The freebies debate

The Supreme Court wants a national debate on the rampant freebie handouts by states in India. The Court has wondered recently if we need a law to end the freebie culture.

The Reserve Bank of India (RBI) defines freebies by distinguishing them from public/merit goods, expenditure on which brings economic benefits, such as the public distribution system, employment guarantee schemes, states’ support for education and health.
However, the RBI in a report said that, free electricity, water, public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidization (practice of charging higher prices to one type of consumers to artificially lower prices for another group) eroding incentives for private investment.

While some freebies may have damaged the financial health of states, some experts have pointed out the positive societal impact in some instances.
Studies have shown free bicycles increased girls’ participation in secondary schools by 30% in Bihar.
Political parties argue that free laptops, too, improve the quality of education and involvement of students in schools and colleges.
Even the Constitution has mandated that State secure a social order for the promotion of the welfare of the people and minimise and even eliminate inequalities in income, status and opportunities (Article 38).
The problem comes when it becomes a burden on the State’s finances.

Over the years, India has rolled out product-based subsidies (from food to fuels) and people-oriented ones (free electricity, water, farm loan waivers, etc.).
Southern states like Andhra Pradesh and Tamil Nadu may do well on socio-economic indicators but still roll out many populist schemes. Politicians promise to offer the electorate free power, laptops, TVs and mobile phones before elections.
Data from the Comptroller and Auditor General of India (CAG) shows that the State governments’ expenditure on subsidies has grown by 12.9 per cent (in 2020-21) and 11.2 per cent (in 2021-22). The share of subsidies in total revenue expenditure by States has risen to 8.2 per cent in 2021-22 (from 7.8 per cent in 2019-20).
For many states, the debt growth has outpaced Gross State Domestic Product (GSDP) growth over the last few years, observes RBI, pointing out that it’s unsustainable. Punjab, Rajasthan, Bihar, Kerala and West Bengal are India’s most indebted states.

The Supreme Court has called for a national debate on the freebie culture in India, including the possibility of the Centre framing a law to control it.
In 2014, the Election Commission added a new chapter (chapter VIII) to its Model Code of Conduct to scrutinize poll manifestos, and it has, on occasion, questioned political parties. But the powers that it drew by adding the chapter are both vague and limited. EC can at best censure a party.
A law already exists to keep the Centre’s and the states’ spending on a tight leash—the Fiscal Responsibility and Budget Management (FRBM) Act. It only needs more teeth to become more effective.

The FRBM Act came into effect in 2003, setting fiscal deficit targets for the Centre and the states, eventually hoping to eliminate the revenue deficit. But the FRBM targets have been pushed back several times.
After the Covid crisis, too, 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 about 6.8% in 2021-22.
For states, the FRBM target is 3% of the GSDP—for any relaxation from this target, states need the approval of the Centre.
The FRBM has failed to control the spending of the Centre as well as the states for two reasons. First, it’s easy for the Centre to modify its FRBM targets. It can do so by just making a mention of it in the Finance Bill, which outlines the taxation and spending plans of the government for the fiscal year.

Debt ceilings are difficult to bypass in some developed economies. Finance Minister Nirmala Sitharaman has called for all government spending to be routed through the Budget. That in itself would be a big reform.
Unchecked, government spending on welfare schemes can often spiral out of control. The crisis in Greece, and its ripple effects in other parts of Europe, is one such example. The budget deficit of Greece exceeded 15% of its GDP in 2009 and triggered the eurozone debt crisis.

The recent economic crisis in neighbouring Sri Lanka is a reminder of the critical importance of public debt sustainability.

Today Current Affairs Upsc Exam Syllabus & Previous Yearpaper.