Populism vs Prudence: Can India Afford Its New Electoral Economics?

Populism is the new global electoral currency. From Bihar’s elections to Zohran Mamdani’s rise as the mayor-elect of New York City, politicians seem to have thrown fiscal prudence out of the window as they vie with each other to see who can make bigger promises to the voter. A self-described socialist has won more than half the votes in the city that epitomises the splendor of capitalism with promises of free bus rides, price-controlled accommodation and grocery shops.

Hence, a key question arises: Are we witnessing the arrival of a new, ‘more rewarding’ phase of politics for the average voter, or are these politicians leading us slowly, but surely, to an era of financial perdition.

The Bihar Experience

Bihar’s political manifestos outlined sweeping commitments that will shape the future of the state over the next five years. The National Democratic Alliance (NDA), which won the popular mandate, has vowed to create over one crore jobs across the public and private sectors. The opposition Mahagathbandhan’s promise of “one government job in every household” did not seem to have resonated with voters, going by the results.

Employment emerged as the defining battleground, followed closely by the theme of women’s empowerment. Neither front has been found willing to be left behind: the Mahagathbandhan’s “Mai-Bahin Maan Yojana” proposed to give ₹2,500 per month to women, while the NDA promised to make one crore women in Bihar “Lakhpati Didis”—women earning more than ₹1 lakh a year.

But are these promises deliverable? Let’s look at the numbers. According to 2023 population projections, Bihar’s population is 12.7 crore, or 9.1% of India’s total population. Currently, the state has 7.5 lakh government jobs, with around 5.5 lakh vacant posts. To deliver the opposition alliance’s promise of “one government job per household,” the state would need 2.5 crore jobs—a 33-fold increase.

Given that Bihar has 3.16 crore people registered on its e-Shram portal—a national database of unorganised workers meant to facilitate registration and provide social security—if the government were to create that many public sector jobs, it would absorb nearly 80% of its entire registered applicant base. The NDA’s promises are also ambitious, although somewhat more realistic. To create one crore jobs in the private sector in a state that accounts for less than 0.1% of India’s foreign direct investment flows, the government will have to rely largely on the micro, small, and medium enterprises (MSME) sector. This is a tough ask in a state thatis not known for industrial or commercial vibrancy and accounts for only around 3% of all Employees’ Provident Fund Organisation (EPFO) accounts in the country, despite being home to around 9% of its population.

Yet the Bihar election is only the latest in a series of populism-infused contests. What seems to have served as an inspiration for the Bihar strategy was the Bharatiya Janata Party alliance’s triumph in the 2024 Maharashtra elections. The sweeping victory of 235 out of 288 seats was attributed to their flagship “Mukhyamantri-Meri Ladki Behan Yojana,” under which women received monthly financial assistance of ₹1,500, with three instalments disbursed before the election to over two crore beneficiaries.

In a bid to cement voter support, the Mahayuti alliance vowed to raise the amount to ₹2,100 per month if re-elected. Chief Minister Eknath Shinde even promised ₹3,000 monthly. The scheme today costs ₹46,000 crore per year—nearly 8% of the state’s total expenditure of ₹6.12 lakh crore, and over 11% of its revenue receipts.

Before that, political upstart Aam Aadmi Party swept the Delhi Assembly elections in 2015 and 2020, aided by populist promises such as free electricity and water. Even in the 2025 election, AAP laid out the “Mukhyamantri Mahila Samman Yojana,” which proposed to raise the monthly payment for women to ₹2,100 from ₹1,000. Kejriwal described the programme with a sense of pride, saying that for the Delhi government it is a blessing—“the blessings of our mothers and sisters will bring prosperity.”

An Unhappy Union

The schemes, while effective at the hustings, have drawn criticism from the Centre, which sees itself as the custodian of Indian fiscal discipline. Union Finance Minister Nirmala Sitharaman last week cautioned that many states are headed toward difficult territory owing to “freebies.” She drew a distinction between investing money in productive assets and funding welfare schemes. “There are states which have 70% of their revenues going toward committed expenditure. When I say committed, it’s salaries and pensions. They have to give it. I am not saying don’t give. But 70%? With 30%, what else will you do?” Sitharaman said

She is not the only one critiquing the policies of populism. Economists have been warning for years that welfare payments and freebies, while effective in spurring consumption and cushioning hardships for citizens, do not generate the ‘multiplicative’ effect of investing in economically productive assets such as roads and ports. However, even Sitharaman is not immune to similar pressures and temptations. In the last budget, she pegged total expenditure at ₹47.16 lakh crore, of which capital expenditure accounted for only ₹10.18 lakh crore—just over one-fifth of overall spending.

She set aside a considerable amount from the budget for schemes that can be considered ‘doles’ or payouts, such as the PM Kisan Samman Nidhi (₹63,500 crore), the public distribution system (₹2.03 lakh crore), and the fertilizer subsidy (₹1.68 lakh crore).

Moreover, a significant share of the Centre’s own budget goes toward committed expenditures such as salaries, pensions, and interest payments—constraining the room for capital investment.

Investing in People, Not Assets

Many of these so-called welfare schemes in education and healthcare, while not directly generative of economically valuable assets like roads and bridges, do still contribute toward GDP growth. For example, expenditure on education and skilling creates a citizenry that can then contribute in its own way toward economic development. Similarly, investment in healthcare and nutrition gives an indirect boost to GDP by producing healthy and productive citizens.

Schemes such as enhanced credit lines for MSMEs, street vendors, and gig workers also unleash the entrepreneurial potential of citizens and strengthen the country’s workforce, boosting productivity and growth in the long run.

Many schemes that are derided as freebies—such as free cycles for school-going girls in Bihar and free laptops for students in Tamil Nadu—also help empower and develop the human resources of the states, with long-term beneficial impacts downstream.

Moreover, state governments, which have primary responsibility for welfare-oriented subjects such as health and education, often prioritise such social investments over typical ‘capital investments’ in assets such as roads and bridges—the symbols of modern development. The need to invest in hospitals and schools is also likely one of the reasons why states’ committed expenditure tends to be higher than that of the Centre.

The Tamil Nadu Paradox

In the debate between the votaries of populism and investment-led development, Tamil Nadu stands as a state that defies categorisation. It not only runs expansive welfare programmes but also tops the country in industrial development. On the welfare side, it operates flagship schemes such as the Kalaignar Magalir Urimai Thogai, which provides ₹1,000 per month to women heads of households, alongside one of India’s most efficient public distribution systems and a strong public health network. Chief Ministers such as J. Jayalalithaa are notorious for having introduced schemes to distribute free fans, mixers, and cattle.

This year will see the Chief Minister’s Breakfast Scheme expanded to cover an additional 3.14 lakh students.

Yet Tamil Nadu remains one of the most industrialised states in India, with a strong emphasis on capital expenditure. Despite accounting for only around 5% of the country’s population, it accounts for 8–9% of India’s GDP and a whopping 12% of India’s manufacturing jobs.

The state continues to push investment-led growth. The 2025–26 Budget outlines spending on new urban infrastructure, water supply projects, and the development of IT parks, fintech hubs, and industrial corridors. Meanwhile, the Tamil Nadu Semiconductor Mission 2030 aims to position the state as a high-tech manufacturing hub. This dual emphasis can be seen in the state’s fiscal and budgetary numbers. In FY24, the state allocated roughly ₹45,000 crore to capex—among the highest for any large state. In the Budget Estimates for 2025–26, committed expenditure is expected to account for around 62% of revenue receipts, still significantly below the 70% levels that have pushed other states into fiscal stress.

What is more striking is that it has achieved all this while maintaining a debt-to-GSDP ratio of around 27%—only slightly above the FRBM limit and far below highly indebted states such as Punjab and Rajasthan.

Tamil Nadu’s example shows that states can, with a strong industrial base and steady capital investment, pursue welfare programmes without sacrificing long-term growth or fiscal stability.

A Sweet Balance?

So, the question is: what exactly is populism? Is it possible to distinguish between ‘useless’ or ‘purely election-oriented’ populism and those initiatives that have long-term beneficial impact?

Indeed, the same leaders who kicked off India’s economic growth through reforms—P. V. Narasimha Rao and Manmohan Singh—also launched several key welfare schemes. Many of the programmes that now form the backbone of India’s social security system, such as the universal employment guarantee scheme, trace their origins to their tenures.

Madhavi Arora, chief economist at Emkay Global, sees no contradiction between investing in people and investing in hard assets, and highlights the importance of striking the right balance between welfare and capital expenditure. She says India will have to shift to “smart welfare coupled with productive spending.”

Arora says the key focus should be on prioritising growth-enhancing welfare, tightening beneficiary targeting, shifting subsidies to time- bound, rules-based frameworks, and protecting capital spending as a “core” budget element. “India can sustain welfare commitments while continuing high public capex by making welfare more targeted and productivity-enhancing, protecting infrastructure investment through fiscal rules, and improving execution and financing efficiency. This maintains growth momentum without undermining fiscal stability,” Arora said.

Madan Sabnavis, chief economist at Bank of Baroda, says there is no “right or wrong” when it comes to welfare responsibility. “Welfare schemes are done at all levels—Centre and state. As long as one is operating under the FRBM limit of 3%, it is fine,” Sabnavis said. “Political motives may be different, but the economic impact is the same. Any money sent to anyone will encourage consumerism and drive the economy.”

According to economist Lekha Chakraborty, it is time for India to relook at the “fiscal rules,” as the debt-GDP threshold rule creates a lot of confusion among the states. She calls for revised limits for the fiscal deficit–GDP ratio, along with a “glide path” to reduce it to 3% by 2030–31. This, she says, will ensure that states have the flexibility to undertake capex and welfare.

What seems safe to assume, though, is that populism will continue tobe an electoral currency in the country. The challenge is not to eliminate welfare schemes or populism, but to strike a balance—ensuring that the pursuit of political legitimacy through social schemes does not compromise the fiscal prudence required for long-term development.

“What India now needs is rules for ‘fiscal welfare,’ and it can only come through political consensus, where parties are not competing to give freebies,” Vinay K. Srivastava, Professor of Finance at the Institute of Technology and Science, said. “India needs a fiscal system which is based on credible fiscal rules, better quality expenditure, and growth-enhancing reforms.”