By Categories: Economy

Background:

  • A petition was filed in January in the Supreme Court, which sought judicial intervention to direct the Election Commission to derecognise political parties who use freebies to lure voters to vote in favour of these parties. 
  • This issue has invited clamor and debates from various sections of society after Prime Minister mentioned Revdi culture.

Definition of freebies:

  • The dictionary meaning of freebie, something that is given to you without you having to pay for it, especially as a way of attracting your support for or interest in something”. But in terms of policy measures it is difficult to interpret and define.
  • According to Former Chief Election Commissioner OP Rawat, “Except for subsidies given to promote food production, direct benefits for employability, educational attainments, sports, cultural activities, free medical care to the poor, free food to those who are destitute to sustain themselves and affirmative action for weaker sections, including women, everything else is a freebie and should be so recognised.” He adds that free power, free cell phones, free laptops etc, fall in the ambit of freebies.

Timeline of freebie debate:

Impact of freebies:

  • Positive:
    • The Mid-day meal scheme of Tamil Nadu had attracted a lot of opposition as it was considered a freebie but in later years it was seen that it improved enrolment, retention ratio of children and gave education a fillip as well as improved nutritional standards. This scheme was finally introduced on a national level.
    • Freebies fill the gap of inadequate investment in the social and public sector and thus is an outcome rather than a cause.
    • Freebies can lead to upward social and economic mobility and may serve as a protective net in depressed economic scenarios. 
    • Economics promotes growth but freebies may advance equity.
    • Poorer states are constrained by a narrow tax base and reduced economic activity and this acquires another layer of complexity of providing welfare measures in form of freebies, as these have an element of supplementing socio-economic protection.
    • For example, Tamil Nadu Government’s free bus pass for women has led to women empowerment as more women have joined the workforce due to reduced transport cost. This is an example of positive externality and has supplemented the income and has crafted a story of economic growth and development.
  • Negative:
    • According to the RBI report, It could potentially undermine credit culture, distort prices through cross-subsidisation eroding incentives for private investment, and dis-incentivise work at current wage rate which will lead to fall in labor participation rate and ultimately lower economic productivity.
    • Free supply of electricity and water in states in the form of freebies has led to environmental degradation.
    • Debt to GSDP ratio of some states has become highly unsustainable and will slow down the economy  and freebies will lead to macroeconomic instability in some states.
    • States owe more than Rupees 2.5 lakh crores as dues to power discoms. This will result in lower profitability and in turn force many companies to be declared as non-performing assets and in turn lower Return on assets for financial institutions.p

States spending on subsidies and freebies:

  • A RBI report on “State Finances: A Risk Analysis”, 2022 mentions that rising expenditure on non – merit freebies has become a new source of risk that has emerged recently in India.
  • As per the latest available data from the Comptroller and Auditor General of India , the state governments’ expenditure on subsidies has grown at 12.9 per cent and 11.2 per cent during 2020-21 and 2021-22, respectively. 
  • The share of subsidies in total revenue expenditure by states has also risen from 7.8 per cent in 2019-20 to 8.2 per cent in 2021-22. 
  • Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh are the top five states with the largest rise in subsidies over the last three years.
  • States like Gujarat, Punjab and Chhattisgarh spend more than 10% of their revenue expenditure on subsidies. Subsidies, however, are known to crowd out resources from other useful purposes.
  • As per RBI report, recently states have started providing subsidies as a form of freebies such as provision of free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies.
  •  Some freebies may benefit the poor if properly targeted with minimal leakages, but their advantages must be evaluated against the large fiscal costs and inefficiencies they cause by distorting prices and misallocating resources. 
  • The GST compensation payout came to an end in June 2022, further reducing the fiscal space available for social sector expenditure. In such a situation, a multitude of social welfare schemes in the form of freebies will not only put a heavy burden on the exchequer but will also exert upward pressures on yields if they are financed through market borrowing. 

Merit Freebies vs Non-merit freebies:

A fine line exists between merit and non-merit freebies. So, it becomes important to determine freebies or welfare measures which have a long term positive impact and include several beneficiaries. For instance, the distribution of laptops for students, according to some critics, has been defined as private assets. But this private asset became a portal to public good during the time of COVID-19 when all the schools were shut down. So, a poor million students accessing better educational facilities is, essentially, a public welfare programme.

 

Conclusion:

Allocation of resources that bridges inequality and reduces drudgery will augur socio-economic growth. Prudent expenditure and reduced off-budget borrowings by states needs to be encouraged. Freebies are required in the form of subsidy as a welfare measure to uplift the poor and the impoverished and socially disadvantaged instead of applying the same to cultivate the vote bank that is completely against better financial prudence and anti-growth.


 

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