A class of politicians has veiled an attack against political opponents of the ruling party by saying that they are promising ‘freebies’ (revdi) in exchange for electoral votes. The controversy sparked up, when in mid-July Prime Minister Narendra Modi after inaugurating the Bundelkhand Expressway in the state of Uttar Pradesh, expressed concern over the growing culture of revdi, wherein political parties promise freebies to garner votes. A Public Interest Litigation was also filed in Hon’ble Supreme Court which later advised the government to appoint an expert committee to examine the issue.
In the meantime, political commentators, economists, social scientists, and experts have given their own logics in favor and against freebies. Where the ruling party at the centre contended that freebies besides being a threat to the democratic values goes parallel to bribing of voters, opposition parties lamented that the central government is itself caught up in distributing freebies. Central schemes relating to food subsidy, electric vehicles subsidy, installments to farmers, solar plant installation subsidy etc. fall under the broad head of freebies. This attack and counter attack is continuing but none of the authorities could disclose which freebies are required (good) and which are not required (bad).
If we dive into the history of the dole culture, we reach the 1950s when in 1956, Chief Minister of Tamil Nadu Late Kumaraswami Kamaraj introduced free midday meals for children belonging to poor families in primary schools for 200 days a year to increase the enrolment in schools. In the year 1967, DMK party founder CN Annadurai promised 4.5 kg rice for `1 through the public distribution system to the people of Tamil Nadu, if he is voted to power. In 1982, MG Ramchandran, Chief Minister of Tamil Nadu extended the mid day meal scheme to all the children between the age group of two to five studying in Anganwadis and between five to nine studying in primary schools in rural areas. During the 2006 elections, DMK promised free colour televisions to the voters in Tamil Nadu and in Bihar, the Mukhyamantri Balika Cycle Yojna was kicked off by the then Chief Minister Nitish Kumar. Eventually, this freebies culture became a trend and today almost all party contesting elections promise a variety of goods and services to the people if it is voted to power - may it be free textbooks, uniforms, and mobile phones to the students, food to the poor or free health and electricity to the households.
In this political discourse on freebies, the economic essence is being missed. Freebies may not essentially be free for everyone as the government doling out these freebies may surreptitiously succeed in shifting the burden on to other taxpayers. Of course, in a welfare state the interests of marginalized sections of the society too need to be defended, but the governments cannot increase the prices for other segments of the society to compensate for the loss. For example, if electricity is to be provided free of cost to some sectors/segments in the society, governments must not increase the prices of electricity in other sectors to compensate for the additional costs.
Economists argue that there is a thin line of difference between a freebie and welfare measures. Merit goods have positive externalities but non-merit goods may have greater positive externalities. Free gas cylinders, mixers, bicycles etc. may appear to be the non-merit goods (wasteful expenditure), yet, the beneficiary women can free themselves up early and then participate in formal/informal jobs to supplement the family’s income. It is up to the parties contesting the elections to promise freebies keeping in mind the fiscal condition of the state concerned. The practice of providing freebies by making additional borrowings is atrocious, since it triggers another new cycle of debt burden. During the National Conference of Chief Secretaries that was chaired by PM Modi in Dharamshala in June this year, it was flagged that after winning the elections many state governments have doled out such freebies (promised earlier) that have acted as a scratch on the festering sores (financial health). Further, in a few cases, the funds for these freebies were arranged through off-budget borrowings or by pledging public assets like hospitals, courts, jails, and parks etc. The state governments cited the cases of Sri Lanka, Pakistan and Bangladesh which underwent turbulence owing to their fiscal profligacy or the freebies.
Many schemes of state governments are the replicas of central government schemes. Despite that, state governments are spending a considerable amount on subsidies. Precisely, the state government's expenditure on subsidies grew by 12.9% in 2020-21 and 11.2% in 2021-22 whereas their share of grants in the total revenue expenditure that was 7.8% in 2018-19 increased to 8.2% in 2020-21.
Debt position of all State Governments and UTs
(in Rs. Lakh Crore)
Year
Outstanding Liabilities
Change over the previous year
Interest Payments
Change over the previous year
Total Receipts
Change over the previous year
Interest payments as percentage of total receipts
2010-11
18.29
-
1.09
-
9.35
-
11.65
2011-12
19.94
1.65
1.18
0.09
10.96
1.61
10.77
2012-13
22.10
2.16
1.26
0.08
12.52
1.56
10.06
2013-14
24.71
2.61
1.41
0.15
13.69
1.17
10.29
2014-15
27.04
2.33
1.67
0.26
15.93
2.24
10.48
2015-16
32.18
5.14
1.96
0.29
18.81
2.88
10.42
2016-17
38.09
5.91
2.31
0.35
21.02
2.21
10.99
2017-18
42.92
4.83
2.65
0.34
23.61
2.59
11.22
2018-19
47.87
4.95
2.88
0.23
26.62
3.01
10.82
2019-20
53.51
5.64
3.25
0.37
27.27
0.65
11.92
2020-21
61.49
7.98
3.63
0.38
28.08
0.81
12.93
2021-22
69.47
7.98
4.13
0.50
34.77
6.69
11.88
Note: Total Receipts include Revenue Receipts and Non Debt Capital Receipts
Source: State of State Finances Report for different years issued by RBI
Table 2
Debt position of the Union Government
(in Rs. Crore)
Year
Outstanding Liabilities
Change over the previous year
Interest Payments
Change over the previous year
Total Receipts
Change over the previous year
Interest payments as percentage of total receipts
2010-11
4059590
-
234022
-
823737
-
28.41
2011-12
4670054
610464
273150
39128
788375
-35362
34.65
2012-13
5225307
555253
313170
40020
920182
131807
34.03
2013-14
5859331
634024
374254
61084
1056589
136407
35.42
2014-15
6411391
552060
402444
28190
1152948
96359
34.91
2015-16
7098298
686907
441659
39215
1257982
105034
35.11
2016-17
7625078
526780
480714
39055
1439576
181594
33.39
2017-18
8454631
829553
528952
48238
1550911
111335
34.11
2018-19
9377857
923226
582648
53696
1665695
114784
34.98
2019-20
10576381
1198524
612070
29422
1752679
86984
34.92
2020-21
12538909
1962528
679869
67799
1691545
-61134
40.19
2021-22
13956343
1417434
813791
133922
2029513
337968
40.10
Note: Total Receipts include Revenue Receipts and Non Debt Capital Receipts
Source: Budget documents of the Government of India
On account of borrowings, the fiscal health of the state governments is deteriorating and yet they are spending a good part of their expenses on freebies. A statistical disclosure to the debt position of states and the central government is carried out in tables 1 and 2. It is clear from table 1 that the burden of outstanding liabilities and interest payments of the state governments and UTs across India is mounting year by year. Outstanding liabilities of the states and UTs together that used to be `18.29 lakh crore in 2010-11 increased almost four times i.e., to ` 69.47 lakh crore in the span of ten years or so. Similarly, the pace of interest payments and total receipts too increased almost four times. In absolute terms, interest payments as a percentage of total receipts that used to be 11.65% in 2010-11 increased to 11.88% in 2021-22, but in relative terms, it averaged to 10.61% from 2010-11 to 2015-16 and 11.63% from 2016-17 to 2021-22. It reflects that out of every `100 receipt (non debt capital receipts), in the former half (2010-11 to 2015-16) `10.61 used to be paid as interest which increased to ` 11.63 in the latter half. How the burden of debt is engulfing the state governments and deteriorating their fiscal position can be understood from the change over the previous year carried out with each variable. Specifically, in the last one decade or so, the burden of outstanding liabilities and interest payments has increased and of the total receipts decreased (except for the year 2021-22).
To the extent, debt position of the central government is concerned, further distressing trends appeared. Outstanding liabilities tripled from ` 40 lakh crore in 2010-11 to ` 139 lakh crore in 2021-22. Similarly, interest payments increased four times from nearly ` 2 lakh crore to ` 8 lakh crore in the same time period. Against these two, total receipts (including revenue receipts and non debt capital receipts) increased by only 2.5 times from ` 80 lakh crore to ` 200 lakh crores. Interest payments as percentage of total receipts that used to be 28.41% in 2010-11 increased to 40.10% in 2021-22. It reflects that out of every ` 100 earned (non debt capital receipts) by the union government, `40 is paid up as an interest payment which speaks volume about the distressed financial health. Overall, numbers present a depressing condition of economic affairs at both the states as well as central level and do not warrant any fiscal profligacy.
A possible solution to this burning debate can be reached if the arguments extended by the National Institute of Public Finance and Policy (NIPFP) are considered and logically vetted. NIPFP made an attempt to distribute subsidies into two parts i.e. merit subsidies and non merit subsidies. Expenditure on food, education, environment, and health is categorized as merit subsidy while all other expenditures are categorised as non-merit subsidies. Keeping into consideration the debt burden of the states as well as the central government, it becomes imperative that only the expenditure on merit subsidies is promised by the political parties to woo voters. The Election Commission too should monitor the manifestos of political parties so that non-merit subsidies are not promised. As a matter of fact, the amount to be spent on non-merit subsidies (freebies) should be directed towards the capital expenditure so that public investment gets initiated and gainful employment is generated in the country.
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