Targets for the Centre and states for 2023-24 are 5.9% and 3%, respectively, with half-a-percentage point leeway to the latter for power sector reforms. States have a steeper glide path for deficit reduction that is particularly vulnerable to political promises of free food and energy. GoI, on its part, is committed to a capital expenditure programme to nurse India’s economic recovery, and is nudging states towards fiscal balance.
India’s ability to attain its pre-pandemic fiscal targets is also influenced by its need to keep credit flowing to small enterprises in an environment of globally high interest rates. Broad-based investment revival depends on keeping credit costs in check by better budgeting of government expenditure.
States have an additional requirement of cleaning up off-budget liabilities accumulated through political promises such as those on free electricity. Power distribution being the sole point of revenue injection, state utilities’ inability to pay is holding up investments in generation and transmission.
Apart from introducing imperfections in the market mechanism, sectarian political targeting of welfare perpetuates inequality. Universal wealth redistribution through cash transfers is a more robust approach. Promises to vote banks are essentially a zero-sum game where one segment benefits at the cost of another.
India has unsuccessfully experimented with inclusive growth for much of its post-Independence history. It has now corrected course to grow through clusters accompanied by even-handed welfare delivery. This approach has worked in steering the economy through multiple global economic crises. A return to competitive populism will be an unnecessary throwback the world’s fastest-growing major economy can do without.
