New govt likely to vote for populism in budget

With the Lok Sabha election results indicating that there will be a coalition government at the Centre, economists expect the upcoming Budget to take a populist turn with a likely spurt in welfare and support schemes.

"Every government focuses on welfare schemes, but the larger the coalition, the higher the focus on such schemes," said NR Bhanumurthy, economist and vice-chancellor of BR Ambedkar School of Economics University, Bengaluru.

And that is not necessarily a good thing for the economy. "Freebies like free electricity and loan waivers should not take centre stage going forward as that will be detrimental to economic growth," Bhanumurthy said.

Instead, the new government should focus on scaling up many of the schemes already on the ground, including the rural employment guarantee scheme (MGNREGA), which is the only automatic stabiliser in the economy, along with irrigation and energy-related schemes in rural areas, he added.

Major parties have promised several schemes in their manifestos. Congress' promises include an annual ₹1 lakh cash transfer to women, one-time loan waiver to students, and a substantial increase in the minimum selling price to the farmers. BJP has promised to expand the Ayushman Yojana health insurance scheme.

Bhanumurthy said the new government is likely to focus on rural areas.

Experts have been pointing to rural distress owing to high inflation over the past year and below normal monsoon last year impacting agricultural incomes.

While the economy grew 8.2% in FY24, agriculture output grew a mere 1.4% compared with 4.7% in the previous year.

Experts indicate that the muted 4% growth in personal consumption was also due to rural distress.

"There is a need for targeted interventions to provide support to the distressed population," said Devendra Kumar Pant, chief economist at India Ratings and Research.

"If the trickle-down theory hasn't worked, there is a case for targeted intervention."

However, economists caution that a significant increase in such interventions can upend growth.

"You cannot rule out an increase in such interventions. If the scale of such interventions increases significantly, it would have implications for the country's fiscal consolidation and growth prospects," Pant said.

"However, we don't see a significant increase in scale...it is likely to be somewhere around the current levels," he added.

The government, in the interim budget, had set a target of 5.1% of GDP for FY25, going further down to 4.5% in FY26. The Reserve Bank of India has projected 7% growth for FY25, whereas international agencies like International Monetary Fund project India to grow 6.8% in the current fiscal.