Are freebies affecting the economic growth of India?

Context: In an address delivered at the Delhi School of Economics recently, N.K. Singh, the chairperson of the 15th Finance Commission, warned about how the race to provide freebies to voters could be a “quick path to fiscal disaster”.

He also noted that freebies could be harmful for the long-term economic growth of the country, and emphasised the need to distinguish between productive and unproductive forms of welfare spending.

The article is an interview with two different experts who examine whether there is a case for doing away with freebie culture.

Freebies by states vs Fiscal stability

There’s no simple answer to this question

Freebies – Different types

– There are different kinds of freebies. Some of them are extremely justifiable, some of them are not. But given that in the last 30 years there has been rising inequality and also some level of distress in the last decade, some kind of relief to the population in the form of subsidies may not be unjustified. It may actually be necessary for the economy to continue on its growth path.

– MGNREGA type of spending and subsidy in the form of food ration schemes need to be expanded. They are not just doles, but go a long way in increasing the productive capacity of the population. One can call these as an investment for the long-term, for improving the productive capacity of the population.

– One of the experts state that he is not in favour of giving away loan waivers, because they have undesired consequences such as destroying the whole credit culture.

Centre also engages in giving out freebies not just to the poor people but also to a large number of corporations.

Fiscal Stability of states

Broadly speaking, fiscal stability is a situation in which the government is able to deploy its fiscal policy towards long-term economic objectives, which are high employment and growth rates.

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.

Also, as per the study of the State finances conducted by the RBI, it’s seen that from 2005 onwards, in aggregate, States have adhered to the limit in terms of their gross fiscal deficit (gap between the total revenue of the State and the total expenditure)

Further, the outstanding debt reduction of states is going pretty well. From a high of 31% of GDP, it came down to about 22% of GDP by 2014-15. After that, it has inched up about five percentage points by FY 2020.

– Central government’s debt-to-GDP limit is supposed to be 40%, it has now crossed 90% of GDP. So, the problem of fiscal stability is more pressing at the level of the Centre.

Way forward

There are nuances to the issue, and one will have to get into those nuances to take a final call on whether a certain welfare spending is necessary or not.

For instance: Some of the subsidies going into education, such as for laptops and other things have now become necessities for increasing productivity, knowledge, skills, and various other things.

So, we need a more nuanced understanding of the issue.

Source: This post is based on the article “Are freebies affecting the economic growth of India?” published in The Hindu on 29th Apr 22.