Elections hike primary fiscal deficit by 0.9%

I'm really thrilled by the events of the past few days", exults Indira Rajaraman, RBI Professor at the National Institute of Public Finance and Policy (NIPFP), speaking on the various duty cuts and other concessions, like the wage hike for bureaucrats, pension for unorganised sector, offered by the government.

A firm critic of the finance minister's populist measures, Rajaraman's happiness is for a different reason "" the moves confirm her hypothesis that, for the last three decades and more, each election in India has resulted in a huge fiscal deficit.

Presenting her paper at a NIPFP-IMF conference on fiscal policy in the capital yesterday, Rajaraman's analysis shows that each time there's an election in the country, politicians come up with populist expenditure schemes, so the primary fiscal deficit (that's the fiscal deficit minus interest payments) has gone up by a whopping 0.92 percentage points of GDP.

This means that, since there have been 3 elections in the past six years, the primary deficit would have gone up by almost 3 per cent of GDP because of just this.

Rajaraman's analysis shows that while elections have always triggered a hike in fiscal deficits, things have got a lot worse in recent years.

Till 1971, she argues, since there was no real competitor to the Congress, there was no real reason for rampant pre-poll populism.

Between 1951 and 2001, the election-led hike in the primary fiscal deficit was 0.66 per cent of GDP - since this rose to 0.92 per cent in the sub-period 1971-2001, Rajaraman concludes that this shows the pressure of multi-party politics and the need to appease all sections of votebanks.

Reacting sharply to a comment by a former finance secretary that this was a modest price to pay for democracy, Rajaraman reminded him of the number of elections held in the recent years, and added that the 0.92 percentage points figure was a 30-year average and the figure for the recent past were a lot higher.