Coalition challenge: Fiscal prudence mustn’t lose to competitive populism

The Centre’s fiscal deficit, as reported by Mint, could easily be reduced by up to 300 basis points in 2024-25 from 5.1% of GDP projected by the interim budget, but a decision on this is yet to be taken. This scope to tighten the gap between revenues and expenses arises largely from a record surplus payout by India’s central bank that has given the exchequer a bonanza; strong tax collections and dividends from state-run enterprises also help. 

But the money could also be spent. Some observers expect India’s post-poll political scenario to bend budgets towards populist expenditure. National power becoming more contestable, with freebies and welfare packages in the fray, could result in a race to woo voters through profligate means. 

The Modi administration now depends for Lok Sabha support on state-level allies that expect sweet financial deals for their states. In all, central coffers are expected to face demands that are harder to resist. Yet, this could also be a chance for the government to show its resolve on fiscal prudence. To send out a clear signal of it, it should aim to tighten the fisc to under 5% of GDP this year.

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As far as signals go, it would allay concerns that coalition rule will constrain the BJP’s administrative freedom. To that end, the party’s retention of all major ministerial portfolios is not enough. It needs to exert its influence on key matters of policy too. 

While Sitharaman’s stated goal of reducing the fisc to 4.5% of GDP by 2025-26 was always too slow as a path of fiscal consolidation, there was no point that had to be proven about resisting the risk of being drawn into competitive populism. In any case, economic growth was pacy and retail inflation under 6%. The Centre’s fiscal control will now invite more scrutiny because the task looks harder. 

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It is not just to cap inflationary pressure that the Centre must not overspend. A tight fisc keeps public borrowings down and interest rates for private borrowers in check, even as moderation in the pile-up of public debt means relief for future generations of citizens who are unfairly expected to pay for our excesses.

When ‘animal spirits’ in an economy are in fine fettle, the usual worry is that a central grab of financial resources will crowd out credit for private investment. In our particular case of subdued spending by non-public agents, the strategic plan—which coincided with a covid-created need for fiscal stimulus—was to have public spending crowd it in for a change. 

As official data shows, we managed 7%-plus annual expansion of the economy for three years on a roll this way. Such a big-spender approach, however, is not sustainable. For our economy to expand well without the aid of state boosters, we need all engines of growth to fire together, especially consumption and value generation in the private sector. 

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To give this scenario a chance, the Centre must rein its expenditure back. Thankfully, businesses seem upbeat and production capacities may soon need enlargement to meet rising demand. Although a rapidly emerging economy can’t do without a sizeable role of the state, we should return without ado to a growth path that’s more evenly fuelled and better balanced in its rewards.