Define limits and state the financial cost of election freebies

I have written extensively on the folly of going back to the old pension system (OPS) (Mint, 2 Dec 2022 and 6 Jan 2023), so will leave this for now, although it may resurface as an election promise in the mid-terms has come. State. Besides, the issue of pension is currently under the scrutiny of a high-level committee set up by the Finance Ministry at the Centre.

The freebies currently offered in Madhya Pradesh include free electricity up to 100 units (kilowatt hours), 50% subsidy above 200 units and full rate levy thereafter. The problem is that the offer appears to be open to all users. Subsidizing electricity for poor households at low connected loads is a common (and commendable) practice across states. In the Central Electricity Authority’s annual report (dated May 2022) on state-wise power tariffs for 2020-21, Madhya Pradesh charged concessional rate 3.25 per unit for individual household with connected load up to 100 watts and monthly consumption up to 30 units. but minimum monthly fee 45, about three times the cost of a possible daily use of a 40-watt light bulb in three to four hours. There is also a bulk supply provision for slum clusters (without minimum charges per household), but those charges are often unfairly distributed among households within the cluster.

It can be argued that zero-pricing of the first slab at low connected loads incentivises poor households to move towards individually metered legal connections to the grid. After that it becomes possible to identify the remaining (large) illegal connections and completely get rid of them. This could potentially position utility distribution companies (discoms) on a universal billing platform as a secure base for future revenue growth.

The present free offer being given by any one of the competing political parties does not make the limit to cover the low connected load only. Subsidy bill was paid by Madhya Pradesh to DISCOMs in 2020-21 to meet revenue shortfall 20,371.61 crore, which is the highest ever among all states. In that context, an initial free slab for all consumers seems really unfeasible.

Apart from this, subsidy on Liquefied Petroleum Gas (LPG) cooking fuel has also been offered, which will fix the price of LPG cylinders. 500. This is almost 50% subsidy. Currently, around 40% of the petroleum price is accounted for by state Value Added Tax (VAT) including central excise duty and dealer commission (petroleum products are out of its purview) GST System). Halving the issue price of an LPG cylinder essentially means waiving the state VAT on the product along with paying central excise duty on it.

If it is offered universally to all LPG consumers, then setting a cap on the number of subsidized cylinders is the only way to contain the fiscal cost. If not universal, it raises the same problem of identifying beneficiaries that arises with other freebies such as a basic income (given in Karnataka) to every female head of household. The outward identification of beneficiaries may be fraught with injustice. A woman may be the head of the household because her husband has moved elsewhere, but her remittance may make this a non-poor household. No other woman may be the head of her household, but the nominal male head may be unemployed or ill or disabled.

The most famous free scheme of all was the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA).MANREGA), a brilliantly designed scheme as its beneficiaries are self-selected. Households that volunteer to obtain job cards for performing manual labor at public work sites are automatically covered.

Free bus travel for women is similar to MGNREGA in terms of self-identification. In some other cases, such as agriculture loan Exemptions (again on offer in Madhya Pradesh), eligibility criteria are usually tightly framed so as to contain the fiscal cost. But this makes it difficult to calculate the dues of each farmer, and delays getting benefits to eligible farmers.

The freebie packages currently being offered are usually a colorful assortment thrown as a trap to draw the votes of voters who think they might benefit from this or that element.

I now realize that my earlier suggestion that the EC needs to quantify the fiscal impact of freebies from political parties is impractical. Political parties themselves can credibly quantify the cost of freebies offered by a rival party, and demonstrate to voters how much other programs and schemes will suffer as a result. Such actions would raise the level of electoral debate, but this has not happened so far.

Indira Rajaraman is an economist.

UPDATE: 06 July 2023, 11:00 PM IST