What is the issue?
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.
How do freebies hamper the economic growth?
- Macroeconomic stability- Freebies undercut the basic framework of macroeconomic stability.
- In the case of Punjab, some have speculated that the promise of freebies is going to be an additional impact of 3% of GSDP.
- Expenditure priorities- The politics of freebies distort expenditure priorities.
- For instance, Rajasthan’s decision to revert to the old pension scheme is regressive because 6% of the population, which is made up of civil servants, stands to benefit from 56% of the state’s revenues.
- Social inequalities- The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.
- Unsustainable- Provision of free power, water, etc. distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
- Distortion of agricultural priorities- The depleting supply of groundwater is an important issue to consider when speaking of freebies pertaining to free consumption goods and resources.
- Manufacturing- Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.
- Subnational bankruptcy- It raises the question of whether the time has come to consider recourse mechanisms like subnational
bankruptcy.
Do freebies have any productive role?
- Constitutional provision- As per Article 282, the Union or a State may make any grants for any public purpose.
- Better workforce- Sometimes, freebies build a healthier and a stronger workforce, which is a necessary part of any growth strategy.
- For example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
- Increased productivity- Subsidies going into education, such as for laptops have now become necessities for increasing productivity, knowledge and skills.
What is needed in this respect?
- Differentiation- We need to distinguish between the concept of merit goods and public goods.
- The strengthening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health are considered to be desirable expenditures.
- Sustainability- It’s not about how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.
- Revisiting the Seventh Schedule- Most of the centrally sponsored schemes are subjects which are classic subjects in the domain of the states, such as employment, food, education.
- So the Seventh Schedule which classifies the subjects into three lists requires a revisit.
- Revisiting the Article 282- The entry under Article 282 of the Constitution has been used and misused for having all the centrally sponsored schemes.
References
- https://indianexpress.com/article/opinion/columns/freebies-are-a-passport-to-fiscal-disaster-7879244/
- https://www.hindustantimes.com/india-news/competitive-freebies-politics-calls-for-considering-sub-national-bankruptcy-n-k-singh-10165039043882html
- https://www.thehindu.com/opinion/op-ed/are-freebies-affecting-the-economic-growth-of-india/article65363024.ece
