Bureaucrats are right. Fiscally reckless freebies are a bad idea

In the run up to the recently-concluded assembly elections, every party, including the Bharatiya Janata Party (BJP) that was the defending regime in four out of the five states where polls were held, promised hand-outs.

Almost every party promised free electricity. Some promised farm loan waivers, some others vowed minimum support prices (MSPs) — a guaranteed floor price — for fruits and vegetables. There were also promises of direct transfer of funds to select groups such as women.

One of the primary objectives of State-funded entitlements is to address concerns of equity. Otherwise, for instance, there would not have been the need to legislate free lunch for the poor who have a right to live with human dignity. Then there is the larger question of whether such government-sponsored hand-outs are the most effective option to achieve equity goals.

There is the textbook argument that much the same result can be achieved by widening the circle of prosperity, though the process is slower. Enhanced farm productivity, for instance, is vital for keeping food prices in check on the one hand, and raising rural incomes on the other.

In March 2012, then Finance Minister (late) Pranab Mukherjee announced that it was the government’s endeavour to keep subsidies at less than 2 percent of gross domestic product (GDP).

Effectively, this means that if the value of all goods and services produced in the country is Rs 100, the government will not spend more than Rs 2 either on hand-outs that go into anti-poverty programmes or cheaper inputs that keep food, fuel, and fertiliser prices at affordable levels.

This January, the Supreme Court observed that freebies was a 'serious issue'. Chief Justice of India NV Ramana said, "I want to know how to control this legally. Can this be done during these elections? It has to be for the next election. It's a serious issue. The freebies budget goes beyond the regular budget."

The top court said it had earlier asked the election commission to frame guidelines to prevent the same, but the poll body just held one meeting with political parties asking them for their views.

The top court was hearing a petition seeking direction to the Election Commission of India (ECI) to seize the election symbol or de-register a political party that promises or distributes ‘irrational freebies’ from public funds before elections.

One of the primary objectives of subsidised entitlements to the poor is to address concerns of equity. Otherwise, there would not have been the need to legislate free lunch for the poor who have a right to live with human dignity. India still has a long way to go before it can get food into every mouth that needs it. The Food Security Bill promises to do precisely that.

That subsidies directed only by populism and electoral objectives can bloat the fiscal deficit and burden the government needs no emphasis. There is now demonstrable evidence that states have been borrowing to fund non-revenue yielding expenditure.

A recent RBI paper showed that state governments’ market borrowings have grown at a much faster pace since 2014-15 compared to the Centre. Gross market borrowings of state governments increased almost three-fold from Rs 2.4 lakh-crore in 2014-15 to Rs 6.34 lakh-crore in 2019-20. The state-wise position shows that the debt-GSDP ratio, on average, ranged from a low of 16.1 percent for Telangana to a high of 48.7 percent for Jammu and Kashmir.

In public finance, as it is for households, borrowing in itself is not a bad idea, if the bulk of the loans are spent on asset creation. The expenditure pattern of states, however, shows some red flags. Revenue expenditure constitutes about 83 percent of total expenditure. The share of capital outlay, which can help in improving growth prospects through building requisite infrastructure by states, was consistently below 15 percent. States spend about 25 percent of total expenditure towards committed expenditure including interest payments.

Whether pre-election populist promises yield votes and swing poll results need deeper research and data. It is nobody’s case that in a 1.4 billion strong nation, in which nearly one in every three live below the poverty line, one needs an effective and efficient method through which privileged tax payers can support the poor.

But, this should not come at the cost of unending borrowing to fulfil poll promises about freebies that are not carefully fiscally weighed. It may be good electorally, but is certainly not good public finance management. Building flyovers across the cityscape does not solve the problem of traffic jams. It requires investment in good, efficient, and dependable public transport. Likewise for effective welfare economics.