Financial profligacy is the complement of populism. The latter form of politics thrives by doling out sops in the hope that recipients will continue to vote for it. The latest practitioner of this kind of politics is Arvind Kejriwal, the new chief minister of Delhi. He has promised the people of Delhi free water, cheap electricity and other goodies. His admirers overlook the simple fact that these items will become cheap or free through subsidies, which will have to be paid for by the taxpayer. It is axiomatic that the State has no money of its own: its exchequer is financed by taxes. Delhi, because it is Delhi, enjoys a higher allocation of funds on most things, and this may make things easier for Mr Kejriwal. But what is alarming is that he has probably started a race for profligacy among state chief ministers. Someone like Mamata Banerjee, the chief minister of West Bengal, who has a record of doling out subsidies, will be encouraged by Mr Kejriwal’s example. This is one race that India could do without. To be fair to Mr Kejriwal, he is not the pioneer of profligacy. Others have practised it before him in the past. More recently, the president of the Congress, Sonia Gandhi, has influenced the United Progressive Alliance to pass the food security bill and the National Rural Employment Guarantee Act without any consideration of how these schemes will be financed.
These populist projects could not have come at a worse time for India. The country’s finances cannot afford to pay for these schemes. Growth is falling, deficit is on the rise, and there is the balance-of-payments problem looming. All economic indicators strongly indicate that India needs a regime of financial prudence and a reduction of expenditure on all fronts. Defying this, a period of financial profligacy has opened. It is sometimes suggested that since some items least deserving of subsidy receive state subventions, there is no harm in adding to the list. This is an argument which believes that many erroneous decisions add up to making the right decision. There had been the hope in the early 1990s that India was entering a new economic era in which growth would flourish, state expenditure would be tapered down, and the frontiers of the State gradually withdrawn. After two decades, all three hopes have been belied. There are valid explanations for the fall in growth, but, on the other two counts, Indian politicians of all hues have to bear the responsibility for failure. The trend will continue as long as populism is the keynote of politics.