Karnataka Elections: Freebie promises cast cloud over $1 trillion economy target

Ahead of the Karnataka assembly elections, freebies are back in vogue as politicians make one last effort to garner votes.

Less than a year after a national debate over pre-election freebies, political parties are falling over themselves to announce schemes that could very well fall under this category to snap up votes in Karnataka.

The importance of the Karnataka assembly elections is not lost on anyone. The southern state votes on May 10 and its result could have an impact on the next year's Lok Sabha elections. The incumbent Bharatiya Janta Party is under pressure, with some predicting a victory for Congress. No wonder then that the recently-released election manifestos are full of freebies in a last-ditch attempt to get votes.

Before diving into the details, it's worth recalling that there is no legal definition of the word 'freebie'. However, economists – including those from the Reserve Bank of India (RBI) – broadly define it as a public welfare measure that is provided free of charge.

But it is also important to make the distinction between freebies that are beneficial – such as the public distribution system, employment guarantee schemes, and support for education and health – from those that could undermine credit culture, distort prices, and disincentivise work at the current wage. These include the likes of free electricity and water as well as a waiver of pending utility bills.

Promises made to Karnataka

The BJP's manifesto, made public on May 1, had some interesting titbits under a prominently-marked 'Top Promises' section: free provision of three cooking gas cylinders per year to below-poverty-line families, a scheme through which these families will get half a litre of milk per day and five kilograms of ration per month, and matching deposits made by women of SC, ST households of up to Rs 10,000 for a period of up to five years.

Delve a little further and some other promises stand out: higher subsidy for dairy farmers and millet cultivation, free transportation of farm, dairy and horticultural products from villages to urban markets, free annual health check-ups for senior citizens, increase in pensions for widows to Rs 2,000 per month from Rs 800, and the most striking of them all – a one-time grant of Rs 25,000 to poor families to undertake travels to places of religious importance such as Tirupati and Ayodhya.

The Congress is not far behind. It has promised 200 units of free electricity per household, free bus travel for women, an unemployment benefit of Rs 3,000 per month to jobless graduates, and interest-free loans to women to buy two cows or buffalos. Further, police officials on night duty will get a special allowance of Rs 5,000 per month as well as one month's extra salary.

Some of the promises made by other parties include: Janata Dal (Secular) – Rs 2 lakh cash incentive to brides of young farmers, five free cooking gas cylinders per year, and loan waivers for women self-help groups; Aam Aadmi Party – free electricity to the tune of 300 units, free bus travel for students, and a one-time loan waiver for small farmers.

But can Karnataka pay for all – or any – of these?

Fiscal pressures

As luck would have it, Karnataka's finances are in a relatively strong position.

As per an analysis of state finance by the RBI staff, published in June 2022, Bihar, Kerala, Punjab, Rajasthan and West Bengal are "highly stressed". These five states, along with Andhra Pradesh, Jharkhand, Madhya Pradesh, Haryana, and Uttar Pradesh, were identified as vulnerable.

Karnataka, meanwhile, is doing better but not as well as some others. Its interest payments amounted to 14.3 percent of its revenue receipts in 2021-22 – well below Punjab's 21.3 percent but higher than Odisha's 4.3 percent. Its fiscal and revenue deficits were 2.8 percent and 0.4 percent of the state's GDP – again, not the worst but not the best either.

Tellingly, the RBI staff noted in their analysis that all states taken together are expected to see a decline in their debt-to-GDP ratio by 2026-27, largely due to the "stellar fiscal performance" of five states, one of which is Karnataka. As per their forecasts, Karnataka's primary deficit – defined as fiscal deficit minus interest payments – is seen at 1.3 percent in 2026-27, only marginally higher than the 1 percent level that would stabilise the state's debt.

It is worth pointing out that Karnataka's primary deficit in 2021-22 was also 1.3 percent of its GDP.

Clearly, Karnataka is doing fine fiscally and could soon stabilise its debt. But that is before the freebies announced prior to next week's elections are accounted for. As such, whichever party comes to power, things will become worse for the state's finances if they deliver on their lofty promises.

Centre versus states

Politics, as well as finances, is at the heart of the freebie debate. The heated discussion on the subject in mid-2022 was sandwiched between two sets of assembly elections: Goa, Uttarakhand, Punjab, Uttar Pradesh and Manipur in the first half of the year and Himachal Pradesh and Gujarat in the second. And a point that stood out was that political parties are not answerable to anyone when it comes to deciding how to spend taxpayers' money – except taxpayers themselves.

"There is no place in the Constitution…where the Supreme Court gets to decide, or any court gets to decide, how the people's money gets spent," Tamil Nadu Finance Minister P Thiaga Rajan had said back in mid-August at the peak of the debate sparked by the 'revdi' comments made by Prime Minister Narendra Modi.

The Centre's contention, meanwhile, is that any scheme should be accounted for and states should not come to New Delhi asking for funds post assembly elections.

Neither Thiaga Rajan nor the Centre is wrong. But election manifestos make no mention of how much any of these 'non-beneficial freebies' will cost. And it cannot be denied that some states are fiscally weaker than others. While Karnataka does not currently fall into this category, the sustainability of its future could be at risk if political parties have not done the math before making their promises.