The sweeping victory – 49% votes were cast to the coalition – is as sound an electoral mandate as you can get. This spells good for political stability. The victory was all the more remarkable because it came barely five months after the BJP-led Mahayuti fared very poorly in the Lok Sabha elections. This will have national reverberations
and lead to political realignments in the state.

Every electoral outcome prediction, and then postmortem, is a matter of intense debate. Depending on one’s prior beliefs, one can fit any model or theory to fit the observed behaviour. No one theory or explanation is, however, sufficient. Even the exit polls have gone horribly wrong in their prediction. It is clear that what motivates or animates voters is not subject to clean and simplistic explanations. The determinants of voter preference are not purely economic, or even driven by narrow self-interest. It could be purely an emotional response at the ballot booth. With the increasing influence of religion-based propaganda and caste identities, it becomes almost impossible to identify the decisive factor.

Debts set to rise

However, one cannot deny that the majhi ladki bahin (my beloved sister) scheme launched barely three months before the elections has had a significant impact on voter behaviour. This was passed by the Assembly well before the model code of conduct kicked in. In its somewhat hasty implementation, the eligibility checking might not have been as rigorous as needed. As a result, 25 million women now receive Rs 1,500 per month as direct cash benefit. After elections, the entitlement will go up to Rs 2,100 as per the Mahayuti poll manifesto. The total extra burden on the exchequer will be around Rs 63,000 crore per year, exceeding the amount spent on the National Rural Employment Guarantee scheme or the free food grain scheme for beneficiaries in the state. Already Maharashtra’s finances are such that 67% expenditure is on “revenue items” comprising salaries, pensions, and interest payment on past debt. That debt will climb to Rs 7.8 lakh crore by next year, making the annual interest payment burden alone nearly Rs 50,000 crore. This interest burden cannot be defaulted or postponed.

The Comptroller and Auditor General of India (CAG), in its report to the government in May, has warned about the rising debt burden. Even without the ladki bahin (LB) scheme, Maharashtra has to plan the repayment of past loans which are due in the next seven years. That amount is Rs 2.75 lakh crore, which is roughly Rs 40,000 crore to be provisioned every year from now on. All this extra debt burden would have been manageable if the growth rate of the state (and hence tax revenue) were to rise. But at least this year, the growth rate is expected to be 5.5%, below the national GDP growth. This is well below the 12% needed to achieve a 1 trillion-dollar economy. The state which had a revenue surplus in 2019 now has a revenue deficit projected to 0.5%, and fiscal deficit of 2.6% of the state’s GDP. The total debt is getting close to 20% of the state’s GDP, which is considered the maximum limit under the combined fiscal responsibility framework for states and the Union government.

Seen from this fiscal lens, the short-term benefits of a direct cash transfer scheme have led to a future burden on the taxpayer. The LB scheme has not eliminated others. Indeed, there are more sops such as zero electricity bills and Rs 15,000 for farmers and Rs 10,000 for students. The LB scheme has been a successful formula that was used in Jharkhand and other states that offer cash or kind benefits targeting women. It pays electoral dividends by increasing female voter participation. But what it does to the fiscal situation, and consequent drag on growth, inflation and interest rates as well as future tax burdens is not well examined.

Poll myopia needs an antidote of responsible fiscal leadership for long-term sustainable growth. Otherwise, populism is a race to the fiscal bottom. And the path to a future Universal Basic Income and unconditional cash transfer scheme is jeopardised.

(The writer is a noted Pune-based economist; Syndicate : The Billion Press)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH).