MC Explains | How to spot a freebie?

A sustainable way to boost the income of Indian farmers is to focus on raising farm productivity which is not only low but varies from region to region. (Representative image)

Prime Minister Narendra Modi has ruffled feathers by questioning the politics of garnering votes by promising freebies. Delhi Chief Minister Arvind Kejriwal, who has promised 300 units of free power to each household if his party wins the elections in Gujarat, has hit back, demanding a referendum on the issue.

The Supreme Court has weighed in, too, asking the Centre, Niti Aayog, the Finance Commission, and the Reserve Bank of India to brainstorm on the “serious” issue of freebies and put forth “constructive suggestions” to tackle them.

The Election Commission told the apex court on August 10 it welcomed the suggestion of an expert panel on freebies, but sought not to be made part of it because it is a constitutional authority.

Given all of this, it’s become pertinent to ask what qualifies as a freebie and what doesn’t.

To be sure, India is a welfare state, but the government is the custodian of public funds and must use them judiciously.

N.K. Singh, the chairman of the 15th Finance Commission, has said that while there is great ambiguity in what freebies mean, the country needs to distinguish between the concept of merit goods and public goods on which expenditure outlays have overall benefits. An article by central bank staff said that it is necessary to distinguish freebies from public or merit goods, which bring larger economic benefits.

Using this as the starting point, Moneycontrol looks at a few ways to distinguish freebies from merit goods.

Future versus now

The first test of identifying a freebie should be whether it meets an immediate political goal for whosoever announces it or is aimed at future growth and prosperity.

In India, it is typical for political parties to promise and implement measures that help them win the next election.

As opposed to this, independent institutions such as the finance commission and regulators like the central bank are expected to ensure growth and stability over the medium term.

If it feels like a freebie, and is timed like one, it is likely to be a freebie.

Think free water, power, farm loan waivers, consumer durables and so on.

Freebies such as these may ameliorate immediate financial stress for the common man or farmers but have long-lasting and devastating effects on the finances of states and public utilities.

Moreover, they also distort markets and take away resources from other sectors.

It is important to remember that the government finally taxes us or future generations to bridge the fiscal hole created by politically expedient doles.

ALSO READ: States must curb freebies to spend more on expanding their economies

Education, food, health tests

Nutrition sustains life. Education and health build human capital.

The state must provide these services for free or at low cost.

It should also step in during crises. Since the pandemic hit, leading to a hefty human and economic toll, the Centre has been providing free foodgrain to more than 800 million beneficiaries.

Any state support that does not meet this test must be looked at closely. It could be a freebie in the garb of a subsidy.

According to an article by Reserve Bank of India staff, states have recently started delivering a portion of their subsidies in the form of freebies.

States’ spending on subsidies grew 12.9 percent and 11.2 percent during 2020-21 and 2021-22, respectively. In line with this, the share of subsidies in states’ total revenue expenditure has risen from 7.8 percent in 2019-20 to 8.2 per cent in 2021-22.

The finances of many states are in a precarious position, with many of their debt and fiscal deficit ratios exceeding limits.

It is therefore, important that states step back and reprioritise spending to achieve long-term welfare by permanently empowering citizens who are then able to forgo such benefits, according to the article by the Reserve Bank of India staff.

For instance, India’s public distribution system, employment guarantee schemes, and states’ support for education and health are well-spent subsidies as they help provide much-needed employment and succour to the economically weaker sections.

Also needed are production-linked incentives for various sunrise industries that will boost not just exports but also employment opportunities.

Freebie for ever

In a country as complex as India, good intentions often lead to bad outcomes.

Freebies also have a way of sticking around for longer than intended.

While several freebies start off as one-time measures, political parties compete with each other to offer more lucrative doles, burdening the state exchequer further.

It is also common for opposition parties to come into power after promising freebies, only to then turn around and issue white papers on the poor fiscal conditions of their states. Still, they remain under pressure to implement the doles.

Therefore, states must ensure that there are sunset clauses for new subsidies or social sector schemes.

Cutting down freebies will also result in resources being redirected to health, education, agriculture, and rural infrastructure, creating more jobs and reducing poverty.

In the medium to long term, states with high revenue spending and low capital investment may experience slower revenue growth and higher interest outgo, according to the RBI staff article.