The other day, while flipping through The Hindu, caught by an alarming caption, “If freebie culture persists, India may face Sri Lanka’s fate”, I was to at once read the whole report with bated breath…
It was 19th April 2022. The Annual Day Celebration function of the Delhi School of Economics—a premier institute of the country that was established to marry economic “theory” with “practice” so as to “make it useful for policy purposes and the promotion of human welfare”—was on. It was presided by Prof. Yogesh Singh, Vice-Chancellor, Delhi University. Mr NK Singh, Chairman of the 15th Finance Commission, Government of India was the Chief Guest. Dr Ramesh Chand, Member, Niti Aayog, Government of India, was the Distinguished Guest.
After being welcomed by the Director of the Institute, Dr Ramesh Chand took to the microphone and made certain candid observations that merit the attention of every citizen. Lamenting the poor participation of the subject experts from the academia in the debates on farm subsidies, MSP, etc., in the media, Dr Ramesh Chand observed that in the absence of subject experts, the “self-anointed experts” are skewing those debates.
He went on to assert that several support measures offered to agriculture are not even quantified correctly. Often, the quantum of interest subvention—some states offer interest subvention of 4% on timely payment of loans, while some offer entire interest—granted to farmers is not considered while evaluating farm support measures. In the same vein, payment of 70-80% of the crop insurance premium made by the Central government is often ignored. Moving on to MSP, he said that the economic cost of buying any produce under MSP comes to 30 to 35% more than the MSP. And ironically, the government is not in a position to dispose of it even at the MSP. Over it, there is a free supply of power to farmers.
Thus the “mind-boggling” support measures offered by the government to agriculture had already hit the 10% limit of government support prescribed by the WTO. The net result of these freebies is: Farming has become extremely dependent on such crutches. Further, States are left with little or no funds for the creation of agricultural infra, which is essential for giving a real push to growth in agricultural productivity.
He concluded his address to the student community of economics with a warning: “Our policies and support to agriculture and many other sectors are going in a direction that if we do not put a check on it, I think a day is not far when our fate will be same as that of the Sri Lankan economy”, and requested them to create awareness among the public about freebies and the embedded risks thereof.
Then came the Chief Guest, Mr NK Singh, who was equally vociferous about both the economics and politics of freebies”, which in his view, are “deeply flawed”. Worrying that “Governments across the political spectrum are now being increasingly attracted to this new slogan of freebie politics”, Mr Singh observed that “It is a race to the bottom… not the road to efficiency or prosperity but a quick passport to fiscal disaster”.
Admitting the necessity of subsidies for schemes that offer larger benefits, he emphasized the need to distinguish these from other sops such as 300 units of free power per household, that are part of the contemporary political narrative.
Instead, if the States continue to dole out freebies to influence the electorate, Mr Singh opined that India could face the prospect of “sub-national bankruptcies”. Indeed, he warned that the political competition over such sops is a “quick passport to fiscal disaster”.
Now the moot question is: Are there any takers for this sane advice? If the recently concluded assembly elections to the five states—where we have witnessed all parties including the BJP promising freebies like free power, farm loan waivers, etc., to incentivize voters—are any indication of the mood of the political parties in the country, no one can foresee any remission in this malady.
Of course, some political setups may argue that as long as the welfare spending at the state level is sustainable and affordable, there is perhaps, no issue since such doling out is the prerogative of the political executive. Before deliberating further, let us first understand what fiscal stability means. In common parlance, fiscal stability means the deployment of States’ fiscal policies to achieve long-term economic objectives such as high employment and growth in GDP.
As against this dictum, if freebies, which according to the Cambridge English Dictionary means “something that is given to you without you having to pay for it, especially as a way of attracting your support for or interest in something”, are offered indiscreetly, they are, as the speakers observed, certain to cause damage to the long-term interests of the economy.
Having said that, we must also admit that there are certain kinds of populist subsidy schemes that merit continuation. For instance, subsidies in the form of food ration schemes not only reduced poverty levels but are also known to build a strong and healthy workforce resulting in the improved productive capacity of the population. Similarly, schemes such as MGNREGA cannot be termed as freebies, for they not only created assets but also prevented a fall in the consumption demand. Such schemes are indeed long-term investments for improving productivity and growth in the economy.
There are thus nuances in the whole issue of freebies that merit healthy and transparent deliberations to decide what a desirable assistance program is and what is not. Simply put, it is the issue of productivity and its contribution to the long-term growth of the economy that must decide the allocation of subsidies for any sector. Indiscriminate doling out of funds for schemes such as giving free power up to 200-300 units to the urban population, loan waivers, etc., is certainly not justified, for it is a sure way of spoiling long-term prospects of the economy as a whole. Moreover, such increased revenue expenditure restricts the states’ capacity to commit more finances for creating essential infrastructure under critical sectors like agriculture, education and health.
So, as Dr Ramesh Chand, Member, Niti Aayog, advised at the annual day function of DSE, it is perhaps, time for India to move away from the path of freebies culture to a culture of prudence.