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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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.