India needs to strengthen its economic health with sustainable fiscal policies for long-term stability; state guarantees only put it in a perilous situation

After the Lok Sabha elections 2024 on June 4, the Center narrowly escaped plunging into a state of ‘fiscal catastrophe’. Even as Modi–-led BJP failed to secure an absolute majority on its own, it garnered the support of 293 MPs including 53 from its allies under the National Democratic Alliance (NDA) and formed the Government.

On the other hand, the I.N.D.I.A bloc led by the grand old party (GOP) namely Congress cobbled up a total of 234 MPs. A swing of just 38 from NDA to I.N.D.I.A bloc could have enabled the latter to catapult itself to the seat of power. In that scenario, the GOP would have to redeem the promises/guarantees made in its manifesto “Nyay Patra" released in April 2024. These entail mammoth fiscal costs.

Look at an annual grant of Rs 100,000/- to every poor Indian household (HH) under the ‘Mahalakshmi’ scheme. The amount - like unconditional income support - will be directly transferred to the bank account of the oldest woman of the HH. If the HH doesn’t have a woman, then the amount will be transferred to the account of the oldest member of the HH. Meanwhile, at a poll rally, Gandhi announced “Initially, we will give you Rs 100,000/- annually, and later we may increase it to Rs 200,000/-”.

There are around 400 million households in India. Even if we take a conservative estimate of only 10 per cent of the households or 40 million being poor, the Scheme would cost the exchequer Rs 400,000 crore annually. In case, the grant is increased to Rs 200,000/-, the cost would be Rs 800,000 crore per annum.

Aware of the huge impact on the budget, the manifesto puts two caveats on the Scheme. First, “the poor will be identified among the HHs in the bottom of the income pyramid”. Second, “the Scheme will be rolled out in stages and reviewed every year to assess the number of beneficiary HHs and its impact on alleviating poverty”. The way these conditions have been crafted shows that, to begin with, not all 40 million families will be covered. Further, the party could also drop some beneficiaries in due course to rein in the outflow.  

However, given the massive appeal of the grant amount promised under the Scheme, not a single poor household would like to be left out and a beneficiary HH once included wouldn’t like to get excluded. Any attempt to do so could trigger socioeconomic tensions between those who get it and others who don’t. So, all 40 million poor HHs will have to be given Rs 200,000/- each.

The other guarantee is a Youth Apprenticeship Scheme (YAS) for diploma holders under which an unemployed youth will be given Rs 100,000/- every year. Taking a total of 260 million persons in the 15-29 years age bracket and an unemployment rate of 10 per cent, giving Rs 100,000/- to each of the 26 million unemployed would cost the exchequer Rs 260,000 crore annually.

An apprenticeship is an arrangement under which a person works for an agreed period to learn a new skill that enables him to get a suitable job. During this period, he gets a fixed amount as a stipend. Under such an arrangement logically it is expected that at the end of the training period, there won’t be any need to give the stipend.

But, the GOP hasn’t alluded to any blueprint for training and occupations/businesses where the apprentices - on completion of the training - would get absorbed. In such a scenario, persons getting Rs 100,000/- will continue to get it year after year. As a result, the Center will be saddled with a recurring liability of Rs 260,000 crore.

Congress promised a legal guarantee for the MSP (minimum support price). The farmers would want it for all 23 crops for which MSP is currently fixed. Eventually, this will have to cover all crops; the entire agricultural produce. The government can’t force private entities to buy at the MSP. So, it should be prepared to pick up the whole of it. This will cost about Rs 33,00,000 crore annually.

It promised 3 million government jobs. Taking an average salary of say Rs 50,000 per month, this would entail an additional cost of Rs 180,000 crore annually. A hike in the wage under the Mahatma Gandhi National Rural Employment Act (MNREGA) to Rs 400 per day would cost around Rs 80,000 crore. Further, the GOP has promised a one-time student loan waiver to cost around Rs 120,000 crore.

All put together, Congress’s Guarantee Schemes will cost the Union Government a monumental Rs 47,40,000 crore annually (800,000+260,000+33,00,000+180,000+80,000+120,000). Excluding the cost of student loan waiver which is one time, the recurring annual burden would be Rs 46,20,000 crore. This is almost close to the total expenditure of Rs 47,66,000 crore estimated in the interim Union Budget for 2024-25 and more than four times the capital expenditure outlay of Rs 11,10,000 crore.

  During 2024-25, the total receipts other than borrowings of the central government are estimated to be Rs 30,80,000 crore including tax receipts of Rs 26,02,000 crore. The spend of Rs 800,0000 crore on the much-touted Mahalakshmi scheme alone will take away a quarter of the total receipts and nearly one-third of the tax receipts.    

As it is, the fiscal deficit (total receipts minus total expenditure) or FD for 2024-25 is estimated at Rs 16,85,000 crore which is 5.1 per cent of the gross domestic product (GDP). Add to this Rs 46,20,000 crore being the additional expenditure due to the guarantees, we get a whopping FD of Rs 63,05,000 crore which comes to 19.1 per cent of the GDP. This is more than two times the 9.2 per cent reached in 2020-21 when the economy was crippled by the devastating Corona pandemic.   

One shudders at the very thought of where this will take the Center’s debt currently estimated at around Rs 187,35,000 crore (as of 31st March 2025). It will double in less than four years, courtesy of the guarantees. At present, the Center’s debt is around 57 per cent of the GDP.

As per the amendment to the Fiscal Responsibility and Budget Management (FRBM) Act (2018–19), this should have been lowered to 40 per cent by 2024-25. Instead, we will be heading towards a level far more than 100 per cent.  India's sound economic fundamentals, robust growth momentum, and focus on fiscal consolidation have led global rating agencies such as  S&P Global to consider a sovereign rating upgrade by raising its country outlook to positive from stable after a long hiatus of one-and-a-half decades. All this could go for a toss in the event of ‘fiscal profligacy’ triggered by the guarantees.

The fiscal catastrophe would bring with it a deadly cocktail of unsustainable debt, galloping interest payments (exacerbated by rising interest rates), high inflation (courtesy, mountain of cash in people’s hands), declining investment, decelerating economic activity/GDP even as crores of persons don’t need to earn their living and simply wait for the State largesse to take care of all their needs. In short, India would be heading towards an economic disaster. The BJP not having an absolute majority makes the Modi – government vulnerable. In this case, Congress-led I.N.D.I.A bloc takes charge, and the risk of economic disaster looms large.

(The writer is a policy analyst; views expresed are personal)