Freebies by the central and state governments in the run-up to elections result in a shrinkage of fiscal space, leading to a debt trap, said economists. Strong fiscal rules are needed to curtail such practices, they added.
"This (freebies) will result in the shrinkage of fiscal space. Any additional fiscal operations need to be funded through debt, which will result in mounting deficits. If the deficits persist and consistently breach the Fiscal Responsibility and Budget Management (FRBM) rules, the states may end up in a debt trap. Hence, there should be strong fiscal rules that bind the states to curtail such expenditures," Sri Hari Nayudu A, an economist at the National Institute of Public Finance and Policy (NIPFP), told Moneycontrol.
The economists were commenting after Prime Minister Narendra Modi told Moneycontrol in an exclusive interview that there is a need to eschew such "financially irresponsible schemes".
"In our own country too, on multiple platforms, I have spoken about the need to be alert against financially irresponsible policies. The long-term implications of such policies destroy not only the economy but also society. The poor pay a heavy price," the PM had told Moneycontrol.
However, over the years, Union and state governments have resorted to providing subsidies and freebies to gain political mileage, sometimes through appeasement. To outperform political competition, governments of the day have increased the volume and magnitude of these subsidies and populist schemes.
"Probably, the 16th Finance Commission (FC), which is going to be constituted soon, may keep unwarranted expenditures or freebies as one of the agenda items/parameters in deciding fiscal transfers. As a custodian of public money, it’s the constitutional duty and moral responsibility of the government to spend money prudently and efficiently," Nayudu said.
In the process of achieving socio-economic objectives, governments at every level provide various services, the majority of which are autonomous, while some are subsidised. Hence, the analysis of government expenditures is a mundane and complex process due to the infinite range of services that the government provides to different agents of the economy.
"At difficult times, the vulnerable sections of society need intervention from the government side. As long as government intervention is limited to financial support for education and health, it will improve the productive capacity of the economy. An equal amount of government intervention for development activities such as education and health and direct consumption boosts will have the same impact on the fiscal deficit, debt, and interest rate in the economy. In the case of the former, which is education and health, the productive capacity of the economy improves, while in the latter case, the impact on the productive capacity of the economy will be minimal," Devendra Pant, Chief Economist, India Ratings, told Moneycontrol.
Governments have intervened by providing subsidised food grains through the Public Distribution System (PDS), scholarships or waiving tuition fees for students from lower-income strata, and LPG subsidies for below poverty line (BPL) families.
"In assessing the role of the government, we should realise that redistribution is a legitimate role of the government because the market does not undertake this task. In doing redistribution, the government has to strike the right balance between spending on building physical and social infrastructure and spending on short-term measures, and within redistribution through targeted cash transfers and providing subsidies.
Cash transfers empower the recipient to exercise the choice of spending, whereas subsidies restrict the choice, alter relative prices, and distort resource allocation in unintended ways," Govind Rao, a member of the 14th Finance Commission, told Moneycontrol.
The issue is not restricted to so-called freebies, nor is it specific to any political party. Ultimately, it is electoral politics, and these activities can be financed by borrowing because future generations have to repay it, Rao said.
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