The Economics of Freebies

By Shambhavi Kumar | Edited by Aman Kayal 

As a report published in The Quint aptly sums it up, Freebies are akin to “putting money in your left pocket by taking it out from your right pocket.”

With the legitimacy of freebies offered by politicians before elections being challenged in the Supreme Court over the past few months, the deliberations surrounding the impact of freebies on a country’s economy, especially a developing country like India, is brewing once again. 

Freebies, in the most simplistic terms, refer to the free goods and services offered by the government of the country to its citizens. But what exactly constitutes freebies? Is it necessarily a liability? How is it different from targeted subsidies? 

According to K.R. Shanmugam, Director, Madras School of Economics, “Subsidies are of two kinds — good and bad. The good ones do not impact other sectors, distort prices while uplifting the targeted populace, while bad subsidies have a negative effect on the other sectors.” Such goods and services contribute to an increase in the productivity of workers in the long-run, help mitigate regional disparity and bring about more equality across various socio-economic groups, and at the same time, can augment public expenditure in the long-run with an increase in welfare. Mid-day meal programmes, subsidy for development of Solar power, subsidised public transportation that can help decongest roads and curtail pollution while making transportation affordable are some examples that fall under this category as they aim at long-term development. 

On the other hand, we have economically draining subsidies, popularly referred to as Freebies. Although there is no legal definition of freebies, the Reserve Bank of India has clarified that they ‘cannot refer to merit goods or expenditures such as public distribution system, employment guarantee schemes, and states’ support for education and health facilities.’ Rather, they include provisions of free electricity, water, waiver of loans and bills, among other goods. Such freebies become a huge liability to the society, where the cost of such ‘free goods’ are borne by the taxpayers, which in India constitute less than 1%  of the population. 

Promises of such free goods and services have historically been a part of Indian Society and are not a new-age phenomenon. Between 1954 and 1963, the State Government of the erstwhile Madras state made provisions for free meals and free education. Though these were progressive measures, what followed were a whole range of freebies offered by political parties as a means for winning elections. Fierce competition for the vote bank saw various other parties promising 4.5kgs of Rice at ₹1, free coloured television sets, cash handouts, gas stoves, pieces of land, among other preposterous offerings. The incumbent Delhi government had promised certain units of free electricity and free water supply if it was elected in 2015 and similar proposals were made by the newly formed government in Punjab. 

So where exactly does the problem lie? 

Freebies put a massive strain on the State Government’s finances. Economists opine that if the State revenue is in surplus and the State Budget lies within the confines set by the Fiscal Responsibility and Budget Management Act (which is fixed at 3.5 per cent), the state government can afford to offer freebies. However, if it isn’t the case, state finances will get disrupted and may enter into a debt spiral to fulfil the promises of such freebies. According to K.R. Shanmugam, a debt is sustainable when the State Gross Domestic Product Ratio is 20 percent. However, various state governments are in a much dire situation when it comes to debt burden. For example, the state government of Punjab, which had promised to provide 300 units of free electricity and ₹1000 every month to every woman, has a debt burden of nearly 3 lakh Crore. 40% of the state revenue is spent on repayment of loans. Implementation of such policies were delayed because it would cost the government nearly ₹5,000 crores and ₹12,000 crores every month, completely draining its finances (C G, 2022). Similarly, the Andhra Pradesh Government had spent approximately ₹1.62 lakh crores on various freebies. This is significant, considering that the same government was contemplating mortgaging government lands and offices to generate revenue. Telangana’s debt is about 23% of GSDP (Gross State Domestic Product). Even the Central Government’s debt borrowing is around 60%. In such situations of high debt obligations, offering freebies becomes an unfavourable situation

Disruption of state finances and debt burden is one of the prominent reasons for the economic crisis in Sri Lanka. In 2019, President Rajapaksha won the elections on the promise of freebies in the form of tax cuts, which were reduced from 15% to 8%. This saw a massive fall in the annual revenue by a whopping ₹60,000 crore. This, coupled with other factors such as fall in revenue from tourism due to the pandemic, food shortage and inflation forced it to undertake large amounts of borrowings, with an increase in foreign debt by 175% in two years to approximately ₹2.66 Lakh crore. Lack of fiscal prudence pushed the country into a spiral of economic crisis. 

The collapse of the Sri Lankan economy should alert the Indian political parties of the dangers of overspending on freebies. Furthermore, priority sectors may be overlooked if the government focuses solely on offering attractive but ineffective freebies such as television sets, free transportation for all, including those who can afford it, and subsidised education for all without effectively identifying the target population. Such expenditures only become a burden on the taxpayer rather than truly benefiting the society. Moreover, the question arises if influencing voters by offering freebies is ethical in free and fair elections. 

For a welfare state like India, the government must provide economic aid to the citizens to improve their standard of living and curb widespread poverty and inequality. However, well-intentioned economic aid can be counterproductive if not implemented meticulously. This has been observed in cases of waivers on agricultural and rural loans. According to a survey conducted by NABARD All-India Rural Financial Inclusion, only 26% of rural households in Chhattisgarh, 35%  in Madhya Pradesh and 31%  in Rajasthan availed themselves of loans from any source during 2015-16 (Kumar & Bhatla, 2019). 58% of marginal and 48%  of small farmers don’t have access to rural credit provisions. Farmer suicides remain high and the advancements in technological state of agriculture are negligible. 

Billions of dollars have been spent in the country on freebies, terming this issue a ‘serious’ concern, Chief Justice NV Ramana and Justices A S Bopanna and Hima Kohli stated “The poor need to be fed but public welfare needs to be balanced because the economy is losing money due to freebies.” It is imperative for the government to focus on targeted subsidies by correctly identifying the target population, provision of freebies and subsidies in those areas that will lead to long-term increase in population productivity, and most importantly, maintaining financial stability. 

References

Business-Standard. (2022, August 21). Freebies make sense only if state budget has revenue surplus: Economists. Business Standard News. Retrieved November 11, 2022, from https://www.business-standard.com/article/economy-policy/freebies-make-sense-only-if-state-budget-has-revenue-surplus-economists-122082100143_1.html

Explained: The history of freebie culture that the AAP and centre are fighting over. Firstpost. (2022, August 12). Retrieved November 11, 2022, from https://www.firstpost.com/explainers/explained-the-history-of-freebie-culture-that-the-aap-and-centre-are-fighting-over-11048441.html

C G, M. (2022, July 20). Strong lessons from Lanka Crisis, says Govt, brings up freebies, Fiscal Health of Some States. The Indian Express. Retrieved November 11, 2022, from https://indianexpress.com/article/india/strong-lessons-lanka-crisis-govt-freebies-fiscal-health-states-8039850/

Kumar, A., & Bhatla, S. (2019, January 22). Loan waivers are no panacea for India’s farmers. Ifpri.org. Retrieved November 11, 2022, from https://www.ifpri.org/blog/loan-waivers-are-no-panacea-indias-farmers

Paliwal, A. (2022, April 6). Sri Lankan crisis puts spotlight on debt, Freebie Culture in India. India Today. Retrieved November 11, 2022, from https://www.indiatoday.in/news-analysis/story/sri-lankan-crisis-spotlight-on-debt-freebie-culture-india-1934280-2022-04-06

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