(Updates with rupee level in 22nd paragraph.)
Sept. 23 (Bloomberg) -- Kamal Chand takes a break from watering his wheat field to sit under a banyan tree and flick through advertisements for motorbikes. Rising welfare payments have turned the Indian farmer’s dream of owning one into reality.
“The government has really helped us,” said Chand, 35, eyeing a picture of a Hero Motocorp Ltd. bike. Higher guaranteed crop prices, wages from a government jobs program and grants have allowed him to renovate his home in the village of Challi in Rajasthan state, buy his wife gold ornaments and acquire his first Nokia Oyj mobile phone. He still has $600 for the bike.
Since gaining power in 2004, Prime Minister Manmohan Singh has poured $77 billion into helping the 833 million people in India’s countryside, helping to double rural consumer spending. Facing an election within eight months, the prospect of votes from farmers seeking more handouts offers Singh’s coalition the potential payback of another term, even as a slowing economy and rupee slide erode support for his Congress Party in the cities.
“Congress will drive home the message that rural quality of life has improved,” said Mohan Guruswamy, chairman of the Centre for Policy Alternatives in New Delhi and a former Finance Ministry adviser. “It’s their calling card for the election.”
Farm wages adjusted for inflation rose almost 7 percent on average annually in the five years through March 2012, from 1 percent in the previous decade, according to India’s Planning Commission. Rural consumer spending surged 19 percent a year to $69 billion from 2009 through 2012, exceeding the $55 billion in cities and large towns. Singh won parliament’s approval last month for $20 billion a year to sell subsidized food to the poor.
The government has at least 12 programs aimed at India’s villages -- including state-sponsored jobs, a housing plan named after former Prime Minister Indira Gandhi, road-building, mid- day meals for schoolchildren and money for farm modernization.
In a country where the electorate is fractured into hundreds of groups, often based on caste, religion or region, these programs offer Congress what may be the best bet for a third straight five-year term in elections that must be held by May. India has six national parties and more than 1,000 smaller parties, according to the Election Commission. The nation’s last single-party government was elected in 1984.
Nearly 90 percent of the 543 lawmakers in India’s parliament represent rural or semi-urban constituencies, according to the New Delhi-based Centre for the Study of Developing Studies. Of those 486 seats, Congress and its allies won 228 in 2009 federal elections after promising farmers access to bank loans at lower interest rates and higher compensation for land sold for setting up factories. The coalition led by the opposition Bharatiya Janata Party got 140.
In Indian cities, 67 percent of voters say Singh’s alliance has lost credibility in the face of corruption and elevated inflation, according to a poll by CNN-IBN television in May. Only 31 percent said the Congress party-led administration represented the best option for running India.
India’s new central bank chief, Raghuram Rajan, stepped up the campaign to contain the cost of living with an unexpected increase in the benchmark interest rate three days ago. The move, weeks after the former International Monetary Fund chief economist took office, raised the risk of tension with Singh’s administration in the run-up to the election.
“Even though rapid price increases are detrimental to the government’s chances of re-election at the national poll due by May 2014, higher interest rates will do little to reverse inflation in the short term even as they cast a further pall over prospects for consumption and investment,” analysts at New York-based Eurasia Group including Anjalika Bardalai wrote in a note last week.
At the same time, a flood of government cash and a rise in agricultural output has given Chand and other inhabitants of India’s nearly 600,000 villages money to spend on goods other than basic necessities, making them a target for consumer firms such as Hindustan Unilever Ltd., Procter & Gamble Co. and homegrown goods makers like ITC Ltd. and Dabur India Ltd. Food- grain production has risen by a third in the past nine years.
Chand’s village of Challi, in Udaipur district, is among the most backward villages in Rajasthan, a state with some of the worst malnutrition and poverty in India. Most of its 200 people belong to the Bhil tribe, which is on almost the lowest rung on the country’s traditional social hierarchy.
Yet, the village has at least three houses with satellite dishes beaming in Hindi television sitcoms, and about 10 homes with telephone lines. Rising local incomes prompted Panna Lal, 25, to open Challi’s only grocery store in May.
Sitting behind a counter with large transparent glass jars containing toffees and biscuits, Lal says his biggest struggle is keeping pace with the variety of requests from his customers. His inventory of soaps, biscuits, cooking oil and detergents is running out faster than he expected.
“People in villages have developed an aspiration for the good life,” said Shailendra Tiwari, who runs welfare programs in the village and surrounding areas for Sewa Mandir, a nonprofit organization. “It’s a revolution that is spreading silently.”
Nearly 42 percent of India’s rural households owned televisions in the fiscal year through March 2010, compared with 26 percent in 2004-2005, according to government data. Sales of motorbikes and scooters doubled in the same period. The S&P BSE FMCG Index of 10 consumer companies including Hindustan Unilever and Dabur has risen eight-fold since the Congress-led coalition took power in 2004, twice the benchmark Sensex index’s gain.
Rahul Gandhi, scion of the country’s foremost political dynasty and the Congress Party’s chief election strategist, focused on the government’s programs for the poor in recent election rallies in Rajasthan.
“When we talk of programs like the right to food and medical insurance for poor, the opposition asks where will the money come from,” Gandhi said to loud cheers from crowd in the district of Baran last week. “They don’t care about the poor.”
The expenditure since 2004 under Singh and Congress President Sonia Gandhi, Rahul’s mother, has saddled India with one of Asia’s widest budget deficits and contributed to consumer-price inflation running above 7 percent for the past 20 months. Price pressures have left the Reserve Bank of India with little scope to lower borrowing costs even amid growth at a decade-low 5 percent in the fiscal year through March.
“It is a bad growth mix,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong. “To take a large chunk of existing income of somebody and transfer it to poor people without taking any output is by nature very inflationary.”
The deficit and an exodus of funds from emerging markets pushed the rupee to a record low against the dollar last month. The currency has lost about 12 percent this year. It fell 0.5 percent to 62.6050 a dollar as of 1:16 p.m. in Mumbai.
“It is in the Congress Party’s advantage to wait until next year for elections because things are so bad right now in the economy,” said N. Bhaskara Rao, chairman of the New Delhi- based Centre for Media Studies. “They would want the benefits of cheap food grains to help them win some mass support.”
Low-cost food is expected to come from the program to subsidize grain for the two-thirds of India’s 1.2 billion people who live on less than $2 a day. The government has to continue with some subsidies as they are desirable and acceptable in India, where a large section of the population is poor, Economic Affairs Secretary Arvind Mayaram said in New Delhi today.
While Congress argues that subsidies are needed to alleviate some of Asia’s worst poverty, the main opposition Bharatiya Janata Party says the current system is corrupt and wastes billions of rupees of taxpayers’ money. Even after decades of public spending programs for the poor, India still ranked below Papua New Guinea in gross national income per capita last year, according to the World Bank.
The BJP’s campaign is also likely to underscore the inflation that has resulted from rural spending, said Satish Misra, a political analyst at the Observer Research Foundation in New Delhi.
“Congress has a tough battle ahead,” said Misra.
Still, it’s important for governments to continue with welfare programs for the poor to improve their living conditions and achieve balanced growth, said Laveesh Bhandari, a director of Indicus Analytics, an economics research company in New Delhi.
“The schemes have to be definitely smarter than the ones that are being implemented now to avoid duplication and waste of funds,” Bhandari said.
Cheap food may shore up the ruling coalition’s support in poor states like Uttar Pradesh and Bihar, which send about a fifth of the total lawmakers to India’s parliament. It may also help Singh in key swing states such as Rajasthan and Madhya Pradesh where the battle with the BJP may decide the election.
The low-cost grain program, which began last month, shows the government needs to keep the handouts flowing if it wants to retain the support of voters who’ve grown used to state aid.
“I have not fully made up my mind,” said Chand, examining the brick work at the house he is building in Challi under a government program to provide permanent dwellings to the poor. “I am inclined to vote for the Congress. It will depend on what they have to offer in the elections.”
--With assistance from Adi Narayan in Mumbai and Manish Modi in New Delhi. Editors: Adam Majendie, Rina Chandran