[Answered] How are freebies different to free essential services and production-related incentives? Are the production-related incentives always good?

In India, budgetary resources support is provided to low-income households for augmenting their consumption of selected goods and services, these are free essential services. It is beneficial in terms of increasing nutrition and health among the population. Whereas freebies are a negative term associated with the things which are provided for free. It may include non-essential services given for election-related benefits, which include free electricity, laptops, mobiles, etc. Freebies incur fiscal pressure on the government exchequer and tax payer.

Offering incentives to support selected categories of investors and producers are called production-linked incentives. Incentives in the form of reduction of corporate taxes have been offered to promote investment in general, or in certain regions such as backward areas. In the case of production-related incentives, alternative methods include direct budgetary support and indirect support through tax concessions. It aims to develop capacities in the local supply chain, introduce new downstream operations, and incentivize investments into high-tech production. A ‘subsidy’ is looked down upon, while an ‘incentive’ is considered progressive.

Benefits of production-related incentives:

• Creation of large-scale manufacturing capacity: Since the incentives are directly proportional to production capacity/ incremental turnover, it is expected that investors will be compelled to create large-scale manufacturing facilities.
• Employment generation: As large-scale manufacturing requires large labour force, the production-related incentives utilize India’s abundant human capital and enable upskilling and technical education.
• Furthermore, it is also expected to bring improvements in industrial infrastructure, benefiting the overall supply chain ecosystem.
• Other benefits include export capabilities, and lessening the import dependency, particularly in critical sectors and high-tech goods.

Issues:

• Production may be incentivized more effectively by other methods such as infrastructure expansion.
• It is also important to consider a limit to the fiscal cost of undertaking such initiatives.
• In respect of production-related incentives, greater care is required for determining the total quantum of support as well as the specific forms of such support.

As far as fiscal stability and financial deterioration of states is concerned, if the welfare measures are sustainable and affordable, then that is fine as it is the prerogative of the political executive. Freebies could be harmful for the long-term economic growth of the country, so it is necessary to distinguish between productive and unproductive forms of welfare spending.