Govt spending before Lok Sabha elections: What data shows2 min read . Updated: 25 Jun 2018, 11:20 AM IST
Not only do governments tend to raise overall spending before elections, they also often spend relatively more on subsidies and transfers
Mumbai: With 2019 Lok Sabha elections less than a year away, and the ruling National Democratic Alliance (NDA) coalition appearing more vulnerable than before, concerns about possible fiscal slippages have begun mounting. Investors fear that the Union government may give in to the temptation of populism to counter anti-incumbency and to lift economic sentiments.
An analysis of historical data suggests that such concerns are not without basis. Most Union governments have resorted to fiscal expansion in the year ahead of general elections, the data shows.
A 2014 research paper by Deepa S. Vaidya and K. Kangasabapathy of the Economic and Political Weekly Research Foundation showed that much of the increase in the deficit ahead of elections is because the actual spending exceeds the budgeted estimates.
That governments in democracies might be tempted to raise spending before elections has long been recognized by political business cycle theories. And India’s recent history suggests that political parties have good reasons to pay attention to such theories.
To illustrate, in the last three elections, the only time that an incumbent government came to power was the United Progressive Alliance (UPA) in 2009, a year in which the government increased spending significantly. Even before the global financial crisis erupted around September 2008, the government had already embarked upon fiscal expansion. It had waived off farm loans, expanded social security schemes under the National Rural Employment Guarantee Act (NREGA), and implemented revised salaries for the central public servants as per the recommendations of the Sixth Pay Commission.
Not only do governments tend to raise overall spending before elections, they also often spend relatively more on subsidies and transfers.
Increased government spending before elections is also reflected in the national accounts data, which suggests acceleration in government’s consumption spending in the run-up to elections.
The NDA-I (1999-2004) and the UPA-II (2009-2014) governments remain notable exceptions to the above trend. But it is worth noting that in both cases, the incumbent coalitions failed to return to power.
With history as guide, the current government might therefore be tempted to increase spending ahead of the elections and resort to more populist policies. To be sure, a case could be made in favour of alleged “populist" spending given increasing stress in the farm economy and lacklustre job creation in the non-farm sector. However, past experience shows that populist measures such as farm loan waiver offer only temporary respite and cause long-term problems.
Populism also carries the risks of destabilizing the macro-economy at a time when the Indian economy’s vulnerabilities are growing. One way the government could manage the conflicting demands of politics and economics could be by resorting to extra-budgetary resources (EBR).
For instance, 61.4% of all capital expenditure outlined in the 2018-19 budget is slated to be financed through EBR, up from 54% in 2016-17. Similarly, while the budget made tall announcements related to spending on agriculture and rural livelihoods, the fine print shows that 84% of all such spending is slated to be financed outside the budget, with the biggest component being providing agricultural credit. Also, given that the government’s fiscal math is based on a cash accounting method which means that the government only acknowledges expenses once a payment has been made, the government can postpone the impact on the fisc by delaying or rolling over certain payments such as those relating to different kinds of subsidies. This trick has been routinely used over the past few years, and this year is unlikely to be an exception.
Despite resorting to such measures, the government may still slip on the fiscal deficit targets.