Recently, the debate on politicians handing out and promising ‘freebies’ has picked up speed, highlighting the risks it poses to a state’s economy, an issue currently being contested in the Supreme Court, with several political parties pleading their case. After its previous hearing on August 17, the apex court had noted that political parties cannot be prevented from making promises to their voters, although it questioned what constitutes a ‘freebie’.
The SC bench led by Chief Justice of India (CJI) NV Ramana called for a debate and discussion saying that moving forward there has to be a definition of a ‘freebie’, asking, “Can universal healthcare, access to drinking water, access to consumer electronics be treated as a freebie?” The PIL filed by Bharatiya Janata Party (BJP) leader Advocate Ashwini Upadhyay has opposed the practice of politicians promising ‘freebies’ prior to the elections, and demanded that the Election Commission of India (ECI) freeze the party’s symbol and cancel their registration, if they do so.
While political parties have been using ‘freebies’ to garner votes for decades, it is important to question who is paying for these ‘freebies’, as the term itself can be misleading. “Freebies are never free,” pointed out Dr Ashima Goyal, a member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee, during an interview on Sunday. She further added that when political parties promise or offer such schemes they are essentially making a trade-off, which negatively affects production and resource allocation while imposing large indirect costs. Dr Goyal used the example of the Aam Aadmi Party (AAP)-led Punjab, where alarms were sounded about the water table falling, a phenomenon she attributed to the free electricity promised to all voters.
The trade-offs made to ensure the delivery of these ‘freebies’ come at the cost of low-quality health, education, air and water, which hurt the poor the most. “When parties offer schemes they must be required to make the financing and such trade-offs clear to voters. This would reduce the temptation towards competitive populism,” said Dr Goyal. Reportedly, former RBI Governor D Subba Rao has also warned against ‘freebies’, as they could become a burden for future generations.
Notably, a report by the Business Standard indicates that various states have announced ‘freebies’ worth over Rs 1 trillion this year. This estimate was based on a study by the RBI, which showed that Andhra Pradesh, Madhya Pradesh and West Bengal had the largest welfare scheme shares in their budgets this year. These states have collectively promised welfare schemes worth more than Rs 670 billion, as per the report. However, Dr Goyal is not the only one who has raised concerns regarding the state governments’ expenditure on such schemes, and their negative impact on their finances, expressing the need to move away from “competitive populism”. Reportedly, experts have also opined that these hand-outs do not generate additional revenues that the state needs to meet expenses, and hence, adversely affect a state’s finances.
Indian States’ Liabilities And Debt
As indicated by data sourced from PRS Legislative Research, in 2022-23, fiscal deficit as a percentage of gross state domestic product (GSDP) of various states ranges from 2.81 percent (Jharkhand) to 4.6 percent (Madhya Pradesh). This figure is important as a higher fiscal deficit would mean that the state government has to borrow more to meet expenses. The PIL filed by Advocate Upadhyay shows that as of March 31, 2021, Indian states collectively have outstanding liabilities worth Rs 59,89,360 crores. The petition also indicates that a new source of this risk has emerged through the rise in expenditure on “non-merit freebies”. Uttar Pradesh (Rs 6,62,891 crores) and Maharashtra (Rs 5,36,891 crores) have topped the list with the highest liabilities. The PIL also indicated that Punjab has the highest debt to GSDP ratio, at 53:3, with a liability of Rs 2,49,187 crores, followed by Rajasthan (ratio at 39:5 and a total liability of Rs 3,91,482 crores).
The apex court has sought suggestions on this issue, from stakeholders like the central government, Niti Aayog and the Finance Commission. Meanwhile, the SC bench is also considering the adverse effect of political parties distributing ‘freebies’ using public funds, on the Indian economy. As they noted during the last hearing, the concern here is the “right way” of spending public money.
The PIL submitted by Advocate Upadhyay through Senior Advocate Vijay Hansaria reportedly quoted the ‘Handbook of Statistics of Indian States for 2020-2021’ published by the RBI, which reads, “New sources of risk have emerged in the form of rising expenditure on non-merit freebies, expanding contingent liabilities and the ballooning overdue of DISCOMS.” To solidify its claim against ‘freebies’, earlier this year, the RBI published a report titled, ‘State Finances: A risk analysis’, written in the backdrop of the Sri Lankan economic crisis and the heavy indebtedness of the states.
Tamil Nadu and its two main competitive parties – the All India Anna Dravida Munnetra Kazhagam (AIADMK) and the Dravida Munnetra Kazhagam (DMK) – are often used as examples to illustrate how ‘freebies’ have been used for decades to rise to power or retain power. This includes handing out fans, television sets, mixers and other household appliances, for years. Meanwhile, major political parties in the north are in the habit of distributing television sets, laptops and bicycles. Earlier this year, amid the UP assembly election, Samajwadi Party (SP) chief Akhilesh Yadav promised the distribution of laptops to the youth and students in the state, following the promise of free electricity. BJP candidate and incumbent CM Yogi Adityanath had distributed smartphones and tablet computers to the youth.
On the other hand, promises of free electricity have also become a tool to win elections, like in the case of Punjab. Earlier this year, while campaigning for the assembly election in the state, the Aam Aadmi Party (AAP) had promised free electricity and fulfilled that promise in the subsequent months. The AAP government has decided to give 300 units of free power per month to all households effective July 1, a move that will cost the state’s exchequer Rs 1,200 crores annually. This was in addition to the government wavering off unpaid bills in the first six months of the calendar year, which amounts to an estimated Rs 1,298 crores.
According to the RBI’s revised estimates, Punjab has the worst ratio, and was identified as the most fiscally stressed state with the debt-to-GSDP ratio for 2021-22 at 49.5 percent. The state expects that to reduce to 48.5 percent by the end of March 2023. As indicated by the aforementioned RBI article, the share of subsidies and freebies has climbed from 7.8 percent in 2019-20, to 8.2 percent in 2021-22. Reportedly, states like Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh have recorded the largest rise in subsidies over the last three years, while states like Gujarat, Punjab and Chhattisgarh spend more than 10 percent of their revenue expenditure on subsidies.
What Do Experts Say About ‘Freebies’?
While these subsidies are often used for upliftment of the lower sections of the population, governments have been increasingly using some subsidies as ‘freebies’, therefore, it is also important to distinguish between the two. The lack of a definition of ‘freebies’ has also become an issue, as highlighted at the last SC hearing. However, the meaning changes depending on who you ask. Broadly speaking, any product or service that is offered free of cost by the government to its citizens, could be considered as a ‘freebie’. Although, generally, government expenditure on public goods and services like healthcare, education, health and employment are considered welfare measures. Spending on free TVs, cycles, cattle and loan waivers could easily be considered ‘freebies’.
Handing out “irrational freebies” has short-term benefits, which can often lead to the imposition of higher taxes and other costs arising from the lower limit set aside for infrastructure creation in the long term. This reportedly leads to lower investment in infrastructure creation, meaning fewer jobs, continuing inefficiencies in the economy, and low revenue growth. Furthermore, as states continue to announce ill-planned ‘freebies’ affecting the overall expenditure of the state, they are forced to borrow since they do not necessarily have enough revenues from taxes, leading to an imbalance in the state’s debt-to-GSDP ratio.
A day after Prime Minister Narendra Modi’s remarks on the ‘revadi culture’ while taking a jibe at the opposition parties for doling out ‘freebies’ ahead of elections, Union Finance Minister Nirmala Sitharaman said it was good that a debate has begun. “There’s now a lot of interest on the topic and discussions are commencing but a genuine good debate and building on arguments is so required because any attempt to divert from the core principle which we need to understand, or any attempt to undermine or dilute this debate is a disservice to this country because we all know, governments have responsibilities,” she said, in response to a question regarding the financial burden of ‘freebies’ on the states.
“You may promise something… the state government or some government – you promise something, say I will give you something for free. It could be electricity, it could be anything else. And I’m not saying you should not do it… Do it but make sure you understand the financial level of your state, the fiscal strength of your state and having promised it during the election, you won, you come back, ensure that you fulfil it because you have given a word and how, by making sure that your budget will have a provision for it,” said Sitharaman during an event organised by the Bharatiya Janata Party’s Economic Cell.
The finance minister went on to highlight how governments have the responsibility to ensure that good education and basic healthcare is taken care of and reaches all its citizens, particularly the poorer sections of the population. Sitharaman said that various committees appointed since the country’s independence have insisted on spending at least six percent of the GDP on health, education and other needs. “So, if any attempt is being made to say education is being now treated as freebie, sorry. That’s an irresponsible misguided statement. So is health,” she said. The minister went on to say that she would not give a list of what is a ‘freebie’ and what is not, and preferred leaving the topic for the people to decide.
Citing the example of free electricity, the FM said that such promises could burden the power generating and distribution companies if financial health is not accounted for. “You promised them up to 300 units or whatever 300 units of free electricity. For that you know the number of people who should get it, you in your budget make a provision for that,” she commented. Sitharaman asked the states to see if they have enough “fiscal strength” and generate enough revenue for ‘freebies’, while also taking care of the state’s “committed liabilities” like pensions and salaries.
Echoing a similar sentiment, economists have indicated that if there is a revenue surplus in the budget then ‘freebies’ could be implemented. “Political parties can announce freebies, subsidies as poll promises. But such poll promises – freebies/subsidies – should be implemented only if there is a revenue surplus in the state budget,” said KR Shanmugam, director of the Madras School of Economics, in an interview. He added that state and central governments are welfare governments, and that their schemes cannot be prohibited.
“The issue of subsidies and freebies has come to the fore with the collapse of the Sri Lankan economy and political parties announcing freebies as their poll promises,” said economist Gowri Ramachandran, to IANS. She reiterated that freebies are not free but a burden on other taxpayers. Shanmugam drew a distinction between subsidies: “Subsidies are of two kinds – good and bad. The good ones do not impact other sectors, distort prices while uplifting the targeted populace, while bad subsidies have a negative effect on the other sectors.” This echoed Dr Goyal’s warning regarding subsidies that distort prices, affecting production and resource allocation, while also imposing large indirect costs.