Can’t buy me an election with budget freebies

“Can’t buy me love,” sang the Beatles. “Can’t buy me an election” is the theme of this year’s budget. Finance ministers usually produce freebies, subsidies and waivers in their last budget before an election. Such attempts to buy votes have very little impact, but finance ministers persist in the hope that it may work this time.

But Finance Minister Palaniappan Chidambaram has just produced an election budget without any big freebies. He aims at fiscal prudence, not a spending spree, to win votes. He aims at accelerating GDP growth and taming inflation, and thinks voters will reward him for it in 2014. That’s a risky gamble, but a refreshingly bold one.

He was Finance Minister five years ago too, when he presented his last full budget 15 months before the 2009 polls. This waived farm loans for small and medium farms, at a cost of over Rs 60,000 crore. It also expanded the rural employment guarantee programme (NREGA) to cover the whole country. Both politicians and the media saw this as a classic attempt to buy the 2009 election, one that succeeded.

In fact this was a false interpretation. Yes, the UPA greatly increased its seats, but not by purchasing voters wholesale in poor rural areas. Rather, the UPA swept all the major cities (Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad). By contrast, the Congres won only 22 out of 115 seats in five of the poorest rural states – Bihar, Odisha, Chhattisgarh, Jharkhand and Madhya Pradesh.

Why? Because the outcome was driven mainly by record GDP growth of 8.5 per cent, not by the loan waiver or NREGA. Record growth hugely improved incomes and opportunities, most of all in urban areas. Hence the UPA swept the cities. In earlier times, dissatisfied voters voted three-quarters of incumbent governments out. But when fast GDP growth of 8.5 per cent arrived, suddenly three-quarters of incumbents gained re-election.

In the earlier BJP era of 1998-04 , anti-incumbency was rife because GDP growth averaged only 5.7 per cent per year, and poverty reduction declined by only 0.75 per cent per year. But then GDP growth shot up to 8.5 per cent per year in the reign of UPA-1 , accompanied by a doubling of poverty reduction to 1.5 per cent per year. The supposed tension between growth and poverty proved false: fast growth actually reduced poverty. Hence the old anti incumbency was replaced by pro-incumbency , benefiting not only the UPA in 2009 but many chief ministers too.

A seminal research study by Poonam Gupta and Arvind Panagariya (India: Election Outcomes and Economic Performance) showed that voters in 2009 were swayed less by national economic performance than by accelerated state government performance. According to CSO data, GDP growth shot up between 2000-04 and 2004-09 from 4.5 per cent per year to 12.4 per cent in Bihar, from 4.8 per cent to 10.2 per cent in Orissa, and from 6.1 per cent to 9.7 per cent in Chhattisgarh. These were all non-Congress states, and voters gave credit for fast growth to Nitish Kumar, Naveen Patnaik and Raman Singh, not to Sonia Gandhi.

Examining state GDP growth between 2004-05 and 2008-09 , the study divided the major states into three growth categories – high, medium and low (relative to national growth). In high-growth states, a whopping 85 per cent of candidates of the incumbent State party won in 2009. The winning rate dropped to 50 per cent in medium-growth states and 30 per cent in low-growth states. Clearly, fast growth mattered hugely.

Many other factors (alliances, caste, regional pride, inflation ) remained relevant. But whenever slow-growth states accelerated to 7 per cent or more, this became a major determinant of victory. The Gupta-Panagariya study noted that fast growth reduced poverty and accelerated job creation , benefiting not just a few rich folk but the masses too.

Almost all Congressmen in 2009 swore that the farm loan waiver and NREGA had won them the election. This, however, owed more to obeisance to the Gandhi family (Sonia had backed these measures) than cool analysis.

This time it’s different. After presenting his budget, Chidambaram was asked why he not repeated his 2008 strategy of introducing freebies like the farm loan waiver and NREGA to buy the coming election. He replied that the 2009 election had been won by rapid economic growth and the accompanying poverty reduction, not freebies. This is perhaps the first time a Congressman has been so candid on this count.

So, said Chidambaram, he was being consistent. He did not think it possible to buy an election with freebies, but did think it possible to win over voters by stoking fast growth in the next 15 months. Whether this will suffice to return to power remains to be seen.

What do you think?