Consensus among political parties is needed to avert the financial disaster that freebies will lead to in the long run
India has already suffered a lot because of freebies. Unfortunately, all the regional parties, and to some extent the Bharatiya Janata Party and the Congress, indulge in mindless populism and imprudent welfarism. There can be justification for free education and healthcare, but none for the distribution of grinders, washing machines, television sets, laptops, subsidised pilgrimages, free electricity, and farm loan waivers.
Freebie culture is blamed on political elites only, while bureaucrats drafting policy go scot-free. The judicial system conveniently ignores its responsibility to correct the course since it will displease the political class and, of course, the media will never discuss the issue since the government advertisement inflows will be hurt. The poor taxpayers of the country enjoy the visual site of watching their own elected government ripping hard-earned money distributed to large sections of the population seeking the comfort of sitting at home since the government has no vision to generate employment for a dignified living. It is all about failed governance and bribing voters to overcome this monumental failure.
Real income growth of the bottom 30 per cent of Indians slowed down from 1992 when India first began ‘opening up’ and ‘liberalising’ its economy by encouraging the private sector. Since everyone has a vote, that means politicians cannot ignore them. The sops and freebies to the poor buy the requisite votes. It is a small price that India’s affluent have to pay to ensure the economy continues to disproportionately reward them.
The political parties in India try to outdo each other in luring the Indian voters with assorted goodies called freebies. This trend has gained more momentum in recent times with the political parties being innovative in their offerings as the ‘traditional free water and electricity is no longer sufficient as election goodies. The political dialogue built around freebies is fraught with danger as it shakes the root of free and fair elections to a large degree.
The unviable pre-election promises adversely affect the informed decision making by voters. This calls for fixing the gaps in the design, execution and accountability of freebie culture. It is not that nobody earlier warned against the consequences of populism. It is a “race to the bottom” and “a quick passport to fiscal disaster.”
The results are for all to see. A recent RBI study said, “We can identify a core subset of highly stressed states from among the 10 states identified by the necessary condition, i.e., the debt/GSDP ratio. The highly stressed states are Bihar, Kerala, Punjab, Rajasthan and West Bengal.” GSDP is the state GDP. The states with the highest debt-to-GSDP ratio in 2021-22 include Punjab at 53.3 per cent, Rajasthan at 39.8 per cent, West Bengal at 38.8 per cent, Kerala at 38.3 per cent, and Andhra Pradesh at 32.4 per cent, whereas the Fiscal Responsibility and Budget Management (FRBM) Act recommended a debt-to-GDP ratio of 20 per cent for state governments (40 per cent for the Centre) by the financial year 2022-23. This level of debt is extremely concerning and is largely the result of committed expenditure and subsidies under populist schemes coupled with slow growth in revenues.
Most of the states, however, post a healthy picture of their finances which is aided by the fact that much of the borrowing that funds these freebies happens off-budget, beyond the pale of FRBM tracking. The States borrow on the books of their public enterprises by pledging future revenues to the State as a guarantee. Effectively, the burden of debt is on the State exchequer, albeit well concealed.
The debt-GSDP ratio of Punjab is the worst, and worsening. Instead of being concerned that the state debt to GSDP ratio has not gone below 40 per cent for the past six years, the Aam Aadmi Party (AAP) government instead announced that around 51 lakh households won’t pay any electricity bills from September. This is in accordance with the AAP’s election promise of 600 units of free power per billing cycle starting from 1 July 2022.
A case in point is Latin America which provides key learning lessons on populist politics. Populism was active during the 1920s through to the 1970s, when the working poor united behind icons like Brazil’s Getúlio Vargas and Argentina’s Juan Perón over their dissatisfaction with industrialisation. Populist governments resorted to inflationary financing to grant benefits to the poor. By the 1980s, uncontrolled public spending resulted in excessive fiscal deficits, unsustainable public debt and intractable inflation. Latin America’s ‘Lost Decade’ followed.
Growth at 5.6 per cent in the 1970s shrank to 1.3 per cent and stagnated for another decade. By the 1990s, inflation had reached 1,000 per cent in countries like Brazil, and the poor suffered exponentially. Large economies including Mexico, Argentina and Brazil languished, and up to half of Latin Americans slid into poverty. It will augur well for India and its political stakeholders to imbibe the lessons of Latin America and how the first generation of fiscal reforms introduced in Latin America introduced political stability in the early 2000s. Going down the same path as Latin America may result in a ‘lost decade’ for India also.
The problem with freebies is a political one; the way out is simple: all parties (at the Centre and in states) sit down together and draw a list of don’ts, a negative list of things that none of them would do. With states running astray, it is the responsibility of the Centre to work together with states to advocate fiscal conservatism while ensuring states still retain their freedom in the spirit of federalism. This requires the Centre to walk a tightrope and requires strong visionary leadership at the helm. More emphasis and confidence should be placed in the legislation already in place to check fiscal spending which is the FRBM Act.
Constructive debate and discussions in Parliament are difficult since the freebie culture has an impact on every political party, whether directly or indirectly. Therefore, judicial involvement is required in order to propose measures. The Election Commission of India can anticipate enforcing the ‘Model Code of Conduct’ for ‘Guidance of Political Parties and Candidates’ effectively to regulate election manifestos in order to prevent the manipulation of informed voter behavior.
Since getting elected is not a license to kill, the elected representatives must not act arbitrarily. The system of monarchy and practicing democracy have a clear distinction, wherein in the latter system the leader is accountable for all the actions, while in the office including the finances and its management. In India, many regional and even national leaders consider themselves the incarnation of god. The reckless way these leaders spend public money is just unacceptable in an orderly society and there have to be reasonable restrictions to be imposed on them while they systematically corrupt the society by offering freebies over quality governance, so as to safeguard the macro interest of the society and the growth of the country.
(The author is a policy analyst)
