‘Freebies’, a judicial lead and a multi-layered issue

Source: The post is based on the article “Freebies, a judicial lead and multi-layered issue” published in “The Hindu” on 26^th August 2022.

Syllabus: GS 3 The Union Budgeting

Relevance: Freebies; Subsidies etc.

News: In the recent, the Prime Minister commented upon the “freebies” handed out by the state governments. The Supreme Court of India also commented that there has to be a distinction between expenditure made on social welfare schemes and “irrational freebies” offered to voters during elections. This has reignited the debate on the economic rationale for granting subsidies.

What is the definition of “subsidies”?

According to the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organization (WTO), a subsidy shall be deemed to exist if there is a financial contribution in form of the direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services, by a government or any public body where government is engaged

In other words, ‘Subsidy’ can be any form of income or price support granted by the government. In fact, there is a distinction between various forms of subsidies: (1) transfer payments that are made for running social welfare schemes, and (2) other subsidies (like freebies) .

Tax policy includes tax preferences like special tax rates, exemptions, deductions, rebates, deferrals, and credits. These are aimed for realising specific benefits serving the greater public good. For instance, to promote savings by individuals, and customs duty concessions are intended to promote exports.

What are the issues in providing tax-preferences?

There are situations when the objectives of tax-preferences are not realised, for instance, the 2019-20 corporate tax cuts did not result in higher private investment as the Government had expected.

First, as compared to individuals, corporates have been enjoying a larger share of tax preferences, for all years except in 2019-20 when the share of individuals inexplicably increased. Further, the corporate sector is also enjoying lower tax rates than the income tax rates on individuals.

Further, the government has reduced subsidies in agricultural sector, public health and education sector.

(a) Public health expenditure has struggled to cross 1.5% of GDP, which is significantly lower than those in other major economies.

(b) In education, the Kothari Commission’s recommendation (1966), that public investment should be increased to “6 percent of the national income as early as possible” remains a distant dream.

(c) Agriculture has remained a neglected sector. Its share has almost halved in recent years.

(d) The market fundamentalists oppose these subsidies/support to the health, education and agricultural sector. The spaces are being created for private players. For example, the Government had brought the controversial farm laws for dealing with the issue of increasing farm subsidies.