PERILS OF POPULISM

While the Centre's fiscal deficit remains contained, difficulty in withdrawing populist policies can impact fiscal prudence in the medium term

The government has decided to extend its free food grain distribution scheme for five more years. The welfare scheme which was to expire in December 23 will now be extended until 31st Dec '28. The scheme entitles around 80 crore people to receive 5 kilograms of rice, wheat and coarse grain for free.

Many see this move as a populist measure to appease voters ahead of the general elections next year. There are also expectations that allocations for other welfare schemes too would be increased to appease voters. Some expect the government to announce more populist policies in case the Bharatiya Janata Party (BJP) puts up a bad show in the upcoming state elections in Chhattisgarh, Mizoram, Madhya Pradesh, Rajasthan and Telangana.

While in India announcements of welfare schemes before the elections are normal, there are risks attached as it may lead to competitive populism. The fact that the government had to extend the free food grain scheme a scheme which was announced during the Covid pandemic and later subsumed in the existing food schemes of the government - reflects the difficulty in withdrawing populist policies once they are announced.

As far as the free food grain scheme is concerned, there are two important macro implications. One, to ensure the availability of grains, the government would put restrictions on exports of food grains. This could lead to lower supplies of food grains in the market leading to higher inflation.

Two, there could be higher spending on procurement of food grains by the government. As procurement costs increase, it will increase the food subsidy bill of the government over time. This, in turn, could lead to an increase in fiscal deficit.

FISCAL DEFICIT - CURRENTLY ON TRACK