Developing countries all across the world struggle to meet multiple aspirations within their limited resources. These include infrastructure and human development, social security, and removing the asset base of the poor. With their pockets tight, anything except judicious use opens the gates to economic disaster.
Unfortunately, freebie culture is slowly creeping into Indian politics. PM Modi has termed it “revdi culture.” The Sri Lankan Crisis has brought a whole new alacrity to India. While hearing on a PIL, the Supreme Court of India noted that an apex body should be constituted to look into this matter. N. K. Singh, Finance Commission chief, commented that political competition over sops is a “quick passport to fiscal disaster.”
What is a freebie?
What constitutes freebie is relative. It’s a Catch-22 in a socialist state like India, because it takes only a thin line for a welfare measure to turn into an exploitative populist measure which instead of improving the population’s HDI will only empty the state’s stock.
Social services are the cornerstone of any welfare state. So, how does one make a difference between welfare measures and freebies?
To identify a freebie, we need to answer the following questions:
What is the purpose of the scheme?
Welfare schemes are aimed at achieving either of the two—growth or the well-being of the people. Tax exemptions for industries to encourage them to set up factories are called stimulus packages. These are incentives that spur growth. On the other hand, subsidies, relief, or old-age pensions, ensure the well-being of people.
But, when the purpose is only to lure voters by offering populist but unsustainable offers, it becomes a freebie. It neither accelerates growth nor impacts the well-being of people. For example, promises to offer coloured TVs or golden mangalsutra are pure populism.
Who are the beneficiaries of the scheme?
Subsidies become freebies when they are offered indiscriminately, even to those who do not need or deserve them. Free electricity to BPL families does improve their living standards. But, hiving free electricity to the rich is unwarranted.
What is the economic status of the state?
Whether a subsidy will be counted as a freebie depends a lot on the economic health of the state. A state, such as Punjab, where levels of poverty are very low but public debt is very high, cannot and should not offer freebies. This indicates that the money that could have been invested in human development is spent to sustain freebies.
Thus, the GSDP to debt ratio of a state has to be considered while determining freebies in that state.
What is the outcome of such offers?
It is argued that reforms in the power sector never materialise because the management knows the government will bail them out whenever necessary. There is no incentive for them to improve the efficiency of the system.
Similarly, it is a matter of discussion why farmers continuously fall to deb-traps, despite several loan waivers.
Do freebies have any benefit?
Many argue that providing public services, subsidies, stimulus packages, etc., are the cornerstones of a welfare state. Undoubtedly, welfare measures are one of the biggest drivers of the economy. Post-COVID stimulus packages around the world helped bring the global economy back on track.
Some of the benefits of welfare measures can be listed as:
- Facilitate growth
- Help industries
- Provide Social Security
- Universal public services
However, this is not to suggest that freebies are helpful. Freebies and welfare measures are not one and the same thing. Government welfare is useful as long as it achieves the twin goals of growth and human development.
Freebies, meanwhile, are a wastage of resources. The scope for corruption widens, while diminishing the hope for growth.
Why are freebies problematic?
Unstable in the long run: Irresponsible expenditure only for the purpose of getting votes is a wastage of the state’s resources. The money is spent on things that do not add any value to the economy in the long run. That money, instead, can be invested in building infrastructure or any other venture that spurs growth and human development.
Adversely impacts the fiscal situation of states: The crisis unfolding in Sri Lanka is a grim reminder of how costly freebies are. A country has to maintain a sustainable GDP to public debt ratio. When revenue expenditure is funded by borrowing, it indicates that things are going south.
Destroys the culture of free and fair elections: A party in government can use its position to unfairly lure voters by offering freebies out of the state treasury. This affects the fairness of elections.
On the other hand, once a party comes up with such an offer, other political parties are pressured to follow suit lest they be left behind. This initiates a vicious cycle that, if not contained, ends up attracting a crisis.
How can the culture of freebies be tamed?
It is interesting to note that subsidies are more prevalent in developing countries than in developed states. For example, no advanced country in the West spends more than 1% of its GDP on subsidies. In India, agriculture subsidies only add up to 2.5% of our GDP. The trend is similar in other developing democracies, such as Bangladesh, Congo, etc.
The reason is that a huge population of these countries are poor. Infrastructural or human development, etc., need long gestation period. Thus, subsidies appear as a quick fix. These are politically rewarding as well.
In the West, there is more funding for public services like education and health.
To contain the spreading menace of freebie culture in India, following measures can be considered:
Define Freebie: Our discussion above clearly demonstrate how complex it is to define a freebie. Several factors have to be taken into account to reach a concrete conclusion.
Nonetheless, the need of the hour is that the brainstorming should begin. Freebies should be defined so that political parties are constrained from making extravagant promises.
Statutory Budgetary Constraints: Genuine constraints on freebies should to be inserted in the FRBM Act. These acts should specify the extent to which union and state governments can spend on subsidies. It is crucial to maintain a healthy GDP to deficit ratio.
Institutional checks: The legislature is deemed to be the ultimate check on the public purse. Unfortunately, opposition parties are themselves accomplices to the freebie culture. Speaking against freebies is considered disastrous politics.
The Comptroller and Auditor General (CAG) audit report can comment on the debt sustainability of the government. However, it comes with a lag and its complexity makes it ineffective.
Role of the Election Commission: Maximum freebie announcements are made during elections. The Election Commission should step in to check this misadventure once the Model Code of Conduct (MCC) is in effect.
Awareness among public: Ultimately, the public is the final check in any democracy. People should be made aware of the ill-effects of freebies and how adversely they impact the overall development of the country in the long run.
The debate on freebie culture is a welcome step for India. In India, the problem of freebies can be solved when we transform competitive politics into good economics as well. Thus, encouraging self-help groups, offering credits, etc., should replace freebies.
Any expenditure should be done with keeping inter-generational equity and sustainable development in mind.
After all, it is rightly said, “If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.”