Freebies: Why it is a road to fiscal disaster

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February 24, 2020 8:14 AM

Freebies provided by state governments need to consider the fiscal burden they will lead to, and must not be used to woo voters.

AK has literally mesmerised Delhi voters by promising free/heavily subsidised electricity—24×7—and free water.

In the just concluded elections in Delhi, the electorate has returned Arvind Kejriwal (AK) to the coveted position of chief minister with a thumping majority with Aam Aadmi Party (AAP), winning 62 out of a total of 70 assembly seats.  AK has literally mesmerised Delhi voters by promising free/heavily subsidised electricity—24×7—and free water, besides several add-ons such as free bus ride for women, free Wi-Fi, full reimbursement of hospitalisation expenses in case of accident on an actuals basis, free testing and diagnostic services—if the facility is not available in government hospitals, the tests can be done in private hospitals, and the expenses thereof, are reimbursed by the state government—free pilgrimage tour for elderly, etc.

These mouth-watering sops yield savings of a few thousand rupees per month per household for all such family units who manage to keep consumption of electricity and water within prescribed limit. This is irrespective of the income earned (even millionaires are eligible). No wonder, AAP was rewarded handsomely. But, these freebies will inflict heavy damage by (i) abetting to corruption and erosion in governance ethics; (ii) undermining ‘equity’ and ‘fairness’, and (iii) having a debilitating effect on the financial health of the state.

As regards to (i), the Government of India’s standards of financial propriety clearly lays down inter alia that “no authority shall exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly, to its advantage; and the expenditure from public moneys should not be incurred for the benefit of a particular person or a section of the people unless a claim for the amount could be enforced in a court of law or the expenditure is in pursuance of a recognised policy or custom”.

The reckless spending of the tax payer’s money on freebies is neither a recognised policy/custom nor it is sanctioned in a court of law. It is blatant financial irregularity that amounts to bribing voters using public money solely for gaining advantage in electoral politics. An individual candidate distributing cash or giving liquor bottles (using his own pocket money) to garner votes is treated as corrupt practice, and rightly so, whereas a party bribing voters that too using public money gets legitimacy (albeit de facto). This smacks of double standard, all the more so given the intent in both cases is quid pro quo?

Coming to (ii), the manner of giving freebies by the AAP government is a serious affront to the equity and fairness. For instance, giving electricity free to any household having monthly consumption less than 200 units and 50% subsidy to those consuming up to 400 units irrespective of the income level is patently inequitable. There are tens of thousand families who fall in higher income strata and can afford to pay; yet their consumption being less than 400 units, they are the beneficiaries of the scheme.

Consider free bus ride. There are lakhs of women who fall in high income bracket and hence, can afford to pay. Yet, giving free ride to all is inequitable. Imagine the plight of a poor person who has to pay travelling in a bus simply because he is a male even as a high income earner gets free ride as that person happens to be a woman. In other areas such as free pilgrimage etc, infrastructure being limited vis-à-vis the number of aspirants, those who are well connected manage access even as others not so privileged are left out.

Look at it from the tax payer’s perspective. When, the tax revenue is used for giving subsidies to the poor sections of the society—for instance, beneficiaries under Ayushman Bharat which covers 100 million poor households—it passes muster as welfare oriented measure. But, when it is used to give freebies to all including the rich, this is bound to be strongly resented. This may even trigger non-compliance amongst tax payers and eventually lead to lower revenue.
As regards to (iii), the ‘freebies culture’ is bound to affect the state’s finances. AK’s argument that he has generated enough surplus to pay for doles is untenable. It is the responsibility of every government to increase revenue needed to meet expenses on development and welfare of the poor. This can’t be a valid argument for justifying indiscriminate spending on freebies, which if allowed to continue at an increasing pace, will end up converting surplus in to deficit. The proof of pudding is in the eating.

The largesse such as farm loan waivers, subsidised/free electricity given by states in the past have led to fiscal slippages. According to a review by Reserve Bank of India (RBI) on “State Finances: A Study of Budgets”, combined fiscal deficit (excess of total expenditure over total receipts) of all the states rose from 1.93% of state gross domestic product (SGDP) in 2011-12 to 2.6% in 2014-15, 3.1% during 2015-16, and further, to a high of 3.5% in 2016-17—against 3% threshold required to be maintained under the Fiscal Responsibility and Budget Management (FRBM) Act.

Emboldened by the electoral success of the AAP in Delhi, other states are also gearing up to join the freebies bandwagon—Maharashtra, West Bengal. For most of the states—already faced with mute revenue collection and huge shortfall in transfer from the Centre, including compensation under GST—this will further exacerbate the fiscal slippage.

For the Centre, the NK Singh committee on review of FRBM Act has allowed breach of up to 0.5% in the fiscal deficit target in case of “far reaching structural reforms with unanticipated fiscal implications”. The committee is contemplating to allow similar leeway to states. However, it would be naïve for them to believe that this can be used to justify deviation caused by freebies.

Yet, ignoring the protocol under FRBM, if states continue with fiscal profligacy, they will be heading towards unsustainable high debt with catastrophic consequences for macro-economic stability and ability of India to sustain high growth. There is urgent need to put an end to freebies. The 15th Finance Commission should recommend this and if need be, it should ask the government to amend the Constitution.

( The author is a policy analyst. Views are personal)

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