What commodities should be distributed free or at a subsidised level

News: Recently, the newly elected Punjab government’s announcement of providing up to 300 units of free power to every household.

Types of allocation of budgetary resources by the policymakers

(1) providing support to low-income households for augmenting their consumption of selected goods and services.

(2) offering incentives to support selected categories of investors and producers to do investment or production. For example, for production-linked incentives to various sectors and tax concessions.

Note: The economic objectives of the budgetary allocation in these two categories are quite different.

What constitutes “freebies”?

There is, in fact, no consensus on the definition of a “freebie”. It is almost a pejorative term. They constitute a sub-set of goods and services distributed by the government free or at highly subsidised prices to low-income households.

The freebie depends on the nature of the commodity or the services distributed by the government. For example,

The subsidisation or the free provision of essential and merit goods can be justified and cannot be called as freebies. The “essential” goods are food grains and the “merit” goods are those, which if consumed, lead to positive impact on health and education-related provisions.

• For example, mid-day meals. In these cases, the consumption of these goods causes benefit to the immediate consumer as well as the wider community. Their consumption meets social objectives.

However, the subsidisation or the free provision of items such as TV sets, free power up to 300 units can be referred to as “freebies”. Such distribution cannot be justified on various grounds.

What are the issues?

India has limited budgetary resources.

In India, the revenue to GDP ratio has been stagnating over a long period of time.

– For example, combined revenue receipts of central and state governments, relative to GDP, is lower than many developed and emerging market economies.

Way Forward

(A) A suitable model should be developed for providing budgetary support in both consumption and production-supporting initiatives.

(1) What goods and services should be selected for such programmes?

It is advisable to limit the distribution of subsidized or free provisions of commodities and services to essential and merit goods. Any distribution beyond these two categories must be treated as “freebies”.

(2) What should be their ideal mode of delivery of the essential items or merit goods?

It may be provided either through direct income support or by a free or highly subsidised provision. However, in case of the latter, i.e., provision of subsidised goods, the government requires a procurement set-up and a public distribution system. This involves additional costs like avoidable administrative costs as well as possibility of leakages.

(3) What should be their ideal mode of delivery of production-related incentives? It can be provided through alternative methods like direct budgetary support and indirect support through tax concessions.

In the case of tax concessions, the outcomes have not been good. For example, the provision of free power to farmers was often misused. The Government of India has registered forgone revenues in the context of tax concessions. Therefore, these schemes require careful designing to avoid their misuse and minimise their costs.

(B) In addition, it would be prudent to limit overall fiscal support to such schemes to less than 10% of the total expenditure of the central government and state governments until their revenue GDP or GSDP ratios increase in a sustained way.

Source: The post is based on an article “What commodities should be distributed free or at a subsidised level” published in the Indian Express on 16^th June 2022.