2024 Ahoy! Will electoral freebies throw fiscal deficit into disarray?

Until the halfway mark of FY24 (H1), the Centre did well to keep its fiscal deficit under control. The Controller General of Accounts (CGA) data shows, that the “actual” fiscal deficit stood at 39.3% of the budgeted ₹17.86 lakh crore (5.9% of the GDP) by the end of September 2023. This was “marginally” higher than 37.3% during the corresponding period of FY23 (H1). The RBI’s November bulletin commanded this and attributed the “marginally higher” figure to a “marked improvement in the quality of spending”.

However, the RBI also warned against “complacency” given the “current uncertain environment”, pointing to global growth slowing down (the FinMin’s monthly report for October 2023 also warned of this) but omitted the obvious domestic risks from (i) November-round of elections in heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh and others, Telangana and Mizoram, and (ii) forthcoming general election of 2024 (April-May 2024). Big elections tend to bring higher fiscal outgo due to populist (welfare) schemes.

To put the Centre’s fiscal deficit in perspective, it was 6.4% of the GDP in FY23 (RE) and the target for FY24 (BE) was 5.9% – both higher than the FRBM limit of 3% but given the post-pandemic reconstruction this was to be expected.

The fiscal deficit target for FY24 is headed for a big breach. Here is why.

LPG subsidy goes up

Post-February 1, 2023 budget presentation, a series of additional LPG subsidies under the Ujjwala scheme were announced. It started in March 2023.

On March 24, 2023, the Cabinet Committee on Economic Affairs (CCEA) approved “a subsidy of ₹200 per 14.2 kg cylinder for up to 12 refills per year” to raise the average annual refill from 3.68 in FY22 (it was 3.01 in FY20). For this, expenditure of ₹6,100 crore for FY23 and ₹7,680 crore for FY24 was approved.

This was followed by more such announcements.

· On August 29, 2023, the Ministry of Petroleum & Natural Gas said the Prime Minister had announced a subsidy of ₹200 as “a gift” for ‘Raksha Bandhan’.

· On September 13, 2023, the Union Cabinet approved “75 lakh additional Ujjwala connections” to take the total Ujjwala beneficiaries from 9.6 crore to 10.35 crore over three fiscals of FY24-FY26. Union Minister Anurag Thakur said these would put an additional fiscal burden of ₹7,680 crore.

· On October 4, 2023, Thakur announced the government had decided to give an additional ₹100 subsidy “for every refill”.

· On October 5, 2023, PMO said the Prime Minister declared in Jabalpur: “…in the last few weeks alone, the cylinder has become cheaper by ₹500 for the beneficiary sisters of Ujjwala. Now my poor mothers, sisters and daughters who are beneficiaries of Ujjwala will get gas cylinders for only ₹600.”

The average price of LPG cylinders in four metros stood at ₹1,113.25 on March 1, 2023 – as per the Indian Oil. Hence, the subsidy had increased by ₹500 as the Prime Minister said.

Then came the November round of elections, announced on October 9, 2023.

·In November 2023, the ruling BJP presented its manifestos in the heartland states as “Modi ki Guarantee 2023” with a promise to give LPG cylinders under the same Ujjwala scheme (a) at ₹500 each in Chhattisgarh, Madhya Pradesh and Telangana and (b) ₹450 in Rajasthan. This was a further subsidy of ₹100-₹150 (down from ₹1,100 in March 2023).

Now that the BJP has won in Madhya Pradesh, Rajasthan and Chhattisgarh, it is time to fulfil the “guarantee” for the January-March quarter (Q4) of FY24 before the next Central budget is presented. The total cost of the LPG subsidy outgo is not known.

Then, there are other post-budget fiscal burdens.

‘Free’ ration for Q4 of FY24 and ‘Bharat Atta’

· On November 5, 2023, the Prime Minister announced extending the “free” ration to 67% of households in the country for five more years – which could come into effect from January 1, 2024. On November 29, 2023, the Union Cabinet approved it. This means a substantial fiscal outgo – over and above the food subsidy of ₹1.97 lakh crore marked for FY24 (BE). The current “free” ration scheme ends on December 31, 2023.

· On November 5, 2023, the Prime Minister also launched a new tribal welfare scheme, “PM Janjati Adivasi Nyaya Maha Abhiyan (PM- JANMAN)” with a budget of ₹24,000 crore.

· On November 6, 2023, the Ministry of Consumer Affairs, Food & Public Distribution flagged off a new welfare scheme called “Bharat Atta” – subsidised ‘atta’ (wheat flour) at ₹27.5 per kg. This will be “available at all physical and mobile outlets of Kendriya Bhandar, NAFED and NCCF from today and will be expanded to other co-op/retail outlets” – through 800 mobile vans and 2,000 outlets. The cost of the scheme is not known yet.

Additional Fertiliser and G20 summit expenses

· On May 17, 2023 (post-budget), the Union Cabinet approved a proposal of the Department of Fertiliser to upwardly revise non-urea fertilisers (phosphatic and potassic (P&K) fertilisers), by ₹38,000 crore. On that occasion, Chemical and Fertilisers Minister Mansukh Mandaviya said the total fertiliser subsidy bill for FY24 was set to overshoot by ₹46,000-50,000 crore (including urea) to ₹2.25 lakh crore due to the rise in imported fertiliser (caused by the Russia-Ukraine war).

· On June 30, 2023, the Union Cabinet also approved “a special package of innovative schemes with a total outlay of ₹3,68,676.7 crore” (urea subsidy) for three years to promote sustainable agriculture. This meant, an additional outgo of ₹1.22 lakh crore (one-third) in FY24. The budget for FY24 earmarked fertiliser subsidy at ₹1.75 lakh crore.

· Meanwhile, the G20 summit held in New Delhi overshot the budgeted ₹90 crore spending to reach ₹4,100 crore (excess of ₹4,010 crore).

The next general election is due in March-April 2024. More welfare schemes may be launched before and at the next interim or vote-on-account budget of February 1, 2024.

There is a precedence for this. On February 1, 2019, an interim or vote-on-account budget was presented – because the general elections were due in March-April 2019 and this budget was meant to provide for the expenses for the first quarter (Q1) of the next fiscal year of FY20 to allow the new government to present full budget for FY20. Instead, it contained an unusual item: the PM-Kisan scheme with a retrospective effect. The budget said “around 12 crore small and marginal farmer families” would be given annual cash transfer of Rs 6,000 in three instalments, at an estimated cost of Rs 75,000 crore, which was to be applicable from “1st December 2018”. It further said “the first instalment for the period up to 31st March 2019 would be paid during this year itself” – that is, a fiscal burden on FY19. On March 7, 2019, the Ministry of Agriculture & Farmers Welfare announced that “more than 2 crore small/marginal farmers have benefitted so far” with cash transfers of ₹2,000 each – that is over ₹4,000 crore of fiscal outgo in FY19, adding to the fiscal deficit.

If such a thing were to happen on the next budget of February 1, 2024, the fiscal deficit for FY24 would go up further by ₹4,000 crore.

Do electoral freebies matter?

Since 2019, the Prime Minister has repeatedly denounced electoral freebies (“revdi” and “revdi culture”). Days before the elections were announced, the Prime Minister warned, on September 3, 2023, that “financially irresponsible policies and populism may give political results in the short term but will extract a great social and economic price in the long term” and that “those who suffer those consequences the most are often the poorest and the most vulnerable”.

But soon, the Centre and the BJP offered a series of freebies to the voters, billed as welfare schemes, not “revdi”. What changed? The elections were on in the backward heartland states collectively called ‘BIMARU’. Until a few years ago, south India was more famous for electoral freebies (free TVs and grinders etc.) but not anymore.

A recent study by the Centre for New Economics Studies (CNES), of the OP Jindal Global University provides a new insight into this.

The CNES created the “Access (In)Equality Index” to measure access to human development opportunities for people (five “pillars”) – basic amenities (water, sanitation, housing, nutrition, clean energy, digital access), healthcare, education, socio-economic security and justice. It classified states into (i) aspirants (ii) achievers and (iii) front-runners depending on their overall performances.

· Best performing states (more than 0.42), called “front-runners”, are 12: Goa, Sikkim, Tamil Nadu, Kerala, Himachal Pradesh, Telangana, Punjab, Mizoram, Karnataka, Andhra Pradesh, Nagaland, Haryana.

· Worst performing ones (less than 0.33), called “aspirants”, are six: Madhya Pradesh, Odisha, Assam, Bihar, Uttar Pradesh and Jharkhand.

· Average performers (0.33-0.42), called “achievers”, are 10: Maharashtra, Arunachal Pradesh, Gujarat, Uttarakhand, Chhattisgarh, Rajasthan, Tripura, West Bengal, Manipur and Meghalaya.

Note, the Hindi heartland states that went to polls are either average or worst performers – not front-runners. That should tell its tale and the relevance of electoral freebies.

The Prime Minister validated the role of electoral freebies by calling his party’s victory the victory of the poor, deprived, farmers and the tribals. The BJP won 52 of the 81 assembly seats falling in the “aspirational districts” of Madhya Pradesh, Rajasthan, Chhattisgarh and Telangana – doubling its win from 23 seas in 2018.

“Aspirational districts” are the “most under-developed districts” and 112 of them were identified for special attention and in January 2018 “Aspirational Districts Programme” (ADP) was launched for their quick and effective transformation.