Freebies, a surefire recipe for disaster

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Freebies, a surefire recipe for disaster

Friday, 17 November 2023 | Ashwani Mahajan

Due to political reasons, the Govt is less likely to be interested in curbing freebies, so other organs of the state like the judiciary should come forward to oppose it

Election is the time for political parties to inform voters about their policies and proposed programs, through their election manifestos. In the past, all political parties have been wooing voters with their promises in the form of programs, but the nature of election promises has changed in the last decade and a half. In these promises, instead of policies and programmes, the announcement of cash transfers and free schemes has taken precedence over policies and programs. Announcement of various freebies, including cash transfers to women, farmers, students and sometimes minorities and weaker sections, free electricity, free water, free travel to the entire women etc., has now become a common phenomenon.

In Madhya Pradesh, apart from waiving off the loans of farmers, the Congress party has also announced many other free schemes like free electricity, gas cylinder subsidy, Rs 1500 per month to women, unemployment allowance of Rs 3000 to youth etc. Similar announcements have been made by different political parties in Madhya Pradesh and other states going into elections. Every possible effort is being made to woo the voters. In such a situation, it is a matter of concern, whether this is a healthy trend for our democracy. Will our governments be able to fund these free schemes? Will the debt burden on state governments increase 

Increasing debt in states

This trend of freebies is now spreading in many states of India. In the elections to be held this month, political parties have made a series of announcements of freebie schemes. We are hearing daily about free electricity, free transport, transfer of money to women, unemployment allowance to youth, etc. along with free vehicles and many other freebie schemes. Some time ago, the Reserve Bank of India and the Comptroller and Auditor General of India (CAG) published data in their respective reports about the increasing debt of the states due to freebies and have expressed concern over these freebie schemes and rising debt burden of the states.

According to the Fiscal Responsibility and Budget Management (FRBM) Act, the target debt-GSDP (gross state domestic product) Ratio, in any state, should not exceed 20 percent. But as per CAG, in most 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. If the debt on state government enterprises and the guarantees given by the state government 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 and 40.51 per cent respectively, and in Tamil Nadu, it is 39.94 per cent. CAG also reported that the debt of the states is continuously increasing compared to the target ratio. Regarding Andhra Pradesh, the Reserve Bank says that after Punjab, Andhra Pradesh is the second state in the country with the highest spending on free schemes. 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. Talking about the state's GDP, in Punjab 2.7 percent of the state GDP is spent on free schemes annually and in Andhra Pradesh it is 2.1 percent. Apart from this, in Madhya Pradesh, 28.8 per cent of the tax revenue is spent on subsidies, and in Jharkhand, it is 26.7 per cent.

Impact on essential expenditure

When a province spends such a large proportion of its tax revenue on free schemes, not only capital expenditure on infrastructure would go down, due to increasing debt of the state governments, but social services like education and health as well as transport and other essential services will also be impacted. For the development of any state, it is imperative to increase investment in infrastructure. Lack of infrastructure affects investment and hence the development of the state. Therefore, it is necessary to speed up the development of the country by curbing the free schemes offered by the states.

Impact on ratings Due to increasing debt the economic rating of the country is being impacted. If this continues, our country will not only have difficulty in getting new investments but our companies and government will also have to pay higher rates of interest on borrowing from foreign countries. That is, increasing debt is not only creating fiscal imbalance but is also affecting the ability of state governments to run welfare schemes and is also blocking the path for the development of the country and industry in particular.

(The writer is a professor at PGDV College, Delhi University; views are personal)

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