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Facts, No Fiction: Recent farm loan waiver prove that Congress hasn’t learnt from its past mistakes that drove fiscal deficit up

Indeed, populist policies do give handsome political returns, but these returns are not only small but also extremely short-term while the costs of such policies are huge and tend to show in the medium to long-term.

The recent trend of populist announcements in the run-up to elections by the Congress for petty political gains indicates a reluctant party that is unwilling to learn from its macroeconomic blunders. To be fair to them, such bad Economics always makes for good politics as voters tend to handsomely reward them for such announcements however, the long-term costs of such politics is way too high which is why it is important to discuss this issue at length.

It has been the case that UPA has been fiscally reckless while the NDA has historically been more prudent at the handling of fiscal deficits. Be it the NDA-1 which enacted the FRBM Act or the NDA-2 which modified the act and has demonstrated its staunch commitment towards fiscal consolidation, both these governments have given a lot of importance to strong macroeconomic fundamentals. This is in contrast with the UPA era where fiscal deficit, current account deficit, inflation and interest rates were all significantly high.

The recent slowdown in economic growth under the UPA from 2011 onwards is just one example where populist policies by the Congress led to a complete collapse of growth. There is a direct relationship between fiscal deficits and inflation and thus, high fiscal deficits result in the acceleration of inflation. Thus, the increase in inflation post-2011 can be attributed to the high fiscal deficits Congress maintained from 2008 onwards and this high fiscal deficit in 2008 was largely due to the farm loan waiver that Congress had announced for direct electoral considerations in 2009.

What we are witnessing today with the Congress going around town announcing farm loan waivers is no different than what we witnessed in 2008 but the question worth asking is if farm loan waivers are effective and the answer to this is a definite no. Thus, the Congress is knowingly pushing for a policy that will not address the problem of volatility in farm incomes but it will cost the state exchequer a significant amount of money and it will only cause inflation in the medium run.

But it is not a new phenomenon whereby reckless spending by the state for political purposes was witnessed under the Congress government. The episode of 2008-2014 reminds me of the entire growth that India experienced in the 1980s. This growth also came with the backdrop of a widening fiscal deficit and the deficit only increased further during the Rajiv Gandhi’s tenure. While this widening of the deficit did lead to growth, the inflation accelerated further, and this growth also led to a widening current account deficit.

“Current Account deficit is defined as the current account consists of the balance of trade, net primary income or factor income and net cash transfers, that have taken place over a given period of time.”

The reason why current account deficit widened is that the growth led to a trend of importing goods for consumption needs while our exports didn’t increase to compensate for the increase in imports. Thus, the deficit-financed growth under Rajiv Gandhi induced a major problem for India which always maintains a twin-deficit; which is a simultaneous fiscal and current account deficit.

This experiment of deficit financing of growth ultimately led to the balance of payment crisis in 1991 when India finally decided to open its economy and get rid of the rigid state control over economic activity. The point, however, remains that anytime a government follows a populist fiscal policy it is bound to have some repercussions and a prolonged fiscal expansion is bound to result in deterioration of macroeconomic fundamentals for a nation which can swiftly escalate and become a full-blown economic or financial crisis.

Despite the experience of the unstable nature of growth in the 1980s and from 2009-2011, the recent populist policies of the Congress indicate two things; it’s an unwillingness to learn from past economic mistakes and secondly the lack of a sound policy agenda to resolve some of the long-standing issues of Indian farmers.

While farm loan waivers result in great photo ops, but they do little to resolve the problem at hand. In fact, they only further complicate the situation further as they drain out potential resources which could have been allocated for rural infrastructural development. With adequate evidence of farm loan waivers being rendered as an ineffective measure to stabilize farm incomes, the fascination for them is largely due to the political rewards that such measures deliver.

Indeed, populist policies do give handsome political returns, but these returns are not only small but also extremely short-term while the costs of such policies are huge and tend to show in the medium to long-term. The crisis of 1991 and high inflation from 2011-2014 is evidence of the costs that these policies induce upon the citizens and the economy so it’d be wise to advise the Congress to learn from its past mistakes and put the economic interests ahead of its political interest. At the same time, it is important that voters realize that there are no free lunches and it is ultimately the voter who ends up paying for such reckless spending by political parties. It is about time that we learn from the past and stops rewarding bad economic policymaking politically as for only then will the good economic policy be the norm and not an exception.

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Karan Bhasin
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.

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