Thursday

29


September , 2022
FREEBIES CAN TRIGGER AN ECONOMIC DISASTER IN INDIA Rajiv Khosla
13:27 pm

Dr. Rajiv Khosla


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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