Regular incomes through steady jobs and not doles will help people stand on their legs
By Seela Subba Rao
Hyderabad: The Supreme Court recently sought suggestions from all stakeholders to define what constitutes ‘freebies’, a term that has become the latest flash point. This is a matter of immense significance at a time when the global economy is in turmoil and the financial status of States is at risk. Many political parties, present and past, at some point in time have been accused of giving out doles to secure votes from the people.
A decade ago, the Supreme Court, dealing with a number of petitions on freebies, ruled that although the distribution of freebies influences people and shakes the root of free and fair elections, the promises or distribution of such freebies cannot be considered a bribe and court cannot tell the government how to spend the public money. Further, these promises are State-wide in nature. From the perspective of policy decisions, it is presumed that the prospective government will implement them if it wins the election. Political parties cannot be prevented from making promises covering various aspects such as universal healthcare, access to drinking water and electricity subsidies to the electorate.
RBI’s Response
The latest data from the Computer and Auditor General of India (CAG) has revealed that the expenditure of State governments on subsidies grew 12.9 per cent and 11.2 per cent during 2020-21 and 2021-22 respectively after contracting in 2019-20. Commensurately, the share of subsidies in total revenue expenditure by States also rose from 7.8 per cent in 2019-20 to 8.2 per cent in 2021-22. Five States namely, Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh top the list with the largest rise in subsidies over the last three years. The share of subsidies and freebies as a percentage of GDP is alarmingly high for almost all the States.
The RBI in its report (June 2022), ‘State Finances: Risk Analysis’, stated that besides macroeconomic shocks faced by the States including price rise, outbreak of Covid-19 pandemic and the Russia-Ukraine war, their financial risks arose from their declining own tax revenue, rising overdue of loss-making discoms and increase in expenditure due to distribution of freebies etc. Hence, it has been felt necessary to distinguish them from public/merit goods. The practice of extending freebies undermines credit culture, distorts prices through cross-subsidisation, misallocates resources and erodes incentives for private investments.
The Thin Line
The differentiation between welfare schemes and freebies has become complex with one being a necessity and the other a wasteful use of public funds. A slew of welfare schemes has been introduced by the Centre as well as the States over time. A few examples are Mid-day meals, Employment Guarantee Scheme, Targeted Public Distribution System and subsidised electricity. Analysts have emphasised that merit goods like free or subsidised food, education, shelter and healthcare are crucial for accelerating human development.
However, mass distribution of non-merit goods like wet grinders, laptops, television sets and fans can drain government revenue. Hence, there is a need to arrive at what should be the list of goods & services and the ideal mode of delivery. Further, a prudent fiscal limit for funding such incentives needs to be decided based on the GDP or GSDP ratio of the Centre and the States respectively.
Policymakers have drawn on budgetary resources for providing support to low-income households for augmenting their consumption of essential goods and services, and also offering incentives to support selected categories of investors and producers. The economic objectives in these two categories are quite different. The first category includes the free or subsidised provision of foodgrains and services like health and education. The second category includes budgetary support for incentivising investment or production by way of tax concessions and production-linked incentives to various sectors.
While subsidisation or free provision of essential and merit goods can be justified on the grounds of meeting social objectives, serious doubts arise when the list of commodities expands to include items such as TV sets, and free power up to 300 units. Hence, it is advisable to limit the distribution of goods and services at highly subsidised levels to essential and merit goods. Any distribution beyond these two categories must be treated as “freebies”.
Demand-Supply Dynamics
Pointing out at the rampant practice of offering freebies to voters, the Election Commission of India (ECI) has asked political parties to provide authentic information to the public to assess the financial viability of their poll promises. The ECI has also floated a proposal for a standardised proforma to be added to the Model Code of Conduct by way of amendment to bring clarity to the process of declaration.
The continuity of freebies is not a healthy practice. People often forget that such benefits are given at the cost of the exchequer. Further, such distribution of commodity freebies largely disrupts the demand-supply dynamics of the market.
Certain laws have been framed in respect of fiscal prudence and put in place, but are not being followed scrupulously. For example, the stipulations/rules are clear that “no borrowed money can be used for revenue expenditure, including freebies”. There is a need to follow the same. Legislative mechanisms coupled with increased public awareness regarding the necessity of long-term productive agenda of welfare can be more helpful in the long run.
No doubt, there are rightful concerns about the long-term negative effects of a runaway freebies culture. At the same time, solutions are not easy to diffuse the situations, particularly in a highly competitive democratic polity. This is largely because of the porous nature of welfare schemes and their increasing attractiveness among the electorates. In a country with a huge impoverished population that lacks formal social protection, welfare goods, including non-merit freebies, serve multiple needs.
Global Outlook
Countries such as Canada, Brazil and Australia went completely against the policy of farm loan waivers and rather followed the approach of loan rescheduling and extensions. Turkmenistan, the fourth largest natural reserve in the world asked its officials to stop subsidies in response to free power and gas supply to its citizens. Certain global outlook needs to be replicated in our economy also to some extent.
It would be prudent to limit overall fiscal support to welfare schemes to less than 8 per cent of the total expenditure of the central and State governments until their GDP or GSDP respectively increases in a sustained manner.
Also, both the Centre and the States have to be assigned with accountability. It is imperative to build a political consensus involving the Centre and the States to arrest the misuse of subsidies/welfare schemes and the resultant adverse impacts on the country’s fiscal position. The need of the hour is not doles, but regular incomes through steady jobs to facilitate the people to stand on their legs.