Fiscal Populism and Its Impact on Sovereign Borrowing Costs

The recent Economic Survey has raised alarms over fiscal populism and the crowding out of capital expenditure due to rising revenue deficits and cash transfers in Indian states. The document, presented in Parliament, emphasizes that fiscal indiscipline at the state level casts a shadow on sovereign borrowing costs.

The Centre has managed fiscal consolidation while achieving record public investment. However, several states have leaned towards unconditional cash transfers, significantly increasing their share in state-level welfare spending. For instance, investment in these programs, especially for women, is projected to reach Rs 1.7 lakh crore by FY26.

Given the global indexing of Indian government bonds, the Survey asserts that state-level fiscal mismanagement can no longer be seen as an isolated issue. It affects the overall cost of sovereign borrowing due to investors' growing scrutiny of governmental finances. To safeguard against elevated borrowing costs, the Survey stresses the need for coordinated fiscal policies focused on boosting productive capacity and income growth.