Rahul Gandhi is throwing down a fiscal gauntlet. The president of India’s main opposition party has pledged expensive sops for the poor if his coalition wins the upcoming general election, due by May.
It is an irresponsible, populist package of promises that, if kept, would blow a massive hole in the budget of the world’s fastest-growing large economy. It also puts pressure on Prime Minister Narendra Modi to respond in kind in Friday’s interim budget.
Gandhi’s Congress party has been on the back foot. It has upped the ante, though, since the ruling Bharatiya Janata Party received a drubbing in state polls in early December. Shortly afterwards, he announced a nationwide waiver of farm loans which could cost up to Rs 3 trillion or 1.4 per cent of GDP, according to Edelweiss.
On Monday, he went further, vowing to introduce a minimum income for the poor, which could cost half as much again if it isn’t funded by repackaging existing handouts, a difficult thing to do.
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There is no question Modi needs to address distress in the rural economy, where income growth has fallen sharply under his watch. Half of India’s workforce depends on agriculture and it is a key vote bank. He has ruled out rural debt forgiveness, revealing some keenness not to stray too far from a target to bring the deficit down to the planned 3.1 per cent by March 2020.
India will have to stretch to accommodate any generosity, however. New Delhi’s current fiscal position is already deceptively tight: off-balance sheet funding is not new but has been steadily rising since 2016, say Ritika Mankar Mukherjee and Sumit Shekhar of local brokerage Ambit. They reckon that more than half of last year’s capital expenditure, or about 2.5 per cent of GDP, was funded through state-owned companies in everything from power to railways and estimate that the true fiscal deficit in current financial year is closer to 4.2 per cent.
Equity and debt market investors are betting on a return of the BJP in some form. With a new alliance of opposition parties forming, that looks less certain. Either way, any largesse promised in the run up to the polls will hamper the next administration's ability to spend on productivity-enhancing reforms that can make a positive long-term difference.
(The author, Una Galani, is a Reuters Breakingviews columnist. The opinions expressed are her own.)