The Impact of Political Freebies on State Resources

INTRODUCTION:

Indian economy is made up by different types of stake holders. Some of them are financially stable while some of them still working hard to earn. Hence to come in flow of financial stable section the government implement various scheme, policies, etc. This scheme, policies often seen as free distribution of ration, free water, free food etc. It has become fashion for most of the political parties to invite attention of general people that is economically weaker section of society by giving or offering this above mention kind of free thing. It also known as in general way “freebies” in return take votes and win elections.

What is freebies?

The meaning of the word freebie, according to the dictionary, is something you are given for free. Also The RBI in its 2022 report defined freebies as “a public welfare measure that is provided free of charge”. It has distinguished freebies from long-term welfare measures. However, the Election Commission of India has not defined freebies in legal and objective terms.

However doing anything for the public is not said to be doing under pretext of welfare. Indian political party before election makes significant approach that how to lure people to vote in their favor for getting in to power. Hence they speak up saying by their manifesto that they will provide free gas, money etc. but how this money will be coming to this political party to promise this thing. It is interesting fact that this political parties used tax payer’s money without any justification.

They use this money to gain vote. This is becoming very common in our country. They give lollipop to downtrodden or illiterate people that they will if come to power give free basic need. It is important to note that what is basic thing is also not explain legally.

Freebies (Rewadi) vs Welfare Policies

In order to differentiate between these two terms, it is crucial to define a freebie. is something you are given free of cost. The Welfare Policies refer to the schemes that are well-targeted to those who need the most. It also includes subsidies and the construction of roads, bridges, hospitals, public education institutions, etc. For example, giving a free colored TV is a freebie but giving someone free education is

a welfare policy. Welfare Policies are “free” public services that are defined in the Union Budget and government programs. Also, these are carried out with the objective of public good and the welfare of all sectors of society. But when we look at freebies, something that is given to the public free of cost, especially as a way of attracting their support or interest in something. The problem of announcing freebies arises when political leaders enter elections without any manifesto.

There is a fine line between these two, distinguishing between a freebie and a welfare scheme requires the proper context of time and place. For example, when government provides life-saving medicines, food, or funds during times of natural disaster or pandemic to all, it will come under essential services, but in normal times, these schemes can be defined as freebies. The welfare measures like healthcare, education, electricity, etc. people cannot organize for themselves. So, they elect governments for that. How much of these welfare services should be free depends on the government’s fiscal space.

Terms like “irrational” or “freebies” are open to subjective interpretation and have no precise legal definitions. The answer to this question lies in the provisions of the Indian Constitution. The constitution lists the Directive Principles of State Policy, the guidelines that set up the socioeconomic conditions for citizens to live a good life. This constitutional provision explains the widespread acceptance of government freebies. The principles say that as India is a Welfare State, the Indian government must take steps to promote the economic and social welfare of its citizens. And government freebies, are after all tools for the welfare of people. Even though Government freebies are not against the law, when a Welfare State takes such steps, they are often criticized. And due to such decisions, the concept of a Welfare State has earned a bad reputation.

What is impact of freebies on state economic development and resources?

“Freebies are never free… especially harmful are subsidies that distort prices”. When political parties offer such schemes, they must be required to make the financing and trade-offs clear to voters. – RBI Monetary Committee.

Following are the state who introduced freebies and subsidies:

The government had as part of the Union Budget 2023-24 set up a four-member committee led by Finance Secretary T.S. Somanathan to review the New Pension Scheme (NPS) for government employees. More recently, the central government has extended the free food grain subsidy scheme by another five years at an estimated cost of Rs 11.8 lakh crore.

Freebies are for temporary period but it has colossal effect on economy which given below:

The debt-to-GDP ratio of Indian states is calculated by dividing the total outstanding debt of a specific state by its Gross Domestic Product (GDP) and multiplying by 100 to express it as a percentage. Here’s the formula:

Debt-to-GDP Ratio for States = (Total State Debt / State GDP) * 100

GDP and Debt to GDP data are sourced from PRS Legislative Research and compiled by Forbes India based on 2024-25 budget estimates* Data is for 2023-24

 The cost of these freebies for some states is estimated to be as high as Rs 96,000 crore or 2.2 per cent of a state’s GDP.

Raising fiscal deficit targets to pay the price

To pay for the exorbitant cost of freebies, state governments revise their targets for fiscal deficit, capex and revenue expenditure or revex, the spending incurred in the day-to-day running of government operations, in their budgets. Six states — Maharashtra, Madhya Pradesh, Rajasthan, Telangana, Tamil Nadu, and Odisha — revised their budgets recently.

All these states increased their revenue expenditure targets while five raised their fiscal deficit targets. On the other hand, only two states increased their capex targets marginally.

It is quite clear that this freebies increased unnecessary burden on the state economy

While political freebies can provide short-term relief to citizens, they often result in long-term financial strain on state resources and hinder sustainable development.

states in India like Tamil Nadu, Delhi, and Punjab are known to be some of the highest spenders on freebies. These states have implemented large-scale welfare programs, often designed to secure electoral support, that involve providing various freebies such as free electricity, rice, laptops, or transportation.

For example:

• Tamil Nadu has long been associated with offering freebies like free laptops, free rice, and subsidized or free electricity for farmers. These programs are designed to appeal to the state’s large rural population and have been a major component of the state’s electoral politics.
• Delhi under the AAP government has offered several freebies such as free electricity up to a certain limit and free water supply.
• Punjab has also made headlines for its free power supply to farmers and other subsidies.

In Maharashtra,Ladki behna yojana will costs Rs 46,000 crore every year. The state finance department pointed out that Rs 4,677 crore were already allocated for women and child welfare department entire year. Some malpractices are seen in this scheme many applicants were defaulters. (ex. 28 applications have been files in the name of one women). This scheme creates a direct fiscal burden on the state’s budget. This includes staff costs, infrastructure development and technology which is required for transparency. For ladki bahin yojana government, the state government may divert funds from other critical sectors like healthcare, agriculture, infrastructure development. State government may increase tax on other area like petroleum, medical and alcohol product. The schemes like ladki behna yojana increases dependency on government aid. This can increase the state’s future liabilities as beneficiaries continue to rely on state assistance and not try to moving out of economic dependency. It faces challenges related to inefficiency, leakages and corruption, particularly in rural area. Government faces burden due to this DBT. Himachal Pradesh government faces financial crisis which results into ministers, chief parliamentary secretaries (CPS) and Cabinet-rank are not able to withdraw salaries for 2 months.

During the 2022 assembly election in Punjab, the Aam Aadmi Party (AAP) made many promises, including free electricity. After the formation of the AAP government, some of these were implemented, but today, the situation is such that the debt burden on the government is continuously increasing and the state is trying to take more loans. The central government is also being accused of not giving money to the state, whereas the reality is that the state government is irresponsibly spending on freebies to garner votes. The situation is the same in Andhra Pradesh, Telangana, Rajasthan, West Bengal, Bihar, and Jharkhand.

Meanwhile, the central government is not in favour of states taking more loans because it is against the Fiscal Responsibility and Budget Management (FRBM) Act 2003. The states in debt due to expenditure on freebie schemes are unable to spend on the necessary responsibilities. Industries in Punjab are incurring high electricity bills because the AAP government is giving free electricity to nearly 60 lakh people.

Infrastructure development in the state is getting badly affected too. Punjab, once the state with the highest per capita income in the country, has slipped to the 19th position. Other debt-ridden states are suffering a similar fate.

In its 2024 election manifesto, Congress has announced Rs 1 lakh as an unconditional cash transfer to the poor every year as part of its Mahalaxmi Scheme. If the party comes to power, the implementation of such a scheme can be frightening. It’s notable that as of 31 March 2023, the total debt on the governments (central and state) in India (including the guarantees given by them) was Rs 231.7 lakh crores, which was 85.1 per cent of GDP at current prices. Out of this, the total debt of the central government is equal to 57.1 per cent of the GDP and the rest is of the state governments (nearly 28 per cent of GDP).

According to the FRBM Act, the target debt-GSDP (gross state domestic product) ratio, in any state, should not exceed 20 per cent. But as per the Comptroller and Auditor General of India (CAG), in many of the states of the country, this ratio is much more than the targeted one. It reached 48.98 per cent in Punjab, 42.37 per cent in Rajasthan, 37.39 per cent in West Bengal, 36.73 per cent in Bihar, 35.30 per cent in Andhra Pradesh, 31.53 per cent in Madhya Pradesh, 27.80 per cent in Telangana, 27.27 per cent in Tamil Nadu, and 26.47 per cent in Chhattisgarh in 2020-21. If the debt on state government enterprises and the guarantees given by the state governments are also added, then by 2020-21, the debt to GSDP ratio in Rajasthan would be 54.94 per cent and in Punjab, it would be 58.21 per cent. In Andhra Pradesh also it has been estimated at 53.77 per cent; it is 47.89 per cent in Telangana and 47.13 per cent in Madhya Pradesh. In West Bengal and Bihar, it’s 40.35 per cent and40.51 per cent, and in Tamil Nadu, 39.94 per cent. It is noteworthy that in Punjab, 45.5 per cent of the total tax revenue is being spent on free schemes and in Andhra Pradesh, expenditure on freebies is 30.3 per cent of total tax revenue. It’s unfortunate that the increase in the overall debt due to irresponsible freebies is causing the downgrade of sovereign ratings by international agencies.

If the Mahalaxmi Scheme proposed by the Congress is implemented, then at least Rs 10-12 lakh crore will have to be made available for the purpose. Some of the possible effects would be as follows. First, due to limited taxation, capital expenditure will be the first victim. This means that infrastructure, industrial and agricultural development, and other capital expenditure will be cut. If we look into the history, in the 10 years of United Progressive Alliance (UPA) rule, the total capital expenditure increased from Rs 1.09 lakh crore in the year 2003-04 to just Rs 1.88 lakh crore by the year 2013-14, that is, an increase of mere 72 per cent. Whereas during Narendra Modi’s tenure as Prime Minister, it reached Rs 10.01 lakh crore by 2023-24, that is, an increase of 433 per cent. The effect will be that development will come to a halt under the Congress, due to which tax receipts will also decrease in future.

Second, the government will have to borrow hugely, the effect of which will be that the future budget outgo on interest will increase and the future budgets will also be in jeopardy.

Third, deficit budgets will have to be made; the FRBM Act will have to be dumped, causing inflation to increase.

A June 2022 Reserve Bank of India paper offers a context to the ongoing freebie debate. It says: “In the recent period, state governments have started delivering a portion of their subsidies in the form of freebies.”

The report further adds that the “provision of free electricity, free water, free public transportation, waiver of pending utility bills, and farm loan waivers are often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidization eroding incentives for private investment, and disincentives work at the current wage rate leading to a drop in labour force participation. The paper highlights that freebies spawn economic inefficiencies. However, it adds that targeted ones “with minimal leakages” may benefit the poor. The rollout therefore must carefully weigh costs and benefits.

An analysis of the list of recent schemes given at the end of the RBI paper alongside inputs from India Today reporters spread across the country shows that most of the welfare schemes have three intended beneficiaries: below the poverty line (BPL) families, farmers, and women.

The Rs 500 crore scheme in Jharkhand, for instance, to give dhoti/lungi and saree at a discounted price of Rs 10 twice a year to 57 lakh families is meant for BPL families. The source of Jharkhand’s burgeoning subsidy burden, however, lies elsewhere. The state has earmarked a whopping Rs 6,655 crore in 2022-23 to offer subsidies to farmers and poor households for electricity consumption.