Will it be a 'Congress' budget, GoI?

Union Budget: In June, Congress-ruled Telangana announced a farm loan waiver of ₹31k cr, fulfilling a key poll promise made before the assembly elections last year. A similar fiscal strategy has helped Congress in the past. One of the key reasons for the re-election of UPA in 2009 was the ₹60k cr farm loan waiver in the preceding year.

No matter how justified, such giveaways create a moral hazard. While these promises don't affect banks that loaned the money - as GoI picks up the tab - it incentivises non-payment of dues. Those who repaid feel cheated. Together, these factors undermine credit culture. The exchequer adds to its debt burden or is forced to cut back on other spending priorities.

To be sure, Congress isn't the only party offering freebies. They stand out because of the scale of its promises and the reasonable electoral successes that have accrued, including in the 2024 general election. In its manifesto for the Lok Sabha polls, Congress promised to transfer ₹1 lakh every year - ₹8,500 every month - to 'every poor Indian family' under the Mahalakshmi scheme, ideally to the bank account of the oldest woman of the household.

Even as economists debate the pros and cons of such populism, the big question is whether BJP will respond in kind in the union budget on July 23. This is especially true given that these promised payouts did, to an extent, influence the outcome, particularly in UP, where the party witnessed a severe erosion of seats.

So far, BJP-led NDA's playbook has favoured empowerment - enabling universal access to basics like banking, cooking gas, electricity, drinking water, housing and health insurance - over entitlement. In fact, they missed an opportunity for a course correction in the interim budget, unlike in 2019 when they came up with the PM-Kisan giveaway.

If BJP does blink, India may witness a phase of competitive populism. Not only will the wages of populism push states and GoI to fiscal ruin, but it will also undermine hard-earned macroeconomic stability, especially in containing inflation at moderate levels.

On June 4, the day the general election results were announced, the perception was that populism as an electoral calling card was on the wane. This was especially true after the creation of millions of labharthis (beneficiaries) through targeted welfare spending. This cohort was seen as blunting the traditional lure of vote-bank politics based on caste and religion, contributing to BJP's winning rhythm over the last decade.

Furthermore, GoI was refusing to bail out fiscally irresponsible states. Similarly, the Supreme Court, which has been frowning upon electoral freebies, was refusing to lend a sympathetic ear. While hearing a PIL two years ago, the apex court railed against fiscally expensive freebies promised in the election run-up to lure voters.

In April, the top court declined Kerala's request to prevail upon GoI to relax the cap imposed on the state's annual borrowings. The legal challenge arose because Kerala, ruled by LDF, ran out of funds to pay salaries and pensions. In two years, the outgo on salaries and pensions had grown by 52.6%. To bridge this shortfall, the state wanted to borrow ₹26,626 cr, over and above its annual quota.

In Karnataka, despite anti-incumbency, Congress won a landslide last year with its five guarantees, including free electricity, payouts to every female head of a family and unemployment dole. Now, the party faces a fiscal challenge as these benefits, which reach around 5 cr people and cost ₹50k crore annually - almost a fifth of its total expenditure - are squeezing spending in other areas and forcing the government to increase user charges on utilities.

No matter what politicians claim, there are no free lunches. In the short run, populism benefits beneficiaries. But eventually, costs outweigh the benefits. Given that key state polls are around the corner, will NDA let politics drive its economics? The budget may provide the answer.