Khatakhat Economics
Khatakhat Economics
Unchecked, the electoral freebies virus will at the least unleash competitive populism and at its worst guarantee national bankruptcy. EPISODE #183
Dear Reader,
A very happy Monday to you.
Last week the Congress-ruled Telangana announced a Rs 31,000 crore farm loan waiver. It was a key poll promise made by the Congress party in the run-up to the assembly elections last year.
This action is consistent with similar populist guarantees made by the Congress party in the just concluded general election, including an annual payment of Rs 1 lakh per year to the oldest woman in every poor family.
Thanks to the party’s former President Rahul Gandhi’s stump speeches, this promise acquired a moniker: Khatakhat.
Since the electoral promise seems to have contributed to the electoral cause of the Congress, the obvious question: What next?
Another round of state elections are due. Will a more chastened Bharatiya Janata Party (BJP) choose to abandon its fiscally prudent stance and go even more populist than the Congress? Is this the beginning of a phase of competitive populism?
This week I explore the phenomenon of Khatakhat Economics and its attendant implications.
The cover picture this week is taken by Rahul Sharma. He has a brilliant eye. Exactly why his compositions are stunning. Thank you Rahul.
Happy reading.
Competitive Populism
A key reason contributing to the re-election of the Congress-led United Progressive Alliance (UPA) in 2009, was the massive Rs60,000 crore farm loan waiver it announced in the preceding year.
In the same refrain, last week the Congress-ruled Telangana announced another Rs 31,000 crore farm loan waiver—a key poll promise of the party ahead of winning a landslide in the assembly election last year.
In both instances, the actions, no matter how well justified, create a moral hazard. Though, they do not impact the bank which loaned the money—as the state government picks up the tab—it incentivises non-payment of dues. In turn, this undermines the credit culture in the country. Further, the exchequer will have to borrow more to make good the loan waivers.
Similar electoral freebies emerged as a key electoral calling card of the Congress party’s strategy in the just concluded general election. A standout guarantee, if people voted for them, was the annual payment of Rs1 lakh every year—Rs8,500 every month—it promised to the oldest woman in every poor family.
Thanks to the stump speeches of Rahul Gandhi, the party’s former President, this guarantee acquired a catchy moniker: Khatakhat.
Check out the clip below sourced from the Congress party.
The slogan seems to have caught the imagination of a segment of the electorate—going by the outcome, wherein the Congress nearly doubled its tally to 98 seats in the 18th general election; over and above the successes it harvested in the polls to the state assembly last year.
Another matter, many women gullibly bought into the electoral promise and turned up at the party’s offices all across the country on 5 June to claim their first instalment of Rs8,500, only to be turned away.
The obvious question, as I raised in the introduction, is: What next?
Another round of key state assembly elections are due.
More importantly, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) is readying to present the full budget for 2024-25 later this month. Will BJP, which lost its majority in this general election, throw out its existing playbook developed on fiscal prudence, and engage in revenge populism?
Indeed if this is true, then can the national exchequer absorb the fiscal impact of such unbridled populism? The growing queue of fiscally irresponsible states like Kerala, Karnataka, Telangana and Punjab outside the door of the union government for bailouts, suggest this is not sustainable.
Fiscal Sins
Till 4 June, the day the general elections were announced, the perception was that populism was on the wane. Or at least that it was no longer a decisive factor influencing voter choices.
Especially after the creation of millions of labarthis (beneficiaries) in the aftermath of targeted welfare spending—which poll pundits claimed contributed to the winning rhythm of the BJP, the new pole of Indian politics, since 2014.
Further, states choosing to depart from the path of fiscal prudence are paying the price. If the centre is showing tough love and refusing to pick up the populism tab, then the courts are not cutting these states any slack either.
For instance, endorsing this mantra of fiscal prudence, the Supreme Court in April this year declined Kerala’s request to prevail upon the centre to relax the cap imposed on the state’s annual borrowings. The state which is staring at an unprecedented financial crisis is desperate for extra funds—even if they accrued as borrowings and added to their future debt burden.
The legal challenge arose because Kerala, ruled by the Left Democratic Front (LDF), ran into a fiscal problem. Its dues on account of salaries and pensions far exceeded the capacity of its receipts—to avoid default, the state had no option other than breach the ceiling on its borrowings. Denied this concession, it approached the Supreme Court for relief.
I wrote about this previously. Sharing a link below, in case you wish to re-read it.
Kerala's Fiscal Outrage
To briefly recap, in two years the liability of Kerala under the head of salaries and pension grew by a staggering 52.6%. It wanted to bridge this shortfall through additional borrowings of Rs26,626 crore.
A similar circumstance is brewing Karnataka.
The Congress party’s five guarantees together with anti-incumbency against the BJP government, ensured a landslide last year.
The five guarantees are:
200 units of free electricity to all households;
Rs 2,000 per month to each female head of the family;
10 kg of food grains to BPL families;
Rs 3,000 per month for two years to unemployed graduates;
Rs 1,500 per month for two years to unemployed diploma holders and free travel for women across the state in state-run non-AC buses.
The annual fiscal bill on these guarantees is around Rs50,000 crore.
A nice explainer done by Money Control has more details (bold text is my doing):
“While these five guarantees benefit 5.10 crore people in the state, they cost the exchequer Rs 36,000 crore in 2023-24.
Siddaramaiah allocated Rs 52,009 crore for these schemes this fiscal year.
The revenue-deficit for 2024-25 totals Rs 3,71,383 crore, and envisages annual borrowings exceeding Rs 1 lakh crore for the first time.”
To make up some of the shortfall, the state government has started increasing user fees on a range of products and services.
Ironically, the freebies are coming back to bite the very cohort they aimed to help. It is only a matter of time before this turns into electoral wrath.
No Free Lunches
The important takeaway, no matter what politicians claim, is that there are no free lunches.
The above examples are sufficient proof about the fiscal cost of Khatakhat economics, which seeks to undertake a redistribution of resources from the well-off to the not so well-off. While it may be politically expedient, it is an economic disaster in the making as it will entail spending beyond your means.
Undoubtedly, in the short run the beneficiaries stand to gain. Not in the long run when costs outweigh benefits—manifesting in the form of higher user charges or severe macroeconomic disruption.
Like I have mentioned in previous newsletters there is a fine line between economic populism (Khatakhat economics) and social welfare.
While the former is open ended and designed at redistribution, the latter is targeted at a specific individual or cohort—like poor, women and so on—with the intent of improving access to basics and thereby enabling empowerment.
With the NDA triangulating the beneficiary by using their Jandhan (bank account), Aadhaar and Mobile (JAM), the targeting has become more accurate—saving the exchequer a cumulative sum of Rs 2.75 lakh crore.
To be sure, saying no to populism does not mean denying social welfare—a necessity in the exceptional circumstances created by the unprecedented back-to-back economic crises in the covid-19 pandemic, Russia-Ukraine conflict and rampant global inflation forcing the US Fed to jack up interest rates.
The question then is how will the NDA respond to the political challenge posed by the recent electoral successes of the opposition inspired by populism?
In the interim budget, they were a picture of fiscal sagacity, passing up on the opportunity to offer electoral incentives—like it did in 2019 with the PM Kisan stipend for farmers. The upcoming Budget playbook will signal whether the NDA will opt for a new playbook or stick to the old one. One in which politics will define the economics.
The President’s address to launch the first session of the 18th Lok Sabha, suggests no change. We will know for sure only after FM Nirmala Sitharaman presents her budget next month.
Till then I will leave you with the thoughts of N K Singh, chairman of the 15th Finance Commission and former revenue secretary in the ministry of finance, on the third rail of Indian politics—the electoral business of freebies.
Delivering the key note address at the annual day celebrations of the Delhi School of Economics two years ago, he said (The bold text is my doing):
“It is not how cheap the freebies are, but how expensive they are for the economy, for the quality of life and for social cohesion in the long run.
We must dread the thought of replicating the culture of competitive freebie politics.”
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
On 4 June, nearly 24 lakh students were informed of the outcome of their medical entrance exam: NEET or National Eligibility-cum-Entrance Test (Undergraduate). It unleashed one of the sorriest spectacles of public policy failure.
Even as the uncertainty persists, the issue led to a political slugfest between the incumbent National Democratic Alliance and the opposition. Is there a way out of the impasse?
To answer this and more I spoke to Ramgopal Rao, the vice-chancellor of the Birla Institute of Technology and Science and former director of IIT-Delhi.
Mr Rao argued, in the course of a very insightful and compelling conversation, that the present pen-paper exam format was well sell past the date. Instead, he proposed an online test model similar to SAT. It won’t be easy. But it is not impossible either.
Do watch. Sharing the link below.
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Kapil, Surendra, Premasundaran, Sangeeta, Gautam and Shashwathi for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all readers. Gratitude also to all those who responded on Twitter (X) and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I will be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
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