Should there be a limit to ‘freebies’

While hearing a petition seeking de-recognition of political parties, Voters promised “irrational freebies”The Supreme Court recently drew attention to the substantial financial cost of free gifts. The court said that the law banning free gifts is not fair, but at the same time called for a balance between welfare measures and the loss to the exchequer. In whose background does the Supreme Court’s remarks come? Conflict between Bharatiya Janata Party and Aam Aadmi Party On the issue of extravagance on free gifts. It is also involved in widespread public debate about how to separate welfare spending from freebies. Ritika Khera And NR Pandora Discuss various aspects of the topic in a discussion powered by Mr Prashant Perumal, Edited excerpt:

Where do we draw the line between welfare and freebies?

Ritika Khera: This is not an easy question to answer as it depends on your point of view and where you sit on the income distribution pyramid. Furthermore, even if people sit at the top of the income distribution pyramid, you can still see something that the petitioner describes as a “freebie” as a welfare measure. The petition has referred to the Directive Principles. Directive principles can certainly guide the policy of the state. But it is not always possible to explicitly state that this is wellness, and it is a freebie. We can take the example of Dravida Munnetra Kazhagam’s response to this petition, where they mention electricity, which is something that the petitioner considers as a freebie, which can provide clean fuel at home, keep you warm. Helping in the study of the child etc. So, there are all kinds of ripple effects. At first glance something may seem like a freebie to the privileged, but it can be something that increases the future earnings of a poor person.

Comment | Understanding the issue of ‘freedom’

NR Bhanumurthy: If we limit ourselves to economic and public policy perspectives, a freebie is any public policy intervention that will have a long-term impact on production and productivity. Any public policy intervention that does not support medium- to long-term production and productivity can be called a freebie. Many state and even central governments follow certain policies which do not really support production and productivity. We need an institutional mechanism to control wasteful spending. We just talked about electricity. It is also important to understand and identify who may be the beneficiary of a particular public policy. You can’t have a comprehensive policy – for example, let’s say you give free electricity to everyone. Therefore, there is a need to identify policies that have long-term impact. Also, there is a need to identify the beneficiary sets.

Is India spending too much on welfare or freebies? What do you think about the comparison with Sri Lanka?

NR Bhanumurthy: First of all, let us first understand what is happening to the financial position of the states. Notably, studies conducted by the Reserve Bank of India (Study on State Finance) have shown that since 2014, social sector spending at the state level has declined even after more resources have been allocated to the states. We all know that health and education are important sectors financed by the state governments. But we see that the allocation for those areas by the states is actually decreasing. So, while one can argue that more resources need to be spent on welfare schemes, we also need to understand the extent to which state governments can spend, and if conditional grants are needed. Second, a report by the Reserve Bank of India two months ago highlighted the financial position of the states. Going forward, at least five states will see fiscal pressure. Ultimately, I think we need to keep track of allocations in the social sector. Also, the time has come for us to start talking about public expenditure efficiency in this country.

It would be unfair to compare India with Sri Lanka. But clearly, there are some lessons to be learned, especially when we look at government liabilities. We always talk about fiscal deficit, revenue deficit, GDP growth etc, but I think the most important variable in this whole debate is public debt or outstanding liabilities. Fiscal crisis is not caused by the fiscal deficit of a particular year, but because of the public debt stock that accumulates over a period of time.

Read also | Why are welfare schemes of states alone considered ‘free gifts’, DMK asks Supreme Court

Ritika Khera: Welfare spending in India is very low. This is lower than other developing countries – a few years ago, public spending on health and education in India was 4.7%, compared to 7% in sub-Saharan Africa. And it is also declining in many states. Even at the central level, welfare spending has declined, at least in the sectors that I keep an eye on. Also, whenever we talk about welfare spending, we only focus on whether we are spending too little or too much. We never discuss whether we’re generating enough revenue in the first place. Why is this question not asked in the Indian context when we know that we are not doing enough on the revenue front? For example, the income tax base has remained more or less stable, despite the high economic growth we experienced till a few years back. But there are also many such tax instruments which we are not using at all in India. We don’t have wealth tax, wealth tax, inheritance tax etc. Property tax in India is very low as compared to other countries. If we raise more revenue, we’ll have more to redistribute. The elite and privileged people do not want to talk about these issues as they will pay these taxes. You mentioned what happened in Sri Lanka. But I’m not really sure whether the financial situation there was generated only by welfare spending, there are many other things happening that caused the crisis.

Read also | YSRCP pleads in Supreme Court in freebies case

Is there any truth in the belief that states spend more on their expenditure than the Centre?

NR Bhanumurthy: When we talk about the financial position of the states, we have to keep in mind that prior to 2015-16, states used to spend more resources on capital expenditure on a large scale following their medium term fiscal structure. But after that, as the RBI studies pointed out, the quality of expenditure has declined. It seems that state governments are taking the easy route, and that is why we are arguing for free. This has also resulted in a reduction in tax resources. As you are not spending on productive activities, it also reduces your tax revenue. I think the problem seems to be on the revenue side as well as on the expense side. Ultimately, we need to have a good tax structure, where you have better resources for higher social sector spending and at the same time ensure medium-term debt stability.

editorial | The SOAP or Wellness Debate: On Free Gifts

Given that India is still a developing country, is there room to raise taxes and engage in more redistribution?

NR Bhanumurthy: We all know that less than 6% of the people in this country pay income tax. Several policy measures and institutions have been brought in to address the issue of widening the direct tax base. But in the case of indirect taxes, I definitely feel that the Goods and Services Tax is going to be a game changer. I have seen that the government is actually also looking at how to remove many tax exemptions because of the perverse incentives. That is one thing. The second is that when it comes to non-tax revenue, while we see a significant increase at the central government level, there has been a substantial decline at the state government level over time. Though the Finance Commissions keep giving incentives, I don’t think the states are really taking advantage of it.

In Focus Podcast | Should the courts decide on free gifts?

Ritika Khera: Thomas Piketty and his co-authors have an older paper that explores the reasons why India has not been able to expand its income tax base like China or Brazil, which was already at that time (about 10-15 years ago). There was only one. Tax base of around 8%. One is that the tax exemption limit in India is increasing year after year. Now, there is clearly a compliance issue. Can we believe that there are only 6% Indians who are above the income tax threshold? If this is true then this is a very serious situation. It tells how dire the circumstances are. And if more people are earning more than the income tax limit, then basically we have a serious compliance issue. This is a very obvious source of tax revenue. I am also not asking for raising income tax rates, but for better compliance. During COVID-19, an estimate suggested that 953 richest Indians had an average net worth of over Rs 5,000 crore. Their combined wealth is about a quarter of India’s GDP. If you impose a one-time 4% property tax on them, you could get 1% of GDP in revenue, which is nothing to scoff at. Similarly, to put things in perspective, we are raising 0.2% of GDP through wealth tax, whereas the average for developing country is 0.6% of GDP and in OECD countries it is 2% of GDP. Is. So again, there’s a lot of scope for increasing revenue. There has to be some redistribution – this is the main function of the government. The unfortunate part is that many people sitting at the top of the income distribution think of themselves as “middle class” and therefore complain about any taxes. I guess they don’t know that tail [of the distribution] Behind them is too long. So, we need some perspective, and this discussion should be accompanied by data.

The Hindu Parle Podcast | Are free gifts affecting India’s economic development?

What is your view on the Supreme Court’s suggestion to balance welfare expenditure and the loss to the exchequer due to such expenditure?

Ritika Khera: The court noted the need to balance welfare spending and our financial concerns. But I would also ask why the court is not saying that we have to balance privileged exemptions with our financial concerns. If there is no possibility to raise more revenue and you have to play a redistributive role, then clearly you should reduce the money that is being privileged. And it’s flowing in many different ways. One, of course, these huge bad loan waivers given to large corporations. Corporate tax has also come down. And there are things like vanity projects on which many governments are spending, be it big statues, going in thousands of crores, bullet trains etc. But also on a more nuanced basis – for example, the service for women in government, child care leave for up to two years. I also understand and support the expansion of maternity benefits. But what is this two-year paid leave for child care? Why shouldn’t that be questioned? If there is no possibility of increasing revenue and expenditure has to be cut, then several exemptions should be the first to flow to the most privileged.

Read also | Voters prefer to earn respectable money for free: Supreme Court

NR Bhanumurthy: Unfortunately, subsidy has become a bad word in this country. Although it is definitely needed in some sectors, it is very important for us to also look at implicit subsidies, which are non-qualifying subsidies in most areas. And we have several studies, notably by Govinda Rao and Sudipto Mundle, that have shown that even today in India, we have more than 8% of GDP that is actually spent on implicit subsidies. I think we really need to see if those implicit subsidies can be reduced so that you get more resources for welfare or social sector spending.

Ritika Khera is Professor of Economics at the Indian Institute of Technology, Delhi; NR Bhanumurthy is the Vice Chancellor of Dr. BR Ambedkar School of Economics University