Are Freebies affecting the Economic Growth of India?

Are Freebies affecting the Economic Growth of India?

The recent economic and humanitarian crisis in Sri Lanka has prompted a debate on state’s role. The government of Sri Lanka cut taxes across the board and provided several free goods. Its consequences are seen today, the economy has collapsed and the country was left with no choice but to default on its commitments.

The freebies given by Indian states has come under the lens now. Freebies have become an integral part of politics in India, be it for making promises to gain electoral gains or staying in power.

What constitutes Freebies?
• Political parties promise to offer free electricity/water supply, monthly allowance to unemployed, daily wage workers and women as well as gadgets like laptops, smartphones etc. in order to secure the vote of the people.
• The states have become habituated to giving freebies, be it in the form of loan waivers or free electricity, cycles, laptops, TV sets and so on.

Why Freebies are necessary?
• There are some examples which show that some expenditure outlays do have overall benefits such as the Public Distribution System, employment guarantee schemes, support to education and enhanced outlays for health, particularly during the pandemic. They help in increasing the productive capacity of the population and help build a healthier and a stronger workforce.
• States like Tamil Nadu and Bihar are known for giving women sewing machines, saris and cycles, but they buy these from budget revenues, contributing to the sales of these industries. It can be considered a boost for the supplier industry and not a wasteful expenditure, given the corresponding production.
• The states that have lower level of development for them such freebies become necessary. They are need/demand based and it becomes essential to offer the people such subsidies for their own upliftment.

Possible negative impacts of Freebies:
• The freebies are against the principles of macroeconomic stability. It distorts expenditure priorities and outlays remain concentrated on subsidies of form or the other.
• Offering freebies, ultimately, has an impact on the public exchequer and most of the states of India do not have a robust financial health and often have very limited resources in terms of revenue.
• As per the Fiscal Responsibility and Budget Management (FRBM) rules the states can’t borrow beyond their limits and any deviation has to be approved by the Centre and central bank. Therefore, while states have flexibility on how they choose to spend their money, they cannot in ordinary conditions exceed their deficit ceilings.
• It is against the principle of Free and Fair elections. It amounts to an unethical practice that is similar to giving bribes to the electorate.
• Giving away loan waivers in the form of freebies may have undesired consequences such as destroying the whole credit culture.
• When the freebies are about giving free power, or a certain quantum of free power, water and other kinds of consumption goods, it distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
• Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure that enable high-factor efficiencies in the manufacturing sector.

Way Forward
• India is a large country and there is still a huge set of people who are below the poverty line. It is also important to have all the people accommodated in the development plan of the country. The judicious and sensible offering of freebies or subsidies that can be easily accommodated in the states’ budget do not do much harm and can be leveraged.
• Ideally, a proportion of state expenditure should be earmarked to ensure better overall utilization of resources.
• Also, it becomes essential to distinguish between subsidy and freebies. Subsidies are justified and specifically targeted benefits that arise out of demands. Although every political party has a right to create subsidy ecosystems to give targeted needy people the benefits, there should not be a long-term burden on the economic health of the state or the central government.