Budget influencers: It’s the political economy, stupid!

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Subscribe to enjoy similar stories. Experts writing about the forthcoming budget and making weighty proposals usually focus on routine macro parameters: the fiscal deficit, capital and revenue accounts, growth in gross domestic product (GDP), inflation rate and interest rates. These are important parameters and merit close attention to understand the economy’s growth path.

But there is another factor that will play a vital role in the budget-making process and decide the trajectory of all these critical macro-economic parameters. It is called the political economy. There are many definitions, but, in simple terms, political economy is how politics affects the economy and the economy affects politics.

The impact of the political economy is usually stronger during periods of an economic slowdown. This is because citizens most affected by the downswing can be expected to use their electoral franchise as political leverage. Jeffrey Friedan, a professor of government at Harvard University, wrote in Finance and Development (an International Monetary Fund publication) in 2020 that, “Politicians need votes from the people who decide elections.

The decisive or pivotal voters vary with a country’s electoral institutions and social divisions." The Indian economy can be assumed to be going through a crunch currently. Advance estimates for 2024-25 GDP growth at 6.4% indicate an economic slowdown. Even though these are only initial estimates—based on data available till December, extrapolated for the next three months, and subject to revisions—slow 5.4% growth in the second quarter has clearly depressed this year’s growth.