What are freebies?
Recently there was an interesting debate on the definition of freebie in the Supreme Court. Solicitor General Tushar Mehta pointed to the dangers of “burdening the finances with false promises in such a way that they destroy the national economy”, pointing to free handouts of TV, electricity, water etc.
The then Chief Justice NV Ramana urged against limiting the definition of a freebie to “water-tight compartments” as “a shaving kit for a barber, a bicycle for a student, equipment for a toddy tapper or a washerman”. Pointing an iron to “Lifestyles and their rise”.
The Reserve Bank of India (RBI) defines free gifts as “public/merit goods, spending on which there is an economic benefit, such as public distribution system, employment guarantee schemes, state support for education and health”. . But free electricity, water, public transport, waiver of pending utility bills and farm loan waivers are “often perceived as free, potentially undermining the credit culture, through cross-subsidies for private investment.” distorts”, the central bank said in a recent report.
Over the years, India has introduced product-based subsidies (from food to fuel) and people-oriented (free electricity, water, farm loan waivers, etc.). It is the latter category that the RBI is more concerned about. In fact, the freebies, referred to by Prime Minister Modi as the “revdi” culture, have raised the debt levels of many states.
Nevertheless, it is a complicated debate. There is already a political storm brewing over freebies and their desirability and impact.
Delhi Chief Minister Arvind Kejriwal has demanded that the governments provide free education, health and electricity up to 300 units to every citizen. “Those who call it freebie scheme and free ki rewari should be declared traitors of this country,” he said.
Meanwhile, the DMK has approached the Supreme Court challenging the definition of free services and emphasizing on free services to help “secure social order” and “economic justice”. Tamil Nadu Finance Minister Palanivel Thiagarajan argued, “Who decides what a freebie is, as opposed to an essential commodity/service provided by a responsible government?”
The impact of free gifts on the financial health of states
Free gifts are rampant in India and unite all states and most political parties. As Justice Ramana cautioned, “We find that in this issue, all political parties are on one side… Everybody wants freebies, everybody!” In fact, the freebie culture is not limited to Kejriwal’s Aam Aadmi Party only. It affects everyone.
Here also there is no north-south division. Southern states like Andhra Pradesh and Tamil Nadu may do well on socio-economic indicators but still launch many populist schemes. Politicians promise free electricity, laptops, TVs and mobile phones to voters before the elections.
In the recently held Uttar Pradesh assembly elections, all political parties including the Bharatiya Janata Party (BJP) had competed among themselves in distributing donations. The BJP promised free electricity to farmers for five years, two-wheelers for meritorious college girl students and free public transport for women above 60 years of age.
The rival Samajwadi Party promised loan waiver for farmers, free electricity for irrigation, 300 units of free electricity for domestic use, and more.
The RBI report said freebies for highly indebted states like Andhra Pradesh and Punjab exceed 2% of Gross State Domestic Product (GSDP).
For many states, credit growth has outpaced GSDP growth over the past five years, with the RBI believing it to be unsustainable. Punjab, Rajasthan, Bihar, Kerala and West Bengal are the most indebted states in India, and most of them will have a debt-GSDP ratio of over 35% by 2026-27.
While some of the freebies may have hurt the financial health of the states, some experts have pointed to a positive social impact in some cases. Studies have shown that free cycles have increased the participation of girls in secondary schools in Bihar by 30%. Free laptops also improve the quality of education and improve student participation in schools and colleges, some argue, like mid-day meal schemes. So, this is a contentious debate.
What is the solution?
The Supreme Court has called for a national debate on freebie culture in India, including the possibility of the Center enacting a law to regulate it. What could be the broad outline of such a law, if at all, wondered Justice Ramana. “Suppose the Center makes a law that states cannot give freebies. Would such a law be open to judicial scrutiny?” he observed,
In 2014, the Election Commission added a new chapter to its Model Code of Conduct to scrutinize election manifestos, and it raised questions on political parties at times. But she recently told the top court that she cannot control the decisions of political parties.
To limit the expenditure of the Center and the states, a law already exists – the FRBM Act. It only needs more teeth to become more effective.
The FRBM Act came into force in 2003, which set fiscal deficit targets for the Center and the states, hoping to eventually eliminate the revenue deficit. But FRBM targets have been pushed back several times. Even after the Covid crisis, the government found it difficult to meet the mandated fiscal deficit target of 3% by 2020-21. The fiscal deficit slipped to 9.5% in 2020-21 and to around 6.8% in 2021-22. Finance Minister Nirmala Sitharaman promised to amend the FRBM Act.
For states, the FRBM target is 3% of GSDP – for any exemption from this target, states need the approval of the Centre,
FRBM has failed to control the expenditure of the Center as well as the States due to two reasons. First, it is easier for the Center to modify its FRBM targets. It can do so only by mentioning it in the Finance Bill, which outlines the government’s taxation and expenditure plans for the financial year. And many states manage to meet FRBM targets in a normal year only through off-budget lending.
In fact, off-budget balance sheet borrowings of states could touch a decade high of around 4.5% of gross domestic product (GDP), or nearly 7.9 trillion in FY22, an increase of nearly 100 basis points from FY15, according to a study by Crisil Ratings.
State-owned institutions have taken these loans. CRISIL estimates that around 4-5% of states’ revenue will go towards meeting such guarantee obligations, reducing the ability of state governments to fund capital expenditure. Crisil attributes this trend to two reasons. First, revenue growth constrained by the pandemic has seen an increase in the fiscal deficit, well above the historical level of around 3%. And then, to borrow more, states need the consent of the Center under the FRBM Act.
Lessons from the Global Experience
It is difficult to circumvent the credit limit in some developed economies. As we have seen in the US, increasing debt beyond the prescribed limit can lead to government shutdowns. There are similar provisions in some other countries as well. Sitharaman has called for routing all government spending through the budget. That in itself would be a huge improvement.
Uncontrolled, government spending on welfare schemes can often spiral out of control. The crisis in Greece and its impact in other parts of Europe is one such example. In 2009 Greece’s budget deficit exceeded 15% of its GDP and the eurozone debt crisis began. Subsequent austerity measures required Greece to reform the way it managed its public finances, particularly its pension system.
RBI has also exercised caution. “The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt stability. The fiscal situation among states in India is showing warning signs of building tension,” it observed.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.