Over the years, freebies have become an integral part of politics for parties to either win elections or stay in power. Political parties vie with each other to provide freebies to voters and add new ones to the list with each election.
Many experts have warned about the danger of freebies, citing the collapse of the Sri Lankan economy as a warning signal. The Government of Sri Lanka cut taxes across the board and provided several free goods and services to people. Consequently, the economy collapsed and the heavily-indebted country was left with no choice but to default on its commitments.
Unfortunately, a clear distinction is lacking between welfare schemes and freebies due to which governments have been justifying the latter in the guise of the former.
The three parameters relevant for taking a decision on freebies are: debt as percentage of gross State Domestic Product (GSDP), interest payment as percentage of revenue receipts and gross fiscal deficit as percentage of GSDP.
As per the Fiscal Responsibility and Budget Management (FRBM) Act, the debt to GSDP ratio should be 20 pc for the states.
Except for Maharashtra and Odisha, all other states have more than 20 per cent debt to GSDP ratio. Punjab is the most debt-laden state with 53.3 per cent ratio while seven states have it above 30 pc. Also, the fiscal responsibility legislation binds the fiscal discipline of all states at 3 per cent of the GSDP. Only Haryana, Jharkhand and Maharashtra are within this limit.
State governments announced welfare schemes (freebies) worth more than Rs 1 lakh crore for 2022- 23. According to the Comptroller and Auditor General (CAG), the expenditure on freebies climbed from 11.2 pc in 2020-21 to 12.9 pc in FY22. The subsidies increased from 7.8 pc in 2019-20 to 8.2 p in 2021-22.
Economists opine that freebies cut into the funds meant for the development of the state. These sops make people lazy and irresponsible and increase free cash with them leading to inflation. Freebies are a misuse of taxpayers’ money by politicians for personal gains, they say. Moreover, free electricity and water lead to the wastage of these precious resources and limit the growth of these sectors affecting the overall economy.
Most state governments, as also the Centre, have been providing freebies to farmers in various forms, but the production of rice per hectare in India is only 3.38 tonnes compared to the world average of 4.25 tonnes. In the US, the yield is 7.94 tonnes, in Japan 6.54 tonnes and in China it is 6.49 tonnes. This shows that freebies are not sustainable solutions in the agriculture sector.
Also, the unpaid dues to power sector entities, both generation and distribution companies, are a whopping Rs 2.5 lakh crore; the average AT&C (Aggregate Technical & Commercial Losses) is around 21 pc and the gap between ACS and ARR (difference between the average cost of supply and average revenue realised per unit of power) is 36 paise. These three figures are enough to indicate the deplorable situation of the power sector in the country.
NK Singh, Chairperson of the 15th Finance Commission, has warned about how the race to providing freebies to voters could be a “quick path to fiscal disaster”. He also noted that freebies could be harmful to the longterm economic growth of the country and emphasised the need to distinguish between productive and unproductive forms of welfare spending
