Freebies Culture & Economy | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Context

Recently, after hearing a plea against the practice of political parties promising freebies during elections, the Supreme Court suggested an apex body of experts to look into the pros and cons of freebies as they affect the economy significantly.

Introduction

• The Supreme Court recently recommended creating an expert panel including representatives from the RBI, ruling and opposition parties, the Finance Commission, Niti Aayog, and other stakeholders to recommend policies to limit the use of freebies by political parties during campaigns.
• Prime Minister Narendra Modi expressed his concerns about the habit of utilising giveaways for votes at the expense of long-term development while pointing out the steadily rising dues of power distribution firms. In Indian politics, he described the culture of subsidies as "a major illness."
• According to the study, the cost of the various freebies mentioned by the state governments in their most recent budget speeches ranged from 0.1% to 2.7% of GSDP for various states.

What constitutes a Freebie

• The main elements of freebie culture are cash transfers/financial aid, utility subsidies, loan or fee waivers, and interest-free loans.
• Freebie culture is nothing new; it has always existed in Indian politics under the guise of socialism.
• Indian politicians offer free products, such as computers and televisions, to entice potential voters.
• Political parties have become more creative in their offerings in recent years because the "typical free water and electricity" are no longer sufficient as electoral gifts, and this culture has gained momentum.

Freebie as a ‘relative term’

• Developing nations to grow faster with public welfare need to prioritize their spending as democracy basically caters to the voters. 
• As seen in the ‘East Asian Miracle’, development policy is mainly based on human development and a proactive state.
• India has a considerable deficit in infrastructure and asset base of the poor in terms of housing, electricity, cooking gas, sanitation, roads and credit availability.
• Anything which removes the asset deficit of the poor/deprived class adds to the overall economic activity and to a more equitable and inclusive society and development. Therefore, those policies are a necessity and cannot be generalized as a freebie.
• Similarly, tax incentives and loan write-offs provided to companies are termed as  ‘stimulus packages’. Even though they affect government revenues, these packages help in creating jobs and increasing productive capacity which spurs the economy.
• So, there is a thin line between welfare politics and freebies and it becomes dangerous when the public debt is high even to provide necessary packages.

Drawbacks of Freebie culture

• RBI in its annual report titled ‘State Finances: A Risk Analysis’ has warned that rising subsidy burdens have stretched state government finances already hit by the pandemic.
• It warned of rising expenditure on non-merit freebies, expanding contingent liabilities, and the ballooning overdue of discoms as new sources of risks.
• Freebies pose fiscal sustainability challenges. For example, Rajasthan, Kerala and West Bengal are projected to exceed the debt-GSDP ratio of 35% by 2026-27. 
• The promise of irrational freebies before elections unduly influences the voters and affects free and fair elections.
• This leads to social inequalities. For example: With the Rajasthan government’s decision to revert to the old pension scheme for its employees, just 6% of the population captures benefits as high as 56% of the pension and salary expenditure.

Way Forward

• The impact of freebies on the economy must be understood and connected with the taxpayer’s money. 
• The difference between subsidies and freebies shall be justified based on socio-economic conditions and end results.
• Putting in money where it delivers more results. For example: Credit provided for the development of self-help groups results in better schooling and employment, in turn, increasing the participation of women in the workforce which attracts more investment. Therefore, interventions given at the basic stage lead to better transformation than freebies provided at the latter stage.
• More focus on the grassroots level by strengthening Panchayat Raj institutions to improve governance.
• Priority expenditure areas have to be defined when there is a resource deficit. Government expenditure has to be judicious in providing access to health, education, and other sectors to uplift the poor to compete better with others in society.
• Electoral reforms – bringing freebies under the Model Code of Conduct and regulating manifestos by the Election Commission of India.

Conclusion

The recent economic crisis in Sri Lanka is a reminder of the crucial importance of public debt sustainability. Freebies reduce the fiscal space available for social sector expenditure. They exert more pressure if they are financed through market borrowing. Therefore, it is crucial for the state governments to reprioritise their expenditure to achieve optimum long-term welfare advantages by making sure that the beneficiaries get empowered permanently and stop using these freebies.