Reading the Maharashtra Verdict from a Fiscal Lens
Maharashtra at 14 percent has the biggest share of the nation’s economic output. Its capital Mumbai is also the commercial and financial capital of the country. From this maximum city, the nation collects a whopping disproportionate share of direct taxes comprising of corporate and personal incomes. Mumbai’s real estate is more precious than gold. The State’s Jawaharlal Nehru Port is India’s busiest container port handling about 60 percent of all containerised cargo, and among the top five ports in terms of total tonnage in the country. It is seamlessly connected to the dedicated freight corridors, with the eastern leg already functional and western leg to be operational soon.
Hence it is crucial for India’s exports. The proposed Vadhavan port at the northern end of Maharashtra will be state-of-the-art, and among the top ten ports in the world when completed. Mumbai’s 22-kilometer trans harbour bridge, commissioned earlier this year, is a crucial link between the island city and the mainland. This will lead to resurgence in real estate activity on both sides of the bridge and give an impetus to commercial activity.
There are several roadways, metro and other infrastructure projects underway which will all add to Maharashtra’s mighty economic heft. In fact, it has the ambition of becoming India’s first one trillion-dollar sub-sovereign economy in the next few years.
So naturally forming the government in Maharashtra is a big prize for any political party. The Bharatiya Janata Party led coalition Mahayuti achieved a stunning victory in the Assembly polls last week winning 234 out of 288 seats. This is their third consecutive victory, a hat trick for the BJP in three Assembly elections, in what was once a mostly Congress-ruled State. The sweeping victory, and generous verdict by the voters of Maharashtra who gave 49 percent of all the votes cast to the Mahayuti, is as sound an electoral mandate as you can get. No fringe party can now wield any ransom like power to form a coalition government.
This spells good for political stability. The victory was all the more remarkable because it came barely five months after the BJP-led Mahayuti fared very poorly in June in the Lok Sabha elections. Thus, despite an anti-incumbency factor, farmer distress in regions of Marathwada and Vidarbha, prices dipping below minimum support price for cash crops like cotton and soyabean and the perception of corruption, the Mahayuti pulled off an amazing victory. This will have national reverberations and will also lead to political realignments in the State.
Every electoral outcome prediction and then postmortem is a matter of intense debate, theorising and is endless. Depending on one’s prior beliefs one can fit any model or theory to fit the observed behaviour. No one theory or explanation is however sufficient. Even the exit polls have gone horribly wrong in their prediction.
The recent decisive victory of President Trump for the second time in the USA is an example of an outcome which many believed was not possible or was very remote. It is clear that what motivates or animates voters is not subject to clean and simplistic explanations. The determinants of voter preference are not purely economic, or even driven by narrow self-interest, as public choice theory would have us believe. It could be purely an emotional response at the ballot box. With the increasing influence of religion-based propaganda and caste identities, it becomes an almost impossible puzzle to crack as to which is the decisive factor.
However, one cannot deny that the Majhi Ladki Bahin (my beloved sister) scheme launched barely three months before the State’s elections has had a significant impact on voter behaviour. This was passed by the Assembly well before the model code of conduct kicked in. In its somewhat hasty implementation, the eligibility checking might not have been as rigorous as needed. As a result, 25 million women now receive 1500 rupees per month as direct cash benefit.
After elections the entitlement will go up to 2100 rupees as per the poll manifesto of the Mahayuti. The total extra burden on the exchequer will be around 63000 crore per year, exceeding the amount spent on the National Rural Employment Guarantee scheme or the free food grain scheme for beneficiaries in the State. Already Maharashtra’s finances are such that 67 percent expenditure is on “revenue items” comprising of salaries, pensions and interest payment on past debt. That debt will climb to 7.8 lakh crore by next year, making the annual interest payment burden alone nearly 50,000 crore. This interest burden cannot be defaulted or postponed.
The Comptroller and Auditor General of India (CAG) in its report to the government in May has warned about rising debt burden. Even without the Ladki Bahin scheme, the State has to plan repayment of past loans which are becoming due in the next seven years. That amount is 2.75 lakh crore, which is roughly 40,000 crore to be provisioned every year from now on. All this extra debt burden would have been manageable if the growth rate of the State (and hence tax revenue) were to rise. But at least this year the growth rate is expected to be 5.5 percent, below the national GDP growth. This is well below the 12 percent needed to achieve a 1 trillion-dollar economy. The State which had a revenue surplus in 2019 now has a revenue deficit projected to 0.5 percent, and fiscal deficit of 2.6 percent of the State’s GDP. The total debt is getting close to 20 percent of the State’s GDP, which is considered the maximum limit under the combined fiscal responsibility framework for States and the Union government.
Seen from this fiscal lens, the short-term benefits of a direct cash transfer scheme have led to a future burden on the taxpayer. The Ladki Bahin (LB) scheme has not eliminated others. Indeed, there are more sops such as zero electricity bill and 15000 rupees for farmers, 10000 rupees for students and so on. The LB scheme has been a successful formula which was used in Jharkhand as well and is part of at least a dozen other States which offer cash or kind benefits targeting women, It pays electoral dividends by increasing female voter participation. But what it does to the fiscal situation, and consequent drag on growth, inflation and interest rates as well as future tax burdens is not well examined.
Poll myopia needs an antidote of responsible fiscal leadership for long term sustainable growth. Otherwise, populism is a race to the fiscal bottom. And the path to a future Universal Basic Income and unconditional cash transfer scheme is jeopardised.
(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press)
