With Congress leader Rahul Gandhi upping the ante on his promise of an annual grant to women from poor families, economists warn the scheme would be a massive strain on India's finances.
"The scheme would prove to be a substantial fiscal burden. In addition, the increased spending power among a large segment of the population would lead to demand-pull inflation, negatively affecting essential commodity prices," an economist told Business Today.
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In its manifesto last month, the Congress Party promised that if elected to power, it would launch a ‘Mahalakshmi’ scheme to provide Rs 1 lakh per year to every poor Indian family as an unconditional cash transfer.
“The poor will be identified among the families in the bottom of the income pyramid”, the manifesto said, adding the “amount will be directly transferred to the bank account of the oldest woman of the household.” If the household does not have a woman, then the money “will be transferred to the account of the oldest member of the family”, the party clarified.
Now, Gandhi has gone further to promise an even higher dole. “Initially, we will give you Rs 1 lakh annually, and later we may increase it to Rs 2 lakh,” he said at a poll rally recently.
Perhaps mindful of the financial consequences, the Congress manifesto has a caveat. The Mahalakshmi scheme “will be rolled out in stages and reviewed every year to assess the number of beneficiary families and its impact on alleviating poverty”, the party wrote, indicating the scheme may not have universal coverage.
Regardless of the proverbial political skull drudgery ingrained in this caveat, the fiscal consequences of a full-fledged scheme of this sorts are going to be enormous and would derail much of the recent gains on government finances and debt that have won India an improved outlook from global ratings agency S&P.
When asked what it would cost the national exchequer to implement this scheme, a leading economist said the math of the Congress manifesto was very worrisome. Highlighting the difficulties in determining eligibility and ensuring compliance, he added apart from the significant fiscal challenges, the nation would also have to contend with the issue of long-term dependency on government aid.
“There are around 400 million households in India. If we consider conservatively only 10 per cent of the households being poor, the proposed scheme may cost the exchequer of 4 lakh crore”, he said. If the grant is increased to Rs 2 lakh, the cost would double to Rs 8 lakh crore, he added.
The promise of 30 lakh government jobs with an average salary of Rs 40,000 per month may add a cost of Rs 1.4 lakh crore annually to the exchequer. The youth apprenticeship scheme for diploma holders at Rs 1 lakh per year could cost another Rs 2.6 lakh crore annually, assuming an unemployment rate of 10 per cent in the 15-29 age bracket.
“For the other manifesto schemes including hiking the MNREGA wage to Rs 400 per day, a conservative estimate of the cost can be pegged at around Rs 80,000 lakh crore, adding to the fiscal profligacy”, the economist added.
This is still not all.
The Congress party has also promised to provide “legal guarantee” to the Minimum Support Prices (MSP) crops as recommended by the Swaminathan Commission. Currently, 23 crops are covered under MSP at an estimated value of Rs 10 lakh crore.
Taken together, the Congress election manifesto promises may wreck India’s fiscal balance, as the total cost may end up as high as Rs 22 lakh crore per annum, in addition to a one-time student loan waiver cost of Rs 1.2 lakh crore.
In 2024-25, the total receipts other than borrowings of the central government are estimated to be Rs 30.80 lakh crore and the total expenditure is estimated at Rs 47.66 lakh crore. The tax receipts are estimated at ₹ 26.02 lakh crore.
In the recent Interim Union Budget, India’s total budget for FY25 was Rs 47.66 lakh crore. Data available with the CMIE Economic Outlook showed that the net tax revenues are estimated at Rs 26.02 lakh crore, while total revenue receipts including tax revenues and non-tax revenues are pegged at Rs 30 lakh crore.
If Rs 8 lakh crore is spent on the Mahalakshmi scheme, over one-fourth of the government’s total estimated revenues of Rs 30 lakh crore in FY25 would get swallowed by this transfer alone.
Another way to realise the magnitude of funds required for this scheme is to look at the FY25 capex outlay of Rs 11.1 lakh crore including on developing infrastructure such as highways, railways, school, hospitals, bridges, airports and others. The annual recurring cost of the Congress promise would be higher than the total spending on infrastructure.
The promised spend would be equal to 70 per cent of the combined budget of Rs 17 lakh crore in FY25 for several major ministries including Defence, Road Transport and Highways, Railways, Rural Development, Chemicals and Fertilisers, Consumer Affairs, Food and Public Distribution.
Taking a direct jibe at Rahul Gandhi's promises, BJP leader and Finance Minister Nirmala Sitharaman questioned whether Congress understands the cost of implementing such social welfare schemes.
In a post on X, she highlighted the fiscal management under PM Modi's leadership and criticized the UPA government's debt growth from FY04 to FY14.
She noted that central government debt grew 3.2 times from Rs 18.74 lakh crore in March 2004 to Rs 58.59 lakh crore in March 2014.
"The central government's debt, which was 52.2 per cent of GDP at the end of 2013-14, was reduced to around 48.9 per cent in 2018-19 through gradual fiscal consolidation. During this period, the fiscal deficit was lowered from 4.5 per cent in FY14 to 3.4 per cent in FY19," Sitharaman stated.
The dangers of fiscal populism come at a time when S&P Global has sparked hopes for a long-awaited sovereign ratings upgrade for India by raising its country outlook to positive from stable after 14 years.
The global rating agency cited India's sound economic fundamentals, robust growth momentum, and government spending as reasons for the decision, while keeping its sovereign credit ratings unchanged at 'BBB-/A-3'.
S&P mentioned that cautious fiscal and monetary policies could lead to an improvement in ratings over the next two years.
“The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. Additionally, a cautious fiscal and monetary policy that reduces the government's elevated debt and interest burden while enhancing economic resilience could lead to a higher rating within the next 24 months," the rating agency stated.
Not just fiscal discipline, India’s ratings would come under the threat in the event of these promises being implemented, feel experts.