Updated Feb 27, 2022

What is the term" Populist Budget" refer's to?

POPULIST BUDGET

“ ie-  Year 2022  there was nothing for the middle class in the budget”, “this budget was for the corporates.” We all come across such comments every year in February when the finance minister reads out the yearly budget, isn’t it! However, things change when elections are on the verge, particularly for Lok Sabha or assembly elections in populated states like Uttar Pradesh. We see a lot of goodies floated for the major chunk of the population. Votes are important. And that’s how the ruling party takes another step to lure mass votes to stay on the throne for another term. This is called a Populist budget, the budget for the population. But is it always good for the economy? 

A populist Budget is usually devoted to schemes that are just giveaways to make people happy and don't have any persistent positive effect on the economy. Subsidies and tax cuts are focus areas while framing a populist budget. Such a budget mainly focuses on the general interests of the public. Examples of such expenditure are waiving off farmer loans, giving higher minimum support prices for different crops to farmers, and cutting income tax levied on lower slabs. Such budgets are also a result of election manifestoes of political parties once they come into power. For example, when a political party won assembly elections in 3 states in 2018, it immediately waived farmer loans in all those states, as promised during the election campaign.

A positive part of populist spending is a sudden boost to demand. When you get funds because of subsidy or you know you don’t have to pay your loan installments from the upcoming month, you tend to spend more. This generates demand in the market.

However, such spending can shoot up inflation and over-burden on the government's balance sheets, making it hard to meet the fiscal deficit target. If a loan waiver has been given, means, the government will pay the due amount to the banks. If a subsidy has been given to a certain entity, the government is paying a chunk of it. And the government’s treasury is funded by the taxpayers of the nation. This is also the reason why economic experts usually oppose the populist budget.

A populist budget is always popular. Certainly, you’ll welcome the news that from next financial year you won’t have to pay 10% tax, so the in-hand salary appreciates. However, a Budget can be popular without being populist if it is centered on the quality of spending that has a long-term positive impact on the economy. For example, expending more on irrigation than waiving off farm loans can prove more advantageous for the overall economy while also aiding the farmer’s interest.

Generally, a populist budget is followed by a negative reaction in the market, but for short period. Just for information, the Stock Market was up only 4 times on Budget Day in the last 10 Years.

Whether a budget is a populist or how populist it is, also depends on an important factor called economic ideology. For example, a political party with an economically Right-leaning ideology is less likely to make a populist budget. Alternatively, budgets framed by an economically Left-leaning party in power are more likely to float more subsidies and loan waivers. You can see that ever since a capitalist government came into power in 2014, subsidies have been canceled year-after-year and there was rarely any loan-waiver seen for the masses. Markets have mostly reacted positively, and you can see markets going from Nifty at 6500 and BSE SENSEX at 22000 in 2014 to Nifty at 18000 and SENSEX zooming to 60000 in 2022. Alternatively, when a socialist government was in the power, NIFTY and SENSEX moved just 4000 points and 19000 points respectively, in 10 years.

There are times when a populist budget becomes the need of the hour, particularly during an act of God like a pandemic or a natural disaster. For example, the most recent COVID 19 pandemic led to millions of job losses. A large section of a population submerged below the poverty level creating a state of crisis. Businesses collapsed. An immediate cash injection was needed for both individuals and businesses. On 12th May 2020 Prime minister announced a historic stimulus package worth ₹20 lakh crore. Two days later the Cabinet cleared several proposals in the economic package including a free food grains package. This included the package announced by the finance minister in Union Budget 2020 announced in February.

Hence, a progressive budget and a populist budget, both have their own set of pros and cons. A populist budget is the one that is aimed at pleasing the people, whereas a progressive budget is the one that aims to strengthen economic growth. As mentioned before, the Government always pursues to balance the two while presenting the Union Budget. Depending on several factors, sometimes the budget can show more inclination towards populism especially if general elections are in the near term, and such a budget is called a populist budget. As mentioned earlier, a populist budget is the one that is typically meant to please the people. Such a budget spends more on lucrative schemes that can increase the government's fiscal deficit and push up the inflation rate. A progressive budget is always framed with a long-term vision and aids to economic growth. While a populist budget is aimed at winning short-term goals like an election.