NEED FOR AN EXPENDITURE CAP ON FREEBIES

What is a freebie?

Freebies refers to transfer of goods or services to people without any payment and may contain an element of allurement of voters for electoral benefits or/and acts as a positive step towards inclusive economic growth.

Status of Freebie culture in India:

1. The expenditure of State Governments on subsidies has grown from 11.2% to 12.9% during 2020-21 and 2021-22.
2. RBI (2022): The top five states with the largest rise in subsidies over the last three years includes Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh
3. Punjab, Madhya Pradesh and Andhra Pradesh have announced the maximum freebies as a percentage of revenue receipts in the financial year 2023.
4. Freebies have exceeded 2% of Gross State Domestic Product (GSDP) for the highly indebted states of Andhra Pradesh and Punjab.

What is the function of the state in terms of expenditure?

1. To direct spending that generates the most economic value showing multiplier effect to society and the economy at large, which can be achieved through spending in capital expenditure.
2. fostering equality through redistribution which can also include giving a “freebie” to the poorer sections of society.

What is the justification given for freebies?

1. Freebies tend to address the needs of people belonging to the lower end of the income distribution.

   1. For instance, schemes such as Amma meal in Tamil Nadu, free electricity scheme in Delhi, free travel for women in public transport benefits people of lower end of the income distribution.
2. States tend to be more inclined to give freebies as they are closer to the citizens than the Centre.
3. States also hold a position that when cycles, saris and dhotis are distributed for free, it incentivises production in their respective industries.
   1. For instance, the wheat prices have been kept subdued due to free power and water provided to farmers in Punjab, else the costs would have gone up.
4. Similarly, loan waivers are seen as a fair treatment of depositors’ money as the government is providing it for a vulnerable section, else the bad loans given by banks have to be written-off.

Why is there a lot of opposition for freebies?

1. The Freebie culture amounts to bribing voters using public money solely for gaining advantage in electoral politics.
2. RBI says that ‘provision of free’ for electricity, water, public transportation, waiver of pending utility bills and farm loan waivers are freebies which causes:
   1. Destabilize credit culture
   2. Distort prices through cross-subsidisation eroding incentives for private investment
   3. Disincentivise work at the current wage rate leading to a drop in labour force participation
3. Freebies “Crowd out resources” that can otherwise be used for developmental activities of the country.
4. Large fiscal costs and inefficiencies can lead to distortion of prices and misallocation of resources.
5. The provisions of free electricity and water can
   1. Accelerate environmental degradation
   2. Deplete the water tables.
   3. Lead to irrational use and wastage of resources.
6. Multitude of social welfare schemes at the face of Centre’s GST compensation payout that ended in June 2022, large social sector expenditure in the form of subsidies can put a heavy burden on the exchequer and also exert upward pressures on yields if they are financed through market borrowing.
7. Freebies are likely to expand contingent liabilities, and the ballooning overdue of DISCOMs.
8. Freebies an also lead to
   1. abetment to corruption and erosion in governance ethics
   2. undermining of ‘equity’ and ‘fairness’
   3. Devastating effect on the financial health of the state.
9. Can lead to inequitable consequences
   1. For instance, in free bus ride, women falling in high income bracket who can afford to pay also travel. This leads to inequitable element in the distribution of subsidies.
   2. This can also cause non-compliance amongst tax payers and eventually lead to lower revenue to the government.
       

The subject of expenditure allocations has to be revisited by the next Finance Commission to draw norms that ensures parity across all the levels of government.