First, the political party or alliance in power gets an added advantage while going into an election. It can announce and implement a cash transfer programme just a few months before the polls and reap the benefits when people vote.
The opposition in the state can only hope to match the scheme or announce bigger and better cash transfers if it comes to power. But, as the old cliché goes, a bird in hand is worth two in the bush.
Second, while politicians of the ruling National Democratic Alliance(NDA) may not admit to economic hardships being faced by a significantly large section of India’s population since the pandemic, their revealed preference is different.
The launch of cash-transfer schemes in Madhya Pradesh and Maharashtra, and the domestic cooking gas subsidy offered to below-poverty-line families in Haryana, is a sort of admittance of distress. Their actions speak louder than their lack of words.
Third, whether such cash transfer schemes are freebies or a need of the hour depends on which side of the dispensation one comes from. But there is more than enough data to show that a huge chunk of India has been facing hardships in recent years.
The larger point is that such schemes are not going to go away in a hurry. In fact, as voters get used to them, politicians might even be tempted to up the ante and launch bigger versions, possibly leading to the central government launch a pan-India cash transfer scheme before the 2029 Lok Sabha elections.
Fourth, political lessons can have economic costs. State governments have to keep their fiscal deficit within a certain limit. Also, since the implementation of the Goods and Services Tax, the ability of state governments to come up with newer taxes in order to increase their revenue receipts is rather limited.
Take the case of Maharashtra. Several news reports suggest that the newly launched cash transfer scheme for women has messed up the state’s finances.
If the scheme has to be kept going in its present form, expenditure on other important obligations of the state government will have to be cut, or the monthly cash being given to women will have to be slashed. Politically, doing the former is easier.
Fifth, there will be other unseen effects because of these economic costs. State governments earn a large amount of money from what is referred to as the contribution of the petroleum sector to their exchequer.
There are quite a few taxes and duties that fill their coffers, but a bulk of the money comes from the sales tax or value added tax (VAT) these governments charge on petroleum products like petrol and diesel sold in the state.
In the first six months of 2024-25, of the ₹1.56 trillion contributed by petroleum companies to the exchequer of state governments, around 92% or ₹1.44 trillion came from sales tax or VAT on petroleum products.
Now, this tax is largely ad-valorem, i.e., charged as a certain proportion of the price of the petroleum product on which it’s levied. This implies that the higher the price of petrol or diesel, the more the taxes earned by the state government.
It needs to be said here that some state governments have a fixed per litre charge also built into such taxes, but a bulk of it is ad-valorem.
In 2014-15, the contribution of the petroleum sector to the exchequer of state governments stood at 1.3% of gross domestic product (GDP). It has largely seen a downward trend since then, except for the pandemic years, when it was at 1.2% of GDP. In the first six months of 2024-25, it was 1% of GDP.
What does this imply? The ability of state governments to make money from petrol, diesel and other petroleum products sold in their state depends on the price at which these products are sold.
Lower prices mean lower taxes for these governments. And given that more state governments are likely to latch on to cash transfer programmes in the years to come, the chances of petrol and diesel prices being cut in proportion to any fall in global oil prices are very low.
Of course, the retail prices of petroleum products are decided by the central government and it hasn’t cut prices even though the average price of the Indian basket of crude oil has fallen from more than $89 per barrel in April to $73 in November.
To some extent, this explains why the voices of stock market experts calling for a cut in petrol and diesel prices to push up slowing consumption growth have been falling on deaf ears.
Sixth, given that the Centre shares a significant portion of its revenues with state governments, if cash transfer programmes continue to grow in popularity, they will limit its ability to reduce personal income tax rates.
Finally, as this writer first noted in August in this column, the political success of cash transfer schemes for women in particular and citizens in general is yet another step that India has taken in moving towards a universal basic income in a disguised way.
