Modi's populism after India election reversal puts public finances at risk

After reverses in the general election and facing possible losses in state polls this year, Indian Prime Minister Narendra Modi’s coalition has stepped up cash handouts, debt waivers and other freebies, although he has previously criticised the policy.

The handouts by state governments and promises by opposition parties trying to match the largesse threaten to upset the fiscal balance in the world’s most populous nation and disrupt spending on urban infrastructure and other development projects, analysts say.

Modi’s Bharatiya Janata Party (BJP) lost its parliamentary majority in the April-June national election and has stayed in power with the help of fickle allies. Opinion polls predict it could lose provincial elections due in Maharashtra, Haryana, and Jammu and Kashmir later this year, while winning in Jharkhand state, which could further dent Modi’s popularity.

Maharashtra, India’s richest state and ruled by a BJP coalition, has raised its fiscal deficit target to 2.6% of state GDP for the current fiscal year from 2.3% in an interim budget in February. The latest budget has listed cash handouts for women and free electricity for some farmers that could cost it about 960 billion rupees ($11.45 billion) in total this fiscal year, or 2.2% of state GDP, according to research and investment firm Emkay Global.