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MOSL: Fuel or Engines (Economy)-And the populism has begun…-Long-lasting effects could be multi-fold and highly adverse

Fuel or Engines (Economy): And the populism has begun…; Long-lasting effects could be multi-fold and highly adverse

 

Our analysis of the 2019-20 budgets of 17 major Indian states confirms that six states – Andhra Pradesh (AP), Haryana (HR), Jharkhand (JH), Odisha (OD), Rajasthan (RJ), and West Bengal (WB) – have followed in the Center’s steps by announcing direct income support to farmers. Telangana (TR) – the poster child of this scheme – has increased support to farmers by 25% under the Rythu Bandhu; it has also reduced the age to receive pension from 65 years to 57 years. Besides direct income support and loan waivers to farmers, many states have increased pension amounts and minimum wages, and introduced unemployment allowances. Interestingly, seven of the 17 states have presented vote-on-accounts (VoA) indicating that probably populism is at the peak with general elections due in just two months. While these measures are highly attractive from a political perspective, we believe that economic implications of such populist schemes are multi-fold and may range from slightly adverse to a tragedy over the longer period; some of these could also hurt the economy in many ways. Most prominently, our estimates suggest that direct income support will constitute at least 20% of farm income for the very marginal farmer (with land of up to 0.40ha); this could potentially reduce the incentive for the farmer to work with the same rigor as before. Besides creating a shortage of workers, this could also hurt productivity growth, which accounted for as much as ~93% of the GVA/GDP growth during the decade between FY05-16. What’s more, such schemes affect the government’s flexibility to maneuver during difficult times; thus, the more productive but untied spending like capital expenditure tends to come under the axe. This also adversely affects the quality of fiscal spending.  Finally, it is doubtful whether any of these schemes will achieve the socially desirable objective of alleviation of poverty because the majority of beneficiaries are either land owners or workers, who may be poor but are not below the poverty line. These factors raise serious doubts regarding the long lasting effects of these fiscal policies.