Karnataka election 2023: The dangerous consequences of gorging on ‘revdis’

Opposition parties use the same playbook on freebies for elections in every state. The upshot: a race to the bottom for state finances

If the Karnataka polls are a template, the run-up to the Lok Sabha elections next year will be a nightmare for the nation’s finances. The Karnataka election is a do-or-die one for the Congress, its last attempt to prove that Rahul Gandhi’s much-vaunted Bharat Jodo Yatra has had an impact beyond the optics. Unfortunately, as has happened in previous elections too, its strategy has been to dole out freebies en masse.

It has promised every household free electricity of 200 units per month; Rs 2000 monthly to a woman in each family; Rs 3000 per month per graduate and Rs 1500 per month to each diploma holder for two years; 10 kgs of free rice per month for people below the poverty line and other such handouts.

The Aam Aadmi Party has upped the ante by promising 300 units of free electricity per month, 80 percent job reservation for locals, an agricultural loan waiver and other goodies.

These parties do not seem to bother that the cumulative losses of the electricity supply companies in the state stand at over Rs 14,000 crore, nor the fact that their cumulative liabilities stand at over Rs 20,000 crore. They have no compunction in setting the stage for a power crisis in the state, as long as they are elected to power.

Indeed, one estimate put the cost of the freebies offered by the Congress and AAP at over 5 percent of the state’s GDP.

But it doesn’t end there. Other parties, even those that are in principle opposed to freebies, are forced to respond, to keep alive their poll prospects. And it is not just about freebies promised in the Karnataka election. Opposition parties use the same playbook for elections in every state—a report said Arvind Kejriwal had promised free electricity, education and healthcare if voted to power in Madhya Pradesh. The upshot: a race to the bottom for state finances. And this is not some abstract financial concept---more freebies mean less spending on road building, on bringing tap water to households, on hiring more schoolteachers. All politicians know there is a price to be paid, but prefer to cynically manipulate voters.

True, the Karnataka government’s debt to Gross State Domestic Product ratio is well below the national average. The problem is that the Opposition will persist with freebies even in the most indebted states. As the RBI said in its report, ‘State Finances: A risk analysis’, ‘The fiscal conditions among states in India are showing warning signs of building stress. The slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burden have stretched state government finances exacerbated by COVID-19.’ The report added, ‘New sources of risks have emerged – relaunch of the old pension scheme by some states; rising expenditure on non-merit freebies; expanding contingent liabilities; and the ballooning overdue of DISCOMs - warranting strategic corrective measures.’

The prime minister was the first to draw attention to the pernicious effects of this ‘revdi culture’ last year. Even the Supreme Court weighed in on the matter, observing that there was no free lunch.

A national debate on the subject seemed to get bogged down in the details, such as whether it’s all right to subsidise ‘merit goods’ such as education and health, while ending ‘non-merit subsidies’, such as subsidies for power, loan waivers etc. The RBI study referred to above also said, ‘As a corrective measure, the state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term.’  A distinction was sought to be drawn between ‘welfare measures’ and freebies. One suggestion was that every promise by a political party should also state its cost and how it would be financed.

It’s important not to muddy the waters. Instead of quibbling about which subsidies are merit or non-merit, the way forward would be to determine a cut-off point for the poverty level, and directly subsidise those individuals below it. And if economist Surjit Bhalla is right and extreme poverty in India had dropped to as low as 0.8 percent in 2019, then subsidies to the poor shouldn’t be too costly.

It is sometimes argued that policies that benefit the corporate sector, such as tariffs or lower taxes, are also subsidies. But such policies have strong externalities, since they benefit economic growth and generate revenues that take care of any extra government borrowing. Similarly, incentives via the PLI schemes or for the transition to green growth also have strong positive externalities. These are far removed from the freebies promised during elections.

As a general rule, subsidies that assist in capital accumulation, whether financial capital or human capital, may be considered. Consumption subsidies need to be kept to the minimum. No nation has ever consumed its way to greatness.

But the cost of subsidies should not be evaluated only in narrow economic terms. What kind of a democracy do we have if governments are elected on the strength of the freebies promised? It’s easy to say that voters need to be educated and in some instances, such as the recent Gujarat elections, the electorate soundly rejected the Opposition’s revdi populism. But there’s always the danger, as George Bernard Shaw said, that ‘A government that robs Peter to pay Paul can always depend on the support of Paul.’

There is also another concern. If, for instance, the Congress is elected to power in Karnataka, it will be emboldened to promise freebies not only in the other state elections but also during the Lok Sabha election next year. That will not only force the BJP to follow suit but could also make its more extremist elements go further down a dangerous path of polarisation and whipping up sentiment against imagined internal and external enemies. Elections should be fought on substantive issues of policy, not on issues of caste or creed or narrow monetary gain.

Just as gorging on revdis is bad for health---it leads to fatty liver, high blood pressure, diabetes, obesity and increases the chances of heart disease---political revdis too result in severe damage to the economic and political health of the nation.

It’s imperative, therefore, that we have measures that prevent political parties from making irresponsible promises. Parliament needs to lay down ground rules as to what promises political parties can make during elections. Our democracy will be the healthier for it, as will the economy.