Why Governments Spend More During Elections

The International Monetary Fund’s Concerns About India’s debts

Newsreel Asia Insight #93
Jan. 04, 2024

As the general elections approach this year, it is anticipated that government debt will rise, a trend commonly observed as governments tend to increase spending during election periods to bolster their chances of retaining power. This practice, recurring in almost every election season and observed globally, has mistakenly been normalised, with its significant impact on us, the ordinary citizens, often being overlooked.

Currently, the Indian government owes about 57% of its Gross Domestic Product (GDP), while state governments owe around 28%, according to the annual Article IV consultation report by the International Monetary Fund (IMF), as noted by The Hindu in an op-ed, titled “The dispute on India’s debt burden.” If we consider this debt in terms of a household, it’s like a family that earns 100 rupees but owes 57 rupees.

Some of you might be wondering to whom these governments owe money. The debt is held by a range of entities, both within and outside the country. Domestically, this includes Indian banks, financial institutions, and citizens who invest in government bonds. These bonds are essentially promises made by the government to repay borrowed funds with interest.

Internationally, the debt holders extend to foreign governments, global financial organizations like the IMF or the World Bank, and foreign investors who either buy Indian government bonds or provide loans. This mix of domestic and international creditors reflects the broad base of trust and investment in India's economic promises.

Borrowing is a standard tool in the economic toolkit of any government, used to fund various essential projects and initiatives. However, the crux lies in the balance and management of this debt.

If the debt grows disproportionately compared to the economy’s growth, it signals potential economic troubles ahead. Consequently, a significant portion of the government’s revenue is then allocated to servicing this debt—paying off the interest and principal. This, in turn, can restrict its ability to invest in crucial sectors like healthcare, education or infrastructure development.

India’s debt-to-GDP ratio has been relatively stable. However, it’s still more than what the government initially aimed for. And it may increase if the government ramps up spending on popular schemes like job guarantees and subsidies to win hearts during this election year, a trend that is already unfolding.

The India Ratings and Research agency recently said India’s fiscal deficit – the difference between a government’s income and expenditure – is likely to exceed the 5.9% of GDP target due to the likelihood of revenue spending surpassing the budget estimate by roughly 2 trillion rupees. This is attributable to escalated spending on employment guarantee schemes and subsidies, the report said.

While these initiatives are crucial for social welfare, the problem arises when this spending is not balanced with the country’s earnings. It’s like a family that, in trying to please everyone, ends up spending far more than what it earns. When the government borrows more, it’s like taking a loan on behalf of its citizens, who eventually have to pay it back through taxes.

The concern arises from the fact that governments, essentially stewards entrusted with managing resources wisely on behalf of the people, might neglect their responsibility in their eagerness to win elections. In essence, today’s overspending can become tomorrow’s burden.

Fiscal responsibility is about balancing the books. It’s about ensuring that the government doesn’t spend more than it earns over a period. Just like a responsible family sets a budget to manage its expenses within its income, the government needs to do the same.

The solution lies in governments making difficult decisions and prioritising their spending with a long-term perspective. They should concentrate on fostering sustainable growth that benefits the nation over an extended period, rather than focusing on short-term electoral advantages.

For a government, the true test of a “nation-first” approach is its ability to look beyond its own term and the interests of the ruling party.