The Supreme Court has come down hard on “irrational freebies” that political parties announce before elections and directed the Centre to consult the Finance Commission on regulating these. The SC’s concern over the issue comes a few days after the prime minister spoke out against the “revdi” culture (likening parties’ promises of freebies to a sweet distributed in North India). It is a different matter, however, that the prime minister himself looked the other way when the Uttar Pradesh unit of his party promised a farm loan write-off when the state went to polls in 2017. That set off a huge round of state-level loan waivers that added up to over Rs 2 trillion, setting back credit culture. State after state, irrespective of the party in power, has promised massive dollops of subsidies and freebies, ranging from free electricity, free water and cash handouts to women even during the last round of Assembly elections. Competitive populism is something the nation has been seeing for a very long time now.
The key question should be whether the state has the ability to back the “freebie” in a fiscally sustainable manner. Unfortunately, the answer in most cases would be a resounding no. In Punjab, the Aam Aadmi Party promised free power (conditional against usage caps) to all users. This was obviously unsustainable as the state’s total outstanding liabilities as a percentage of its gross state domestic product, has risen to 53.3% by March 2022 (Budget Estimate) from 33.1% a decade ago; its deficit stood at 4.6% of GSDP (FY22 BE) against the recommended 3%. Punjab is certainly not the only state where parties have promised or have implemented freebies wide and deep. There is thus no doubt that a course-correction is needed. Chairman of the 15th Finance Commission, NK Singh, told FE that the Commission should be mandated to recommend annual grants to individual states instead of a full five-year grant quantum, giving room to adjust the quantum depending on fulfilment of, or efforts towards, certain commitments to avoid profligate freebie spending. It is a good suggestion, but may be difficult to implement, as questions would be raised on the autonomy of state governments.
Another tricky issue that needs to be thrashed out is to determine a ‘merit’ and ‘non-merit’ subsidy. Even as free power (with caps on usage) to all users is an economically unsound move, many would say that there is a case for such a provision for the economically weaker sections. Similarly, the Pradhan Mantri Garib Kalyan Anna Yojana enabled food security for the most vulnerable households at a time of lost or interrupted livelihoods. But the Centre has extended it by another six months, and there are talks of extending it further. The Centre itself now acknowledges the pressure that an extension of the scheme will put on the fisc, but is probably weighing the political cost of discontinuing the “freebie”. A good way to sort out such issues would be to discuss them in the Inter-State Council. The co-operative nature of the GST Council, in which the Centre and the states meet to determine the outlines of the GST, has shown that there is considerable scope for such institutions that give substance to the prime minister’s promise of “cooperative federalism”. Pre-election freebies and the damage these inflict on the fiscal health of the states could be a good topic for the Inter-State Council.