Context

• The debate that began with an RBI 2022 report on state finances followed by Prime Minister Narendra Modi’s comment on revdi culture aka freebies, has garnered substantial attention so much so that the Supreme Court is hearing on this issue. Freebies have now assumed more importance than ever.

What are freebies?

• Freebies could be defined as non-merit subsidies. The term Freebies is not new; rather it is a prevalent culture in Indian politics (in the name of socialism).
• The political parties are always trying to outdo each other in luring the Indian voters with freebies.

What are Subsidies?

• Subsidies are money transfers (implicit or explicit) by the government in an attempt to drive prices artificially below market prices.
• As a National Institute of Public Finance and Policy (NIPFP) study by Sudipto Mundle and Satadru Sirkar puts it, budget subsidies, in particular, are defined as the unrecovered cost of economic and social services.
• However, all subsidies cannot be easily classified into merit or non-merit.

What are the objectives behind providing freebies?

• Welfare state: It could be said that providing freebies empowers the state to, first, deliver welfare as a welfare state should, by providing subsidised merit goods like health and education;
• Combating poverty: To help households combat poverty (especially in economically stressed times characterised by fewer job opportunities, lower incomes, high inflation, etc.) by providing subsidised public goods like food, electricity, etc.
• Populist spending: To appeal to the electorate through outright populist spending.

Question of classification between a merit and a non-merit freebies?

• Blur Boundary: The boundaries between the aforementioned objectives begin to blur when it comes to classifying one form of freebie as a merit or a non-merit subsidy.
• Few examples: Are corporate tax cuts non-merit subsidies or a measure to boost investment? 2. Is making bus rides free for women in the national capital a non-merit subsidy or a way to boost women’s mobility and labour-force participation? 3. Are free laptops to students in Tamil Nadu not a way to bridge the digital divide in education?
• Varying definition: The existing arguments develop an understanding that freebies cannot be defined in a finite context, and that the definition varies across space and economic conditions.

How freebies impact revenue of the state?

• Adverse impact on revenues: Regardless of which one gets classified as good or bad, freebies are simply expenditures or foregone revenues. Any freebie-induced debt burden could have an adverse effect on the state finances if, one, it hasn’t been properly accounted for through transparent budgeting procedures (including off-budget borrowings in debt calculations)
• Increase in Fiscal deficit: Either way, they lead to an increase in fiscal deficit whose financing could necessitate taking on debt. It threatens fiscal sustainability, i e, it limits the state’s ability to service its debt-related commitments without making an unrealistic fiscal adjustment.
• Lack of data leading to leakages: The targeting of beneficiaries to ease the burden on the exchequer is one way to check these expenditures but lack of data has forced a situation wherein leakages and duplication of beneficiaries is commonplace.
• Jeopardises long-term growth and development: In the absence of adequate avenues of revenue mobilisation, any fiscal adjustment achieved by contracting critical expenditures on the social sector and capital formation further jeopardises long-term growth and development. The emanating risk of fiscal sustainability means a “revdi” today would take a toll on tomorrow’s generation.

What could be the solution?

• Setting up an independent fiscal council: Setting up an independent fiscal council that has been recommended by the FRBM Review Committee (2017), and recently constituted Finance Commissions too, including the 15th Finance Commission.
• Providing information and advisory: FRBM report says, the council will serve both an ex-ante role providing independent forecasts on key macro variables like real and nominal GDP growth, tax buoyancy, commodity prices as well as an ex-post monitoring role, and also serve as the institution to advise on triggering the escape clause and also specify a path of return.
• Monitoring finance: Such a council should work for the union as well as the states. Monitoring of finances and fiscal rules could also help ensure that states comply with a medium-term fiscal policy framework, which has been long argued for by economists.

Conclusion

• Freebies cannot be defined easily, and constitutionally, any state government should be empowered to spend the way it wants, provided the fiscal policy is sustainable. The message from the freebies debate is to make informed economic decisions whilst attending to key development objectives.

Mains Question

Q. There is nothing wrong in having social security programme that aims to lift the poor get out of poverty and empower the vulnerable sections of the society. In this context, where do you see the goal of sustainable economic development? Comment.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now