Business Today

Fiscal Credibility During Poll Years

Historical precedents do not support the popular belief that governments turn profligate in poll years.
Nikhil Gupta   New Delhi     Print Edition: August 26, 2018
Fiscal Credibility During Poll Years

About a month ago, our annual publication detailing the FY2018/19 budgets of 20 states has revealed that the real fiscal spending (by the Centre and states) is estimated to grow at 6.6 per cent in the current financial year, the slowest pace in four years and much lower than the approximate 11 per cent in FY2015/16. The conclusion has been based on the budget estimates (BEs) provided by the states and the Centre. As the general election is about a year away and 11 states, cumulatively accounting for about 40 per cent of the national GDP, are going to polls by 2018-end or in 2019, there have been doubts about the credibility of BEs, especially for the states. Thus, the validity of our conclusion is also under question. So, we are checking the BE sanctity of these states - Andhra Pradesh, Haryana, Madhya Pradesh, Maharashtra, Odisha and Rajasthan (they go to polls along with the general election) - based on fiscal spending (revenue spending less interest payments) and fiscal deficits during the last four election years, namely, 1998/99, 2003/04, 2008/09 and 2013/14. The findings are in stark contrast to popular beliefs and help establish the validity of our analysis and conclusion.

First, our belief in the fiscal profligacy of individual states during election years is unfounded. Fiscal spending is not necessarily higher than what is budgeted in poll years. The aggregate spending by all six states was lower than what was budgeted in each of the last four election years. Again, fiscal spending was lower than budgeted spending in three of the last four election years in all six individual states. In fact, fiscal spending in Maharashtra, the largest Indian state and accounting for nearly 15 per cent of national GDP, was lower than what was budgeted in all four election years. Although the Centre spent more than the budgeted amount in 1998/99 and 2008/09, it spent less in 2003/04 and 2013/14.

Second, while fiscal spending and election results do not show any connection as far as individual states are concerned, these two factors seem to be highly correlated when we look at the Centre. The ruling governments at the Centre again won the elections in 1998/99 and 2008/09 when spending growth was higher and lost in 2003/04 and 2013/14 when spending growth was lower.

Third, the common notion of governments (at the Centre and across the states) breaching fiscal deficit target, or BEs, in election years (as in 1998/99) is also unfounded. The Centre over-achieved fiscal deficit targets in 2003/04 and 2013/14, but there was no uniformity among individual states. For instance, Rajasthan and Maharashtra breached their fiscal deficit targets three times in the last four election years; Andhra Pradesh, Haryana and Odisha reported a better-than-budgeted deficit in three out of the four poll years, and Madhya Pradesh breached it twice. On an aggregate, however, the combined fiscal deficit of six states breached the targets three out of four times (0.9 percentage points of GDP in 1998/99 and 2003/04, 0.2 pp in 2008/09 and overachievement of 0.4 pp in 2013/14). Nevertheless, breaching fiscal deficit without a commensurate breach in spending targets does not hurt the credibility of our conclusion.

Overall, the popular belief that governments turn profligate in election years and thus make budget estimates irrelevant is not supported by historical precedents.

Finally, lower or higher food inflation does not necessarily benefit or hurt a ruling government's poll results. The incumbents retained power in 1998/99 and 2008/09 amid (very) high inflation and lost in 2003/04 when inflation was low. In 2013/14, however, the government lost amid high inflation.

The writer is Economist, Motilal Oswal Institutional Research

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