Are freebies a way to mask state inaction?

Source: The post is based on the article “Are freebies a way to mask state inaction?” published in The Hindu on 24^th August 2022.

Syllabus: GS 2 – Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Relevance: About the impact of freebies.

News: In promising freebies, the political parties and members play with the ground reality of the fiscal condition of the state.

What are freebies?

The evolution of freebies in various states

In Tamil Nadu, DMK founder C.N. Annadurai provided just 1 kg of rice for ₹1 after he got elected. Later the freebies got expanded beyond rice, to gas stoves, colour TVs, laptops, payments for household work etc.

The Delhi government has notably offered water and electricity (up to a certain limit) free to the city’s voters.

The Himachal Pradesh government is offering locals free power upto 125 units, along with free water in villages and a 50% discount on bus fares for women.

In Assam, the State government has announced direct and indirect cash benefit schemes worth ₹6,000 crores impacting nine lakh beneficiaries.

Every year, governments at the Centre and State expand the distribution of private goods such as LPG cylinders to ordinary citizens.

What are the impacts of freebies?

Neglect the necessary infrastructure: Instead of building public assets, social capacity and society, the policymakers shifted their attention towards direct transfers and welfarism (via distribution of private goods for free). This causes a lack of government interest in delivering good public services.

Financial burden on state exchequer: Recently announced freebies in many States are difficult to fund. For instance, According to the RBI data, Andhra Pradesh announced freebies in FY23 that would consume almost 30.3% of its own tax revenue; for Madhya Pradesh, this figure was close to 28.8%; for Punjab, this was around 45.4%; and for West Bengal, it was about 23.8%. All of this will increase the government debt-to-GDP ratio.

Increase NPA: Over the past five years, banks have written off loans worth ₹10 lakh crore. The share of public sector banks in such NPA write-offs was typically between 60% and 80%.

Cost to the voter: When promised freebies are fulfilled, then ordinary voter has to pay the cost in the form of higher taxes or the opportunity cost of less development.

What should be done?

a) Governments announcing freebies should be required to provide a funding plan to bolster Parliament (and State Assembly) budgetary understanding and enhance their ability to act. The Election Commission should push political parties to provide a funding mechanism for such promises., b) A Budgetary Office should be established to aid in writing policies and conducting budgetary analysis, c) Transfers towards capital expenditure schemes should be prioritised over other schemes.

So, to end the freebie culture, governments must stick to fiscal probity and make credible policies. This will provide a network of competent public hospitals, high-quality schools and provides an enabling environment for the working population to build skills etc.