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Why Prime Minister Narendra Modi should loosen the purse strings for his new allies | Political news

Why Prime Minister Narendra Modi should loosen the purse strings for his new allies |  Political news
Why Prime Minister Narendra Modi should loosen the purse strings for his new allies |  Political news


Modi, Narendra Modi

Prime Minister Narendra Modi seemingly ignored voters' reprimands and reasserted his control over the federal government. (Photo: PTI)

By Mihir Sharma

Barely a fortnight after unexpected election results shook up Indian politics, New Delhi appears to have settled into a familiar rut.

Prime Minister Narendra Modi seemingly ignored voters' reprimands and reasserted his control over the federal government. Although he may depend on a diverse group of allies to maintain his power, none have been given the kind of ministerial role that would suggest he will run policy in the years to come.

Yet, as my colleague Andy Mukherjee has argued, this continuity hides a lot of excitement. The most significant change is expected to be in relations between New Delhi and influential Indian state governments.

Although Modi's vital new allies may appear deferential, the fact is that they have their own plans, projects and groups to cultivate. Coalitions in India are unlike those in Europe, where common priorities are defined in advance and then shared publicly. Alliance politics involve continual give-and-take, and typically smaller partners, many of whom command regional support bases, make much of the gains.

We know enough to predict what they will ask. Modi's two biggest alliance partners, the Bihars Janata Dal (United) and Andhra Pradesh's Telugu Desam Party, led by state chief ministers Nitish Kumar and Chandrababu Naidu respectively, have long demanded a largest infusion of federal funds into their state's coffers. Now that they occupy a central position of power in New Delhi, they undoubtedly see the moment to take advantage.

Markets seem to agree with this prediction: companies linked to infrastructure projects in Andhra Pradesh have significantly outperformed the indices over the last fortnight.

What is stranger is that Kumar and Naidu have similar claims, despite representing very different states. Bihar is India's poorest, with economic and human development indicators worse than those of most countries in sub-Saharan Africa. Kumar is best known for his innovative social programs targeted at the bottom of the pyramid. His need for money is obvious.

Naidu, on the other hand, is known for transforming the city of Hyderabad into a technology and innovation hub. Before Andhra Pradesh lost its northwestern districts (and Hyderabad) in a rewriting of state borders in 2014, the country recorded decades of growth, moving from one of the most backward states of India to one of the most advanced. But today, the TDP wants to invest billions in a new capital to replace Hyderabad.

What the two states have in common is debt. Both Bihar and Andhra Pradesh have spent more than New Delhi would like and are running up against strict budget rules that federal policymakers designed for state governments. This has limited the political space available to Kumar and Naidu.

Over the past decade under Modi, the central government has become much stronger than the states, particularly when it comes to revenue collection and policy-making. India's indirect tax regime, for example, was standardized in 2017. It increased efficiency, but also reduced the policy levers available to state leaders.

States have few other options for finding funds. Without Modi's agreement, Naidu will struggle to raise funds for his new capital, either from taxes or the markets.

Meanwhile, Kumar's promises to his voters are big: land for the landless and housing for the homeless. Officials in Bihar estimate that their implementation will cost almost 1% of India's GDP. At the same time, as Kumar pointed out, almost half of the money received by Bihar goes to New Delhi's pet projects, over which neither he nor his voters have control. What's left often arrives so late that it disrupts state plans.

Modi and his ministers may well view their partners' pesky demands as mean-spirited, mean-spirited politics that misses the bigger picture. In fact, if one of India's least developed states and one of its most progressive are both asking for the same thing, policymakers in New Delhi might want to listen to what they're saying.

The first test will be the final budget for the year, which will be presented in a few weeks. India's finance ministry, accustomed to responding only to Modi's twin demands for fiscal rigor and infrastructure spending, may have to redo its calculations.

Giving states more power to raise money would allow them to experiment with policies. No doubt they will make mistakes. But it is important to note that they will also succeed in achieving great things.

Disclaimer: This is a Bloomberg opinion article, and are the personal opinions of the author. They do not reflect the views of or the Business Standard newspaper.

First publication: June 21, 2024 | 8:29 a.m. EAST




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