With a weaker mandate, some say that the BJP-led NDA coalition government might introduce populist measures in the full Budget to regain political momentum, which may potentially reverse fiscal consolidation efforts.
A weakened Bharatiya Janata Party (BJP) in the National Democratic Alliance (NDA), may have to accede to long-pending demands of the Janata Dal (United) and Telugu Desam Party (TDP), which includes granting special status to Bihar and Andhra Pradesh respectively. Any such move, however, is likely to add to the Centre’s fiscal burden, say analysts.
A “special status” essentially means that states with that label will get more financial assistance from the Centre–mainly for spending on their welfare schemes–over and above their allotted share according to the Finance Commission’s recommendations. Special category status provides states with increased central assistance, grants, preferential allocations, and sometimes tax incentives.
In case special status is granted to the two states, the Centre’s transfer to states could go up and have fiscal implications, note economists. “In the event where any additional state welfare promises are enforced at the national level, it could add to the fiscal bill,” said Sakshi Gupta, principal economist, HDFC Bank, while adding that some of this can be cushioned by the high RBI dividend, healthy tax collection growth, and some rationalisation of other expenditures.
Sujan Hajra, chief economist, Anand Rathi said that the primary burden of this status falls on the divisible pool of revenue shared among states, rather than the central government per se, say economists. “Consequently, the fiscal impact on the central government of granting special status to Bihar and Andhra Pradesh would be minimal.”
While Bihar has been demanding a special status for several years, given its weak performance on several economic indicators, the categorisation for Andhra Pradesh becomes crucial now as the TDP had promised to provide several freebies to their state population–such as three free gas cylinders per year to households; Rs 20,000 investment support for farmers per annum; 2 million jobs to the youth; an unemployment allowance of Rs 3,000 per month etc–once they come to power.
Analysts say that TDP will need resources to finance the extensive promises made in its electoral manifesto. A special category status would bolster the state’s finances, although direct contributions from the central government are expected to be limited, they say.
In 2013, a committee headed by Former Reserve Bank of India Governor Raghuram Rajan had suggested doing away with the “Special Category” criterion for providing additional assistance to poorer States. The committee instead had proposed a general method for allocating funds from the Centre based on both a state’s development needs as well as its development performance, but this method was not adopted.
Interestingly, the committee had identified Odisha as the least developed, followed by Bihar and Madhya Pradesh. The four other states apart from Bihar and Odisha clamouring for special-category privileges are among those found by the Rajan panel as least developed, requiring more central resources.
The BJP-led National Democratic Alliance (NDA) government has adhered to prudent fiscal policy over the last decade. Despite implementing numerous welfare measures, including direct cash transfers to vulnerable populations, overall welfare and subsidy expenditures have declined in recent years. In contrast, many state governments have increased their welfare schemes, often perceived as populist measures, say economists.
With a weaker mandate, some say that the BJP-led NDA coalition government might introduce populist measures in the full Budget to regain political momentum, which may potentially reverse fiscal consolidation efforts.
“The NDA’s relatively slim margin of victory, as well as the BJP’s loss of its outright majority in parliament, may delay more far-reaching economic and fiscal reforms that could impede progress on fiscal consolidation,” said Christian de Guzman, senior vice president, Moody’s Ratings. The Centre aims to achieve a 4.5% fiscal deficit-to-GDP ratio by FY26. In the current fiscal year, the figure is expected to touch 5.1%, much lower than 5.6% achieved in FY24.
“India’s fiscal outcomes will remain weaker than ‘Baa-rated peers’, even as the final budget for the fiscal year ending March 2025 (fiscal 2024-25) to be released in the next few weeks provides some indications of India’s fiscal policy over the course of the term of the incoming government through 2029,” said Guzman.
Source:financialexpress.com