Analysis: Modi’s Populism Following India Election Reversal Puts Public Finances at Risk

By Krishna N. Das and Aftab Ahmed

NEW DELHI – In the wake of setbacks in the general election and potential losses anticipated in state elections, Indian Prime Minister Narendra Modi’s coalition is increasing cash handouts, debt waivers, and other benefits, despite his previous criticisms of such policies.

The financial incentives offered by state governments, along with promises from opposing political parties to match these concessions, risk upsetting the fiscal balance in the world’s most populous country and could hinder spending on urban infrastructure and development projects, according to analysts.

Modi’s Bharatiya Janata Party (BJP) lost its parliamentary majority during the recent national elections and is now relying on unpredictable allies to maintain power. Current opinion polls indicate that the BJP could experience losses in upcoming provincial elections in states like Maharashtra, Haryana, and Jammu and Kashmir while possibly gaining in Jharkhand, which could further affect Modi’s standing.

Maharashtra, India’s wealthiest state, governed by a BJP-led coalition, has increased its fiscal deficit target to 2.6% of state GDP for the current fiscal year, up from 2.3% in its interim budget released in February. The latest budget includes cash handouts for women and free electricity for certain farmers, with an estimated total cost of around 960 billion rupees (approximately $11.45 billion) this fiscal year, or 2.2% of the state’s GDP, as reported by research and investment firm Emkay Global.

In Haryana, also administered by the BJP, the government has canceled water dues for numerous farmers, reduced cooking gas prices for millions of low-income families, and introduced financial support for unemployed youth.

Inflation, unemployment, and rural distress became prominent issues during the general elections and continue to be pressing concerns ahead of the state elections.

"While doles are not a new strategy, the extent of populist promises this election cycle across the political landscape is alarming," stated Madhavi Arora, an economist at Emkay. "The recent surge in populist spending in election-bound states could threaten the delicate fiscal balance that has been maintained so far."

Opposition parties are also making extensive promises, including free power to households and monthly allowances for women.

Previously, Modi has criticized the culture of freebies. In 2022, he stated, "This culture is very dangerous for the country’s development. Those who engage in this approach will not contribute to building new expressways, airports, or defense corridors. They believe they can win over the electorate by distributing benefits. We need to collectively reject this mentality and eliminate the culture of freebies from our politics."

Yashwant Deshmukh, founder of polling agency CVoter, remarked that in a context of increasing economic disparity, politicians are likely to rely more on such handouts, particularly as there are fewer emotive issues, like tensions with Pakistan, that had previously benefitted the BJP in elections.

"The fiscal implications of this trend are severe, yet there is a substantial appetite among the public for social welfare initiatives," he noted.

‘RIGHT AMOUNT OF POPULISM’

Some analysts suggest that the BJP’s primary focus on Hindu nationalism may not resonate as strongly as before. While the party has historically used handouts to secure votes, experts believe it now feels compelled to compete with opposition parties in offering such incentives.

A BJP official, who requested anonymity, mentioned that the party is adjusting its strategy based on public feedback following the electoral loss and is navigating populism without compromising public finances. "We aim for just the right amount of populism," he said, adding that the party is proceeding cautiously in light of past missteps.

BJP representatives did not provide comments when approached.

Modi has also enacted various populist measures at the national level. He recently reversed a plan to cut certain tax benefits on real estate sales after receiving pushback from the middle class. Additionally, a pension plan for federal government employees, which will cost approximately 62.5 billion rupees ($745 million) this fiscal year, has been implemented, raising the government’s contribution from 14% to 18.5% of an employee’s basic salary.

Budgets recently announced by five states, including Maharashtra and additional BJP-led states like Madhya Pradesh, Odisha, and Rajasthan, project an average fiscal deficit of 3.2% of state GDP, which is 20 basis points higher than their earlier interim budgets, primarily due to increased spending on populist initiatives, according to Elara Securities. The firm also predicted that the deficit might decline by up to 30 basis points, indicating that fiscal slippage within the states may impact the federal budget.

"The growing divergence in spending priorities and fiscal strategies between the central and state governments might result in a gradual consolidation of the overall fiscal deficit in India," said Christian de Guzman, a rating analyst with Moody’s.

De Guzman stated that while an immediate fiscal crisis is unlikely, significant fiscal improvements should not be expected either. "The government currently finds itself in a weaker position to implement substantial revenue measures compared to before the general election."