Populism drains Indian states unmindful of lessons from the world

A glance through the day's news headlines on Google with a neutral keyword "subsidy" throws up a grim picture, with several states and their enterprises suffering due to politicians' populism. At the national level, even as policy tweaks drag the sale of subsidised electric two-wheelers, says Mint, Union Minister Piyush Goyal is asking the EV industry to come out of their alleged subsidy mindset, according to a report in Money Control.

However, that is not a matter of serious concern as mostly positive reports about the state of the Indian economy have appeared in the public domain over the past several years, especially since India staged a remarkable recovery from the slowdown of the pandemic years 2020-21. The fiscal deficits of different states are, however, disconcerting.

Offer doles to win votes in states; then complain to PM Modi that state coffers have run dry!

In February, Tamil Nadu anticipated an increase in its revenue deficit, projecting it to reach Rs 49,279 crore for the fiscal year 2024-25. This figure represents a rise from the revised estimates of Rs 44,907 crore for 2023-24. The state government, under the leadership of Chief Minister MK Stalin, noted that the revised estimate for 2023-24 exceeded the initial budget estimates for that year, which were set at Rs 37,540 crore.

In June, Andhra Pradesh and Chhattisgarh requested support for the development of new state capitals, while states like Tamil Nadu, Haryana and Odisha made specific project-related requests. Kerala, on the other hand, called for a special financial package of Rs 24,000 crore to address its liquidity challenges. With the Telugu Desam Party (TDP), a significant partner in the NDA government at the national level, regaining influence in Andhra Pradesh, there was anticipation for a long-awaited special package for the state. However, sources indicated that the state finance minister primarily requested assistance for various projects, including the construction of a new capital in Amravati and the Polavaram dam initiative.

In July, Minister of State for Finance Pankaj Chaudhary confirmed in a written statement to the Rajya Sabha that Kerala had formally requested a Rs 24,000 crore special financial package from the central government.

In September, Kerala's Chief Minister Pinarayi Vijayan wanted the 16th Finance Commission to consider the increasing trend of surcharges and cesses imposed by the union government. He proposed that states should receive 50% of tax devolution, surpassing the 41% suggested by the 15th Finance Commission. Vijayan made these remarks during the inauguration of a meeting of finance ministers from five states not governed by the Bharatiya Janata Party (BJP) — Karnataka, Tamil Nadu, Punjab and Telangana — hosted by Kerala to address matters concerning the 16th Finance Commission, which is established every five years to determine the distribution of central taxes between the Centre and the states.

With assembly elections in Delhi approaching in a few months, the city-state government sought to borrow Rs 10,000 crore from the National Small Savings Fund (NSSF) to cover its expenditures for the financial year 2024-25. Chief Minister Atishi has endorsed the proposal, which is being submitted to the Union Ministry of Finance, despite concerns raised by the state’s finance department regarding anticipated lower expenditures due to the Model Code of Conduct (MCC). The department has suggested that Delhi should withdraw from the NSSF.

On 13 December, The Times of India reported the availability of agricultural implements at 80% subsidy. Farmers must rush to avail the opportunity, the headline screams! This comes weeks after the renewed farmers' agitation, mostly by the richest 18% of the farming population in India that lives in Punjab, Haryana and western Uttar Pradesh. Since the first phase of this high-profile movement and the union government's subsequent withdrawal of the farm reform laws, no one has heard what 82% of India's farmers, who are poor labourers employed on farmlands or farmers with small acreage of ownership in western, eastern and southern India want.

Oh yes, the so-called annadātās — they don't give away their produce for free but are eulogised as "dātās" (donors) — want the minimum support price in the statute books. That's like all shopkeepers in the country demanding that if they cannot clear their warehouse inventory in the ongoing market season, the government must buy all that with taxpayers' money! That's like a filmmaker saying if his next film flops, the government must compensate him!

A PIL the Supreme Court hasn't yet decided on

Meanwhile, nothing has come of Advocate Ashwini Upadhyay's Public Interest Litigation (PIL) in the Supreme Court in 2022, in which he highlighted how populist schemes damaged fiscal health and democracy. The petition argued that such schemes, often termed "freebies" — Prime Minister Narendra Modi coined the metaphor "revdi" for it — amounted to bribery and violated constitutional principles. It stressed that distributing non-essential goods (like TVs or kitchen appliances) using public funds primarily served to influence voters rather than address genuine social welfare needs.

It is important to note here that I am not counting such politicians in this analysis who do it for the poor. This is to condemn only those who pamper even such citizens who have much more than the financial ability to pay for the services they avail — offering middle-class women free bus rides and middle-income-group households free water and free electricity, for example. I see no problem with a certain party offering bicycles to rural girls to go to school, as the female drop-out rate is disturbingly high in India's villages. Similarly, Prime Minister Modi's appeal to the affluent to give up the subsidised cooking gas connections during his first term, which was followed by the Ujjwala scheme, was commendable.

Further, such subsidies have not been counted in this analysis, scrapping which would render Indian goods uncompetitive in the global market. For example, if the US subsidises its agricultural production, India cannot afford to sell its own at market-determined prices. Likewise, if Chinese vehicle manufacturers are enjoying a subsidy for making electric cars, Goyal should not ask why Indian EV makers want it too.

Revenue losses and fiscal strain

India's states lose substantial revenue annually due to these populist measures. For instance, Tamil Nadu and Delhi were flagged in the PIL for offering free electricity and transportation to households that could afford to pay.

In Punjab, free electricity to farmers has caused severe fiscal distress, threatening infrastructure investment. These measures ultimately weaken public finances, diverting resources from critical infrastructure and social programs for the truly needy.

Comparison with Greece

India's fiscal recklessness echoes Greece's crisis in the early 2010s when excessive populism without economic foresight nearly led to the country's expulsion from the European Union. The Greek government’s failure to balance populism with fiscal discipline caused unsustainable debt levels, requiring a bailout and harsh austerity measures. India risks similar long-term economic damage if populism continues unchecked.

In January 2015, Greece experienced a significant political shift with the election of the populist anti-austerity coalition formed by the left-wing party SYRIZA and the far-right party ANEL. From January to July 2015, the coalition of Synaspismós Rizospastikís Aristerás-Proodeftikí Simachía and Anexartitoi Ellines engaged in an extended process to renegotiate the terms of Greece’s bailout, which had been established by older Greek administrations in agreement with the Troika (comprising the European Commission, European Central Bank and International Monetary Fund), characterised by a stance of 'unpolitics'. Initially, the SYRIZA-ANEL government dismissed both formal and informal EU decision-making protocols.

Additionally, they turned away from conventional compromise strategies, such as package agreements and side payments. When Greece’s creditors made a last-minute bailout proposal in June 2015 to prevent a potential exit from the eurozone (Grexit), the SYRIZA-ANEL government rejected the offer and sought to leverage the resulting impasse by hastily organizing a referendum for the Greek populace to vote against the proposed deal. This phase of 'unpolitics' concluded abruptly after the referendum, when Tsipras unexpectedly interpreted the outcome as a mandate for negotiation with the Troika, ultimately accepting the previously unacceptable bailout terms.

Which international body will bail out India when its politicians' competitive populism brings it back to the balance-of-payment crisis of 1991? The World Bank and the International Monetary Fund again? Will we not need another PV Narasimha Rao in the future with another knee-jerk reaction like liberalisation that essentially said that everything that was sold off to the Indian public as good economics since 1947 was indeed bad economics?

Populist politicians in India who have been criticised the most for implementing these unsustainable schemes are

1. Arvind Kejriwal (Delhi): Free electricity and water for households with relatively high incomes.
2. Bhagwant Mann (Punjab): Free electricity for farmers, ignoring its fiscal and environmental costs.
3. MK Stalin (Tamil Nadu): Expanding free meal schemes and consumer goods distribution without targeting only the poor.

The deficits caused by subsidies in state budgets are a critical aspect of India's fiscal challenges. While exact figures for each state are not uniformly available, reports suggest that states spend a significant portion of their budgets on subsidies and populist schemes, which can severely strain their finances.

A few subsidy-driven deficits

1. Punjab: Punjab is burdened by free electricity for farmers and other subsidies, contributing to a debt-to-GSDP ratio exceeding 48% in 2022-23. Free power alone costs ₹18,000 crore annually.
2. Andhra Pradesh: Known for its large-scale welfare schemes under the YSRCP government, Andhra Pradesh's fiscal deficit has ballooned. Welfare schemes constitute a significant percentage of state expenditure, adding to its debt.
3. Tamil Nadu: Freebies like free electricity, laptops for students, and various welfare schemes have resulted in a subsidy expenditure of ₹40,000 crore annually.

The Reserve Bank of India (RBI) estimates that state subsidies (including power, irrigation and public distribution systems) account for over 1.5% of the GDP annually. States such as Punjab, Rajasthan and Andhra Pradesh are flagged as high-risk due to their extensive populist measures.

Why Stalin

The name of Stalin in the list may raise some hackles, as Tamil Nadu has been perceived as one of the better-governed states. Official data support the perception. In the Public Affairs Index (PAI) 2022, Haryana topped the chart, followed by Tamil Nadu, Kerala, Chhattisgarh, Punjab and Karnataka. Sikkim topped in the category of 10 smaller states.

The 18 larger states studied were Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal. The 10 smaller states they studied were Arunachal Pradesh, Goa, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

However, in PAI 2022, the analysis of governance switched from the framework of the UN Sustainable Development Goals to a constitutionally enshrined principle of justice. Now, that is a problem from a strictly economic point of view. The lofty term "justice" often triggers socialism in politics. 

The PAI assessed political justice using various indicators like the extent of functional devolution to both rural and urban local bodies, the commitment to independent financial devolution for these entities, the prevalence of crime, and the effectiveness of police in gathering evidence related to cases, as well as addressing the needs of the undertrial population.

In a similar vein, social justice was evaluated based on indicators such as educational outcomes for students, access to safe drinking water and sanitation facilities, early childhood development results, the efficiency of logistics and trade, and the consistency and reliability of power supply.

Chhattisgarh, Haryana and Karnataka performed the best in delivering economic justice. The worst performer in this aspect was West Bengal.

What we are discussing here is whether the subsidies have rendered the state economies weak. The statistics shared above do show Tamil Nadu to be a state that is facing a budgetary conundrum.

Doles to women

Here's the catch. The recent assembly elections in Maharashtra and Jharkhand underscore an eye-catching trend: welfare schemes targeted at women have become powerful tools for electoral success. Earlier, parties like the DMK in Tamil Nadu, BRS in Telangana and the Indian National Congress in Rajasthan retained power largely by appealing to women voters through targeted schemes such as financial assistance, free transport and subsidised household items. West Bengal's Kanyashri nearly made the women forget the horrors of Sandeshkhali.

Why welfare schemes for women work

1. Direct impact: Women are often the primary decision-makers in households. Welfare schemes that address education, healthcare, or financial aid resonate deeply, as they provide immediate and visible benefits.
2. Electoral strength: Women form a substantial voter bloc. Campaigns centred on their needs often result in higher voter turnout among women.
3. Sociopolitical factors: Addressing gender inequities through welfare measures allows parties to project themselves as champions of social justice.

Challenges for political parties

Overcoming the lure of electoral dividends from populist welfare schemes requires a long-term, multi-pronged approach:

1. Awareness campaigns: Educating voters about the fiscal sustainability of such schemes versus their long-term impact can create informed electorates.
2. Policy reorientation: Instead of blanket schemes, targeted measures like skill development, job creation, or healthcare reforms can provide sustainable benefits without fiscal strain.
3. Institutional reforms: Strengthening regulatory frameworks, such as empowering the Election Commission (EC) to assess and approve election promises, can help curb irrational populism.

Global comparisons

Countries like Greece show that unchecked populism can lead to fiscal crises. However, Scandinavian nations demonstrate that well-designed social welfare schemes, coupled with robust tax systems, can provide sustainable benefits.

A caveat will be in order here, though. In the popular political-economic commentary, Scandinavia is passed off as a socialist El Dorado. It is anything but that. An essential part of socialism is production and distribution by the state whereas one hardly comes across large and successful Scandinavian companies that are state-owned. The key to the success of Norway, Sweden and Denmark lies in their efficient distribution of surplus. Along with high taxation, which is a socialist marker in their economic management, of course, the money helps relatively well-off people; yet, the policy cannot be looked down upon as populist. Besides, even in the absence of direct benefit transfer, there are few complaints of leaks in transmission, as money reaches the intended recipients from the exchequer, which is why they never needed DBT which India did.

It is understandable that for political parties in India, where most swear by Mohandas Karamchand Gandhi, Ram Manohar Lohia and Jayaparakash Narayan, discarding socialism lock, stock and barrel may amount to committing political harakiri. However, it should not be difficult for responsible politicians to innovate by offering policies that balance welfare with economic growth, ensuring they appeal to voters without risking long-term financial stability. This requires a shift from short-term populism to governance that delivers sustainable outcomes.

Recommendations

To combat fiscal imprudence, while Upadhyay's petition recommends barring political parties from announcing such schemes without detailing their economic impact and calls for legislative intervention to mandate fiscal accountability for election promises, such an order from the Supreme Court may appear to be an undue intervention by the judiciary that is increasingly being accused of overreach and even activism, blurring the line of its demarcation from the legislature and the executive.

Upadhyay's PIL against the distribution of election freebies is currently active in the Supreme Court and is regarded as an important matter. The petition argues that promising freebies before elections undermines democratic values, distorts the level playing field, and violates the Constitution. It calls for the EC to take deterrent actions, such as cancelling the registration of political parties indulging in such practices.

Then-Chief Justice of India DY Chandrachud emphasised the significance of the case and indicated it would not be dropped. However, no final judgment or substantial hearings on the core issues have taken place yet. Instead, the matter has been referred to a three-judge bench for further deliberation, including reconsideration of the apex court's 2013 judgment in the Subramaniam Balaji vs Government of Tamil Nadu case, which held that pre-poll promises do not constitute corrupt practices.

The court has suggested involving stakeholders like the EC, Finance Commission and other experts to address this complex issue comprehensively. It has also recommended preparing a white paper to evaluate the implications of such promises on public finances.

Populism, if left unchecked, could erode India's economic stability, repeating Greece’s mistakes. Stronger oversight by institutions like the EC and public accountability are essential to safeguarding democracy and fiscal health. We see the EC getting active only during the announcements of elections and the period when the Model Code of Conduct is enforced. It should have a constitutional mandate to intervene whenever a political party announces a welfare scheme that the budget of the state it rules cannot sustain. The party must desist, failing which it must risk losing the right to participate in elections for a certain period of moratorium. This is rather the teeth that the EC needs in all cases of violations of the MCC during elections.