Accounting for subsidies: Let’s build on the ‘revdi’ debate

Source- The post is based on the article “Accounting for subsidies: Let’s build on the ‘revdi’ debate” published in the The Indian Express on 8th October 2022.

Syllabus: GS3- Indian Economy

Relevance– Government budgeting

News– The article explains the freebies culture prevalent in India.

The debate on freebies has begun with an RBI 2022 report on state finances followed by Prime Minister comment.

What are freebies?

Freebies could be defined as non-merit subsidies.

Subsidies are money transfers by the government in an attempt to drive prices artificially below market prices. Money transfer may be implicit or explicit.

Why are subsidies difficult to classify into merit and non-merit?

Freebies empower the state to deliver welfare by providing subsidised merit goods like health and education.

It helps households to combat poverty by providing subsidised public goods like food, electricity. It appeals to the electorate through populist policies.

It becomes difficult to classify freebies as merit and non-merit subsidy when the boundaries between the above mentioned objectives are blurred.

What are the impacts of freebies?

It leads to an increase in fiscal deficit and puts a debt burden on the state.

Debt burden could have an adverse effect on the state finances if iot is not  properly accounted for through transparent budgeting procedures. It threatens fiscal sustainability.

Why is the fiscal council being proposed?

It has been recommended by the FRBM Review Committee (2017) and recently constituted Finance Commissions too including the 15th Finance Commission.

The council will  provide  independent forecasts on key macro variables like real and nominal GDP growth, tax buoyancy, commodity prices. It will also act as a monitoring institution to advise on triggering the escape clause and also specify a path of return.

Monitoring of finances and fiscal rules could also help ensure that states comply with a medium-term fiscal policy framework.