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Home / Opinion / Views /  Opinion | Eventually, it’ll still be about the economy

Political parties are going all-out offering big giveaways to please voters as elections kick off. While these may help win votes, they can do serious damage to the financial health of the next government, irrespective of which party heads it. First it was the Bharatiya Janata Party (BJP)-led government that announced an income scheme under which it has begun giving 6,000 annually to marginal farmers. The Congress came up with an even bigger plan, promising 6,000 every month to the country’s poorest. Not to be outdone, the BJP has now promised to expand the coverage of its scheme to all farmers. Regional parties aren’t leaving any stone unturned either. The Telugu Desam Party and YSR Congress party in Andhra Pradesh, for example, are busy promising big payouts and freebies, even though the state is burdened by heavy debt.

As political parties compete furiously for the attention of voters, it is time to revisit India’s experience of an earlier phase of fiscal profligacy that caused an economic upheaval of sorts. Soon after the 2008 financial crisis, the then government, with Pranab Mukherjee as finance minister, had announced a fiscal stimulus of about 1.8 trillion—mostly through tax cuts and spending increases. That package helped shore up the economy’s growth for a while, but the fiscal loosening carried on for a couple of years longer than warranted. With excess money sloshing around, it didn’t take long for inflation to shoot up into double digits. This hit the common man hard, particularly the poor, as prices of everything from food and fuel to daily-use items and sundry services soared. Public anger reached such a peak that P. Chidambaram, who replaced Mukherjee as finance minister in 2012, blamed runaway prices among other adverse factors for the Congress defeat in the 2014 general elections.

As politicians veer towards high-decibel populism again, it is important not to forget the country’s fiscal constraints. With the government’s revenue growth lagging projections, such massive spending plans can only be funded either through tax hikes on privileged sections such as the rich or via higher market borrowings. Neither would be harmless. Inflation, which has been brought under control by fiscal consolidation and central bank vigilance, could get sparked off again. That would hurt the poor the most, negating the very objective of these schemes. Wanton spending could also saddle India with various other problems associated with uncertainty over the rupee’s real value. Unlike in 2009, when policymakers could justify a super-loose fiscal policy on the urgency of a global crisis, no credible reason can be cited for it today. One of the most laudable achievements of the past five years has been the adoption of a monetary policy framework that explicitly tasks the Reserve Bank of India with keeping retail inflation within a band of 2-6%, with 4% assumed to be its target. For seven months in a row, price levels have stayed below that figure. In their quest for victory, politicians should not fritter away this success. Handouts might impress some voters in the short-term, but their harmful effects could leave a trail of destruction that the entire economy would have to bear.

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