Can India’s States Afford Election Freebies from Politicians?

India's political landscape has become increasingly defined by the use of freebies to secure election victories. Cash handouts, especially directed towards women, have emerged as a crucial strategy for political parties, blurring the line between welfare initiatives and electoral populism. However, this trend raises significant concerns about the financial sustainability of such policies, particularly in poorer states like Bihar, where the fiscal deficit is alarmingly high.

Last updated: 09 October 2023 (BST)

What’s happening now

In the wake of recent elections in Bihar, a significant victory for Prime Minister Narendra Modi's alliance has been attributed to a cash handout scheme targeting women. This initiative, promising 10,000 rupees (£85.18), appears to have effectively mobilised female voters, resulting in a record turnout. As such cash transfers become a hallmark of electoral strategy across various states, concerns mount regarding their long-term viability and impact on state finances.

Key takeaways

• The use of cash handouts in elections has surged, particularly targeting women voters.
• Bihar's recent election victory for Modi's alliance is linked to a significant cash handout scheme.
• States are increasingly facing fiscal pressure due to these populist policies, with many surpassing the 3% fiscal deficit target.

Timeline: how we got here

The trend of freebies in Indian elections has evolved over the years. Key milestones include:

• 2014: The rise of cash transfer schemes begins, targeting various demographics.
• 2020: Increased focus on women-centric financial support as a strategy to enhance voter turnout.
• 2023: Major election victories attributed to cash handouts, including Bihar's elections.

What’s new vs what’s known

New today/this week

The recent success of Modi's alliance in Bihar, primarily attributed to the cash handout scheme, highlights the growing trend of using financial incentives to sway voters. This has reignited discussions about the sustainability of such strategies amidst fiscal challenges.

What was already established

Populist policies have long been a feature of Indian politics, with historical precedents showing that handouts can significantly influence electoral outcomes. However, the economic implications of these policies, particularly in financially strained states, have been under scrutiny for several years.

Impact for the UK

Consumers and households

While the situation is specific to India, it raises broader questions about the sustainability of populist economic policies globally. The implications for UK consumers may be less direct but can offer lessons on the balance between welfare spending and fiscal responsibility.

Businesses and jobs

The focus on cash handouts may divert attention from creating sustainable job opportunities. In the UK, similar populist measures could risk undermining long-term economic growth if not balanced with productive investment.

Policy and regulation

The challenges faced by Indian states may echo in the UK, particularly regarding the management of public spending and welfare systems. Policymakers in the UK could scrutinise the effectiveness of incentive-driven strategies in light of the financial pressures they create.

Numbers that matter

• 6%: Bihar's fiscal deficit relative to its GDP, indicating severe financial strain.
• 4%: The cost of pre-election schemes in Bihar as a percentage of GDP, surpassing its capital outlay.
• 3%: The fiscal deficit ceiling for Indian states, now being exceeded by many.

Definitions and jargon buster

• Fiscal deficit: The difference between a government's total revenue and its total expenditure, indicating financial health.
• Cash transfers: Direct payments made to individuals, often used as a welfare measure.
• Populism: Political approach that seeks to represent the interests of ordinary people, often through appealing financial measures.

How to think about the next steps

Near term (0–4 weeks)

In the immediate future, expect further discussions around the sustainability of cash handouts and the fiscal health of states like Bihar. Political parties may continue to leverage these strategies as elections loom.

Medium term (1–6 months)

As more states prepare for elections, the trend of offering financial incentives is likely to escalate. However, this could prompt a backlash against unsustainable fiscal practices and demand for reform.

Signals to watch

• Budget announcements from state governments addressing fiscal deficits.
• Analysis from financial institutions on the impact of subsidies on state debt.
• Voter turnout and electoral outcomes in upcoming elections influenced by cash handouts.

Practical guidance

Do

• Monitor state budgets for fiscal sustainability.
• Engage in discussions about the balance between welfare and economic growth.

Don’t

• Ignore the potential long-term impacts of populism on state finances.
• Assume that short-term electoral gains will lead to sustainable governance.

Checklist

• Evaluate the implications of cash handouts on local economies.
• Consider the fiscal health of states when assessing political strategies.
• Stay informed on electoral outcomes and their economic ramifications.

Risks, caveats, and uncertainties

The reliance on freebies poses significant risks, particularly in terms of fiscal health. The sustainability of such policies remains uncertain, especially as many states struggle with rising debts and deficits. The political landscape can shift rapidly, making it challenging to predict long-term outcomes.

Bottom line

The increasing use of freebies in Indian elections raises critical questions about the balance between welfare and fiscal responsibility. As states like Bihar showcase the effectiveness of cash handouts in securing voter support, the long-term implications for economic sustainability cannot be overlooked.

FAQs

What role do cash handouts play in Indian elections?

Cash handouts are increasingly used by political parties to attract voters, particularly women, by offering financial incentives that can sway electoral outcomes.

How do these policies affect state finances?

Such policies often lead to significant fiscal deficits, with states exceeding the recommended fiscal deficit threshold, which can strain their financial health.

Are there any concerns about the sustainability of these measures?

Yes, experts warn that the reliance on freebies can crowd out more productive spending and lead to long-term economic challenges for states.