A Double-Edged Sword for Maharashtra and Jharkhand
The recent assembly elections in Maharashtra and Jharkhand have brought populism and freebies back into the spotlight. While the BJP-led Mahayuti alliance in Maharashtra rode the wave of its Ladki Bahin Yojana to victory, the ruling INDI Alliance in Jharkhand secured a mandate with its own welfare schemes, including the Maiya Samman Yojana and farm loan waivers.
However, analysts warn that fulfilling these pre-poll promises could come at a significant fiscal cost. The Mahayuti alliance's pledge to increase the monthly allowance under the Ladki Bahin scheme from Rs 1,500 to Rs 2,100 is expected to put pressure on Maharashtra's finances and necessitate cuts in capital expenditure.
Macquarie Capital estimates that Maharashtra's fiscal deficit will exceed the 3% target, forcing the state to reduce capital expenditure to meet its fiscal goals. The Ladki Bahin scheme alone is estimated to cost the state Rs 350 billion this year, significantly exceeding its initial target of Rs 835 billion for capital expenditure.
Jharkhand's Maiya Samman Yojana, which transfers Rs 1,000 per month to eligible women, and its farm loan waiver program for 1.8 lakh farmers, also raise concerns about fiscal sustainability. Emkay Global Financial Services estimates that increasing the monthly allowance under the MSY to Rs 2,500 would cost the state Rs 90 billion, significantly exceeding the initial budget of Rs 60 billion.
The increasing popularity of freebies poses a significant challenge to state finances. With limited revenue mobilization options, states are likely to face increasing fiscal pressure, leading to a potential slippage in their fiscal deficit targets. This could result in cuts to capital expenditure, impacting long-term growth prospects.
While populism and freebies may be politically expedient, their long-term impact on fiscal sustainability and economic development cannot be ignored. Finding a balance between fulfilling electoral promises and maintaining fiscal discipline remains a critical challenge for state governments in India.