The 360° UPSC Debate | Are Freebies a Gateway to Financial Disaster?

“The widespread distribution of non-essential products such as mixer grinders, laptops, televisions, or gold jewellery can have a detrimental impact on government revenue”

The term ‘freebie’ in the dictionary refers to an item or service that is offered or delivered without any cost. In a bulletin published in June 2022, the Reserve Bank of India (RBI) issued a definition for the term ‘freebies’ as a form of public welfare programme that is offered without any cost. The Reserve Bank of India (RBI) asserts that freebies can be differentiated from public or merit goods, such as education and healthcare, as well as other state expenditures that yield broader and enduring advantages. Nevertheless, discerning between welfare goods, often referred to as ‘merit’ goods, and freebies or ‘non-merit’ products poses a significant challenge. Scholars have underscored the significance of merit goods, such as free or subsidised food, education, shelter, and healthcare, in expediting human development and subsequently fostering national economic progress.

Nevertheless, the widespread distribution of non-essential products such as mixer grinders, laptops, televisions, or gold jewellery can have a detrimental impact on government revenue. According to N K Singh, the former chairman of the 15th Finance Commission, it is imperative to express concern against the prospect of emulating the culture of competitive freebie politics. This apprehension is supported by a comprehensive analysis consisting of seven distinct causes. To begin with, the provision of freebies undermines the fundamental structure of macroeconomic stability. The allocation of resources is distorted by the political practise of providing free goods or services.

Expenditures are being focused on various forms of subsidies. Consequently, what implications does this have for the fiscal sustainability of states that are already burdened with debt? Another concern that arises is the distortion of expenditure priority. Furthermore, the matter of intergenerational equity contributes to heightened social disparities as a result of the misallocation of expenditure priorities away from items that promote economic growth. One aspect to consider is the diversion of resources from environmental and sustainable development, such as the allocation of free electricity or a specific quantity of free power, water, and other consumable products. This diversion hinders the progress towards renewable energy and overall environmental sustainability. Furthermore, there is a distortion in the allocation of agricultural priority. This phenomenon has implications for agricultural practises that do not rely heavily on the intensive utilisation of water and fertilisers.

Furthermore, the detrimental impact it has on the future of the industrial industry. This prompts the inquiry as to whether it is now appropriate to contemplate the implementation of remedial measures such as subnational bankruptcy. The provision of freebies raises concerns regarding the distinction in market behaviour between states that engage in excessive spending and those that do not, as well as the feasibility of establishing a system to address the potential insolvency of subnational entities.

BJP MP Varun Gandhi asserts that on an annual basis, both central and state governments extend the provision of privately-owned commodities, such as LPG cylinders, to the general populace, accompanied by subsidies and, in certain instances, complete coverage of expenses. Does the adoption of such policies imply that Indian authorities have relinquished their efforts to address poverty and inequality? Rather than prioritising the development of public assets, social capacity, and society, policymakers in India appear to have shifted their focus towards implementing direct transfers and welfarism through the provision of private commodities at no cost.

He adds further that several states may encounter challenges in financing the recently announced complimentary offerings. For instance, Andhra Pradesh disclosed freebies for the fiscal year 2023 that would utilise approximately 30.3% of its tax revenue. Similarly, Madhya Pradesh’s allocation for freebies was nearly 28.8%, Punjab’s was around 45.4%, and West Bengal’s amounted to 23.8% of their respective tax revenues (RBI Bulletin, June 2022). In the preceding five-year period, financial institutions have recorded loan write-offs amounting to ₹10 lakh crore, with public sector banks accounting for a substantial portion of non-performing asset (NPA) write-offs, often ranging from 60% to 80%. However, the tradition of offering free items or services persists and is still being encouraged.

In the 2013 case S. Subramaniam Balaji vs. Government of Tamil Nadu, the Supreme Court looked at these questions and said that they were about law and policy. Also, it upheld the distribution of TVs or consumer goods because programmes that helped women, farmers, and the poor were in line with the Directive Principles. As long as public funds were spent based on appropriations approved by the legislature, they couldn’t be called illegal, and promising such things couldn’t be called a ‘corrupt practice’. It had, however, told the ECI to come up with rules about what should be in manifestos. After that, the ECI added to its Model Code of Conduct a rule that parties shouldn’t make promises “that taint the election process or put too much pressure on the voters.” It also said that only promises that could be kept should be made, and that party platforms should explain why a stated welfare measure is important and how it will be paid for. Any other step, like separating welfare measures from populist sop and pre-election bribes, or adding to the responsibilities of fiscal duty and fiscal prudence, should come from the legislature. Even though lawmakers always want ‘freebies’ that shouldn’t be a reason to avoid Parliament.

RBI’s Department of Economic and Policy Research, led by Michael Debabrata Patra, wrote a study about the fiscal risks that Indian state governments face, focusing on the states with the most debt. Based on the debt-to-GDP ratio in 2020-21, states with the most debt are Punjab (53.3), Rajasthan (39.5), Bihar (38.6), Kerala (37.2), Uttar Pradesh (34.9), West Bengal (34.2), Jharkhand (34.0), Andhra Pradesh (32.5), Madhya Pradesh (31.3), and Haryana (29.4). About half of all the money that Indian state governments spend goes to these 10 states. The report also talked about the ‘quality of spending’ by states. It said, “The share of revenue spending in these states’ total spending varies between 80% and 90%.” Some states, such as Rajasthan, West Bengal, Punjab, and Kerala, spend about 90% of their income. This makes their spending bad, as shown by their high ratios of income spending to capital spending. Even though income spending helps people, it only has an effect on the economy for about a year. The benefit of capital expenditures, on the other hand, is stronger and lasts longer, reaching its peak after two or three years.

Argument 2: Freebie promises have helped further democracy

“The ‘freebie’ promises like inexpensive food and free utility items have actually done a lot to advance the democratic goal”

The Directive Principles of State Policy, enshrined in Part IV of the Indian Constitution reflect that India is a welfare state. More specifically, Article 38 in the Constitution says that: The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life; and the State shall, in particular, strive to minimize the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only among individuals but also amongst groups of people residing in different areas or engaged in different vocations. Establishment of a welfare state is a conscious policy which entails the outflow of public resources for improving the quality of life for all citizens, including those who are unable to avail themselves of the bare necessities of life

S.Y. Quraishi, former Chief Election Commissioner said the ‘freebie’ promises like inexpensive food and free utility items have actually done a lot to advance the democratic goal. Since the introduction of Rs 1-2 kg rice, no one has died of starvation. The distribution of bicycles boosted girls’ enrolment and retention in schools in Bihar. The rural poor have seen visible relief as a result of employment guarantee programmes.

Oxfam’s annual report on inequality in India for 2022 contains some troubling insights. As the wealth of its dollar billionaires increased, the number of impoverished doubled to 134 million. The richest 1% have acquired 51.5 percent of total wealth, while the bottom 60% of the population has only 5%. All of these indicators plainly paint a picture of a more contentious and unequal nation. Critics have pointed out that provisions for impoverished beneficiaries are referred to as ‘revdi’, whereas state-sponsored assistance to the wealthy is referred to as incentive. In September 2019, the government reduced corporate tax rates for domestic enterprises from 30% to 22%, and for new manufacturing companies from 25% to 15%. This decision was implemented by the government in about 36 hours. According to the Oxfam analysis, these business cuts resulted in a loss of 1.5 lakh crore.

The Oxfam report additionally emphasised that the government successfully offset the deficit in direct taxes, including income tax, company tax, and capital gains tax, through the implementation of heightened indirect taxes, including goods and services tax, excise, and customs duty, during the duration of the pandemic. This phenomenon resulted in an increase in fuel prices, which subsequently affected the pricing of necessary goods, particularly food grain, thereby disproportionately harming individuals with lower socioeconomic status. These policies have been identified as the primary contributing factor to the exacerbation of wealth inequality, as evidenced by the widening gap between the affluent and the less privileged.

Concurrently, the national minimum wage has remained stagnant at Rs 178 per day since the year 2020. According to the World Food Programme, India currently harbours almost 25% of the global population suffering from undernourishment. In light of the prevailing socio-economic circumstances, it is imperative to reassert the significance and indispensability of our welfare initiatives, while emphasising the pressing requirement for their expansion. The most fundamental role of a democratic state is to ensure the provision of food, education, and jobs to its population.

The yearly report on inequality in India by Oxfam for the year 2022 presents a multitude of disconcerting and striking facts. The population living in poverty experienced a twofold increase, reaching a total of 134 million individuals, coinciding with a doubling of wealth among dollar billionaires. The top 1 percent of individuals have accumulated 51.5 percent of the overall wealth, but the below 60 percent of the population possesses a meagre 5 percent. All these facts unequivocally imply a portrayal of a nation that exhibits more fragmentation and inequality.

Bastian Steuwer, a political philosopher affiliated with Ashoka University, presents a significant argument against the provision of ‘freebies’ that centres around issues of fiscal responsibility. Budgetary constraints are inherent in all circumstances. However, it is noteworthy that the primary emphasis of the discourse revolves only upon reducing fiscal outlays on initiatives that impact individuals with lower socioeconomic status. The budget can be effectively balanced through the reduction of expenditures allocated towards nonessential initiatives, thus minimising wasteful spending. Revenue creation is an essential aspect to consider in any budgetary framework. A tiny proportion of the Indian population contributes to the payment of income taxes. One contributing factor is the issue of tax avoidance. However, it is worth noting that a significant proportion of households generate insufficient income to meet the threshold for income tax liability. Individuals with an annual income below Rs 5 lakh are granted complete exemption from income tax. The threshold is consistently raised. The corporate media frequently portrays increases as a contradictory source of relief for the general public.

According to a recent report released by the Economic Advisory Council, those who earn a monthly income of Rs 20,000 are positioned among the uppermost decile, encompassing the top 10 percent of all income recipients. This analysis fails to acknowledge the absence of wealth tax or inheritance tax in India. If an individual is concerned with achieving budgetary equilibrium, would it not be more logical to initiate taxation measures targeting the affluent rather than prioritising welfare expenditures for individuals who are less fortunate?

Why do freebies still matter even after 75 years of independence, say experts. Depending on whose side of the social gap you are on, the response would vary. These welfare programmes are seen as a waste of tax dollars by those who are ineligible for them. Although more than 40% of government revenue comes from indirect taxes paid by all people of the nation, this section of society only narrowly associates tax with income tax. In addition to paying taxes, the poor also subsidise the luxury by providing cheap labour and/or making natural resources, such as land, available at significantly lower costs than the market. Without accounting for the negative wage growth in 2020, the real wage rates for rural agricultural workers and non-agricultural workers rose at annual rates of 1.82 percent and 0.94 percent from 2016 to 2022, respectively. Any assistance, whether it be in the form of free rice, free power, or even a sari, greatly aids in keeping them afloat. The free tablet distribution reduces the digital divide. Free bus fares make it easier to get to work by covering the expense of transportation. Beneficiaries may search for better occupations that are located farther away. It is now understood how providing free power, health care, and education can benefit society and promote rapid economic growth.

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