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India’s Congress Party Goes for Broke

India’s Finance Minister and potential PM candidate surprised many yesterday by releasing a budget with sharp increases in government spending. Before yesterday, P. Chidambaram was a darling of foreign investors for his commitment to reforming India’s sluggish economy. But by defying expectations for an austerity budget and choosing instead to increase spending by 16 percent for the next fiscal year, the three-term Finance Minister, with the ruling Congress Party behind him, went all in to appease the party faithful. Reuters reports:

While the added spending included capital investment that many have said is sorely needed, including a 29 percent increase in funding for infrastructure and development, it also included a 46 percent jump in funding for development programs in rural areas, the core voter base of the ruling Congress party.

The new budget comes on the heels of the announcement that India’s overall growth was just 4.5 percent last quarter, its lowest level in almost four years. By announcing such a strikingly populist budget, featuring increased spending and a tax hike on the super rich, the Congress Party is signaling just how hard it is running to stay in the same place.

International investors and credit rating agencies, several of which previously threatened to downgrade India’s rating to “junk,” are carefully watching this unfold. Also watching with interest is Norendra Modi, the wonder-governor of Gujarat who has plans for the top job. Modi, the candidate of choice for many in India’s rising business-minded middle class, holds positions that stand in contrast to the populist tendencies of the Congress Party, which gets much of its support from the rural poor. But Congress is blamed for numerous corruption scandals and an economic downturn, and its popularity has slipped drastically. With the 2014 elections looming on the horizon, a populist budget makes a lot of sense. Is it good for India? We’ll see.

[Image: Chidambaram at Davos in January 2011, Wikipedia]

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