The Politics of Freebies

Doles and freebies vitiate the electoral process and impair voters’ judgement of the credentials of the contesting candidates. Voters become passive, and unsophisticated actors, who can simply be bought. This malice does not stop at the voter’s level, it has begun to spread to purchase of elected candidates, making a mockery of the fundamentals of democracy

By Dr. Mohan Kanda
  • Freebies also include ‘club goods’ such as televisions and gold chains but also welfare schemes such as subsidised rations under Public Distribution System
  • Supply of zero tariff power to the agriculture sector has encouraged mindless mining of groundwater, depleting the aquifers and use in excess
  • PM Modi and BJP repeatedly campaigned ‘world’s largest food security programme’ distributing free foodgrain, through the PMGKAY
  • In mid-1990s, the government rolled out its widest-ever waiver of agricultural bank loans with favourable conditions for all, including willful defaulters

Prime Minister Narendra Modi recently warned the youth of the country not to get carried away by the ‘revdi’ culture, or votes being sought by promising ‘freebies’. He hit out at the Opposition parties for offering freebies and said that this was dangerous and harmful to the development of the country. In the same vein, a bench of the Supreme Court of India, while dealing with a public interest litigation (PIL) petition, commented against the promise of ‘irrational freebies’ that these would distort the electoral process. The bench also remarked that freebies were a serious issue and asked the Central government to take a stand on the need to control the announcement of freebies by political parties during election campaigns. It also suggested that the Finance Commission be asked to look into the matter and propose solutions. The petitioner had argued that “irrational freebies” were “analogous to bribery”. This view was echoed by the Solicitor General, Tushar Mehta, also, in his submission, argued that “populist freebies distort the informed decision-making of the voter”. Doles and freebies vitiate the electoral process and impair voters’ judgement of the credentials of the contesting candidates. Voters become passive, and unsophisticated actors, who can simply be bought.

This malice does not stop at the voter’s level, it has begun to spread to the purchase of elected candidates, making a mockery of the fundamentals of democracy. What, can one expect, will be the ethical and moral standards of the legislatures comprising such morphed representatives of people?

EXPLORING SUBSIDISATION

In a developing country, and a large one such as India, with diverse ethnic, agro-ecological, climatic, and economic conditions, a certain degree of subsidisation is essential. Subsidies are intended to protect consumers by keeping prices low, but they come at a high cost. They, however, come with sizable fiscal costs, increasing the fiscal deficit, causing great borrowing, less spending and promoting inefficient allocation of an economy’s resources, while also encouraging pollution. Diverting subsidies to better-targeted social spending, reduction in inefficient taxes, and productive investments can promote sustainable and equitable outcomes.

In a developing country, and a large one such as India, with diverse ethnic, agroecological, climatic, and economic conditions, a certain degree of subsidisation is essential. Subsidies are intended to protect consumers by keeping prices low, but they come at a high cost

Some examples of subsidies are those that pertain to food, electricity, irrigation, elementary education, and health. Tax exemptions for businesses that are meant to encourage the setting up of new factories or plants in underdeveloped zones also constitute subsidies emergency funding intended to improve the production and productivity of certain sectors, which otherwise would have suffered from inadequate capital, are still another form of subsidies whereby a qualified pool of employees gets an opportunity to work in relatively new industries. This, in turn, contributes to the GDP development of India as the beneficiaries start working after gaining knowledge through subsidised education.

Subsidies can be of different varieties. Direct subsidies involve financial aid to specific sectors through fund transfers, such as LPG subsidies, subsidies on food under PDS, etc. These initiatives directly impact the course of businesses. Indirect subsidies, on the other hand, refer to steps taken by the government to reduce industry production costs. They do not involve direct cash payments to that specific industry. Low interest on bank loans and tax breaks are examples of indirect subsidies.

ADVANTAGES AND DRAWBACKS

Though one advantage of subsidies is an increase in the supply of goods, a shortage of supply can also occur. This is because lowered prices can lead to a sudden rise in demand that many producers may find very hard to meet, causing a spurt in demand leading to, that, causes an increase in prices.
Broadly speaking, investments are financially superior to doles and subsidies. For example, a study has shown that redirecting the support currently being extended to food and fertilisers will, over a period of about five years, be enough to complete all the incomplete medium and major irrigation projects in the country.

A glaring example of public money spent unproductively, in fact, dangerously, is that of the writing off of loans to the agriculture sector, by the central and state governments, at various times so is the subsidy for timely repayment of agricultural loans. That, in spite of repeated and well-considered advice by the Reserve Bank of India (RBI), and the National Bank for Agriculture and Rural Development (NABARD). In fact, some states contested the RBI/NABARD directives in courts of law stating that such directives cut into the sovereignty of the governments. The courts upheld the autonomy of the duly constituted statutory regulatory institutions in the interest of safeguarding the ‘ethical standards of banking’ and the governments had the choice to borrow or not to borrow from the apex bankers respecting their regulatory discipline.

DOLE OUT SUBSIDIES

In the mid-90s, the then government of India rolled out the biggest-ever waiver of agriculture bank loans on liberal terms, across the board including loans of willful defaulters. Then followed the waivers and subventions by states, unstoppable and it has become a matter of routine, year after year, elections or no elections.

It is regrettable that the World Bank, which has been extending liberal soft and substantial credit support through its International Development Association (IDA) window to NABARD since 1975, in the late 1980s, had to stop its credit support to NABARD as a protest against the persistence, on to the part of the governments, both central and state, in across-the-board debt waivers and subventions.

Other examples include free power tariffs to agriculture and levy of insufficient water rates in the command areas of irrigation projects. Supply of zero tariff power to the agriculture sector has encouraged mindless mining of groundwater, not only depleting the aquifers but also resulting in the use of water in excess of the requirement. In fact, as the father of the Green Revolution, Dr M S Swaminathan has had occasion to point out, even the ‘water sanctuaries’, meant for future generations, are being used up in the process.

Many dole and freebies are currently offered by various political parties, such as sewing machines, dhotis, sarees, sheep and goats, the Rythu Bandhu scheme in Telangana and similar schemes in other states, such as also the Pradhan Mantri Kisan Samman Nidhi – scheme at the national level.

Prime Minister and members of the Bharatiya Janata Party repeatedly campaigned ‘world’s largest food security programme’ distributing free foodgrain, through the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) to more than 80 crore ration cardholders.

Freebies also include ‘club goods’ such as televisions and gold chains but also welfare schemes such as free or subsidised rations under the Public Distribution System (PDS), cooked meals under the mid-day meal scheme, supplementary nutrition through anganwadis, and work provided through the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). Subsidies, should, serve the purpose for which they are intended. In order to be so, they need to be back-ended, targeted and transparent. A good example of such a well-structured subsidy is that of the Public Distribution System (PDS), which covers only a certain section of the people, in certain parts of the country and in respect of a limited number of commodities. That, in practice, there are leakages, on account of corruption, delays and logistical problems, is a different issue. The design is well intended. Discussion on the demerits of freebies is nothing new. There is, however, a good deal of confusion, on what constitutes freebies, what with the number of services that the Government provides to meet constitutional obligations towards citizens, also being treated as such.

IMPLICATIONS OF SUBSIDISED GOODS

The basic argument is that such subventions constitute a waste of resources and place a heavy and disproportionate burden on the already stressed fiscal resources. In fact, in some states, the norms of fiscal discipline have been flouted with impunity. Subsidised supply of goods and services, as well as the Direct Benefit Transfer systems, subsidised goods and service, are, no doubt, effective palliative measures for poverty, and attendant problems of malnutrition, ill-health etc. However, they are, by no means, a lasting or sustainable solution, because they are not in the nature of an investment. There is no return on the money spent, at least in the economic sense.

Indirect benefits like increased levels of school admissions, literacy, improved better health and nutrition levels etc, are, of course, a return in the form of social benefits, but there are well-known methods of achieving the same results, through methods other than doles and freebies.

Tax exemptions for businesses that are meant to encourage the setting up of new factories or plants in underdeveloped zones also constitute subsidies emergency funding intended to improve the production and productivity of certain sectors, which otherwise would have suffered from inadequate capital, are still another form of subsidies whereby a qualified pool of employees gets an opportunity to work in relatively new industries

Currently, there are certain loopholes in the subsidy chain, which many economists are criticising. However, they are also being recognised by the ministries/departments, concerned and immense efforts are being put in to rationalise subsidies.

Some innovative interventions have been devised by the government of India to contain leaks and improve targeting in the administration of subsidies. One such programme is the Direct Benefit Transfer (DBT) programme.

DBT aims to control pilferage in the distribution of funds sponsored by the government of India, and the benefit of subsidy is directly transferred to the beneficiaries concerned living below the poverty line. It also aims to bring transparency into the implementation of government-sponsored programs and contain pilferage. Some examples of such transfers are scholarships and the LPG subsidy. The benefits in the supply chain, often, do not get reflected on the demand side in securing for the beneficiaries the intended impact.

NEW APPROACHES

Many government interventions are also recognising the value of clustering benefits and aggregating beneficiaries. Cooperatives, self-help groups and, more recently, Farmer Producer Organisations, are some examples whereby beneficiaries can form an organisation, thus gaining the advantage of the economies of scale which enable access to technology and other critical inputs such as credit and insurance.

The famous Amul example of the individual farmer being a member of a Cooperative which, in its turn, becomes a member of a District Federation is a striking example of how a single individual farmer can enjoy the benefits of infrastructure, such as milk routes and chilling centres and share the benefit of the ultimate stage in value addition, such as milk being turned into powder or chocolates. ITC’s “Choupal” is another such successful business model.

It is regrettable that the World Bank, which has been extending liberal soft and substantial credit support through its International Development Association (IDA) window to NABARD since 1975, in the late 1980s, had to stop its credit support to NABARD as a protest against the persistence, on to the part of the governments, both central and state, in across-the-board debt waivers and subventions

SHORT-LIVED VALUE

Little value is usually attached to things which come free. I remember how, in the wake of the unprecedented cyclone and tidal wave that struck the coast of Andhra Pradesh in the year 1977, the central government, several state governments and voluntary organisations undertook the construction of permanent houses for those rendered houseless by the disaster. A few months after the houses had been allotted to the beneficiaries and occupied by them I happened to visit the area. I found that, in several cases, the houses had been converted into cattle sheds and temporary attached structures erected for occupation by the beneficiaries. In many other cases, doors, and windows, whose hinges had become loose on account of repeated exposure to high winds, which are common in the area, were left unattended too. When I questioned one of the beneficiaries why that was so the casual, and somewhat disturbing, reply was, “The house was constructed by so-and-so organisation. I am sure they will also attend to the repairs”.

Freebies, clearly, tend to discourage a sense of ownership and have a very short-lived value.
In this context, it is worth recalling that some progressive farmers, in the fertile Konaseema area, in the East Godavari district of Andhra Pradesh, in the year 2011, declined subsidies, recognising their futility in the shape of cash doles, and, instead, demanded concrete, and non-monetary, interventions, such as timely and adequate release of water and supply of quality fertilisers at a reasonable price.

CRITICAL GAPS

Let us take, for example, the case of fuel subsidies. Many countries seek to protect poorer households by subsidising the consumption of fuel products. However, recent International Monetary Fund (IMF) research shows that fuel subsidies are both inefficient and inequitable, including in India. So is the case, regrettably even in India. A recent IMF working paper has shown that India’s fuel subsidies are both fiscally costly and socially regressive.

At a global level, a major cross-country study by the IMF showed that fuel subsidies generally crowd out high-priority public spendings, like health, education and infrastructure. They also put pressure on current account deficits, distort productive investment toward energy-intensive sectors and technologies, and contribute to global warming. Fuel subsidies are the opposite of carbon taxes, after all. But the study also showed that fuel subsidies are regressive, meaning that they actually benefit the rich much more than the poor. Another argument, at the other extreme, is that subsidised intervention such as PDS must be expanded to include non-ration card holders as well, as there are many who are excluded from ration lists but are in need of subsidised or free foodgrains.

Studies showed the poverty-reducing effect of the PDS contributes to ensuring basic food security but also acts as an implicit income transfer allowing the poor to afford commodities that they otherwise could not, thus improving the physical quality of life index or PQLI of the country. PQLI is the measure that combines the three basic indicators of human well-being, namely, literacy rate, life expectancy, and infant mortality rate into a single index also plays an important role in our country where public procurement at minimum support prices (MSPs) is one of the main instruments of support to farmers allows foodgrains to be available for cheap for consumers while assuring remunerative prices to farmers.

Rupees 1 lakh crore is the revenue forgone annually as a result of ‘major tax incentives for corporate taxpayers’. Putting together all tax exemptions and concessions, including on foreign trade and personal income taxes, the revenue forgone each year is over 5 lakh crore

Rupees 1 lakh crore is the revenue forgone annually as a result of ‘major tax incentives for corporate taxpayers’. Putting together all tax exemptions and concessions, including foreign trade and personal income taxes, the revenue forgone each year is over ₹5 lakh crore.

Small amounts given to the poor by a system that has mostly failed them are called freebies, while the freebies that the rich get all the time through low tax rates and exemptions are ‘incentives’ is nothing but a reflection of the nature of democracy in our country. The PMGKAY, for instance, had kept many away from the brink of starvation during the novel coronavirus pandemic.

FREEBIES VERSUS WELFARE SCHEMES

Freebies have emerged as the buzzword in the backdrop of the debate rekindled by the Bharatiya Janata Party (BJP) and ferociously contested by various Opposition parties in the country. The debate of ‘freebies vs welfare measures’ has divided the political parties vertically into two blocks; one emphatically supporting freebies and the other calling this out as the evil of state finances.

What, then, is the difference between a freebie and a welfare scheme and how it affects the economy remains a moot point. According to Jayati Ghosh, senior development economist, “In most countries of the world, this will not even be seen as a question. Are free water, free education, free electricity, free food and free housing freebies? No, it is a human right because we do not want any citizen of India to go hungry and not have a roof over his head to sleep”. Economist Arun Kumar likewise feels that, “What is being called a freebie today is actually a welfare measure that brings many benefits to the economy.”
The feeling is that till 1947, India and all the countries of South-East Asia had the same overall level of development, but by 1965 they all overtook us. The only reason for this is that in the beginning, they focused more on education and health, which we could not do.

Kumar also argues in favour of subsidies given to the poor, that until 1980, economic growth in most African countries was almost negative, to which the World Bank and IMF said that these countries needed a safety net. After this, the expenditure on education, health, etc. increased there and only then did they start witnessing positive growth. He says that if the government stops or reduces subsidies, there will be a terrible social explosion and the economy will collapse.

Many dole and freebies are currently offered by various political parties, such as sewing machines, dhotis, sarees, sheep and goats, the Rythu Bandhu scheme in Telangana and similar schemes in other states, such as also the Pradhan Mantri Kisan Samman Nidhi – scheme at the national level

Nobel laureate and Indian economist Abhijit Banerjee has also said that the government should spend with open arms and instead of cutting corporate taxes, the government should put money in the hands of the bottom 60 per cent as it has a ripple effect on the economy.

The classical route, of creating an enabling environment, in which employment opportunities grow, increasing incomes, especially for those below the poverty line, and which, consequently, result in better access to social services such as housing, clothing, health and medical care and education etc. In any situation, and at any time a certain amount of targeted delivery of subsidised goods and services is essential, so long as the subsidies are back-ended and transparent. They should also be subjected to a ‘sunset’ arrangement so that over time they fade away and give way to investments of the type referred to earlier.

Renowned economist Amartya Sen once observed that Indian governments were subsidising “privileged consumers” more than the “poorest of the poor.”

The short answer is to keep development expenditures (the investment rate) high and contain the “revdi” culture (doles/subsidy India’s fiscal deficit (both Centre and States) has been hovering around 10 per cent for the last three years. This is too high, perhaps the highest amongst all G20 countries. And much of this is because of huge doles and high borrowings.

Milton Friedman was a Nobel laureate economist, who swore by free enterprise and opposed state intervention in business and trade. The title of his famous book, ‘There’s No Such Thing As A Free Lunch’, has now become an accepted principle in public administration. Freebies invariably come with a price tag attached. Talking of lunches reminds me of the story about John F Kennedy, who, after partaking in a sumptuous lunch organised by his campaign supporters, said in his post-lunch address, “I am deeply touched by this gesture. But not so much as you!”

Mohan Kanda

Dr Mohan Kanda is a retired member of the Indian Administrative Service. In his long and distinguished career, he served in various capacities at the State as well as at the Centre including Chief Secretary of the Government of Andhra Pradesh, and Member of the National Disaster Management Authority (NDMA), Government of India. He has authored several books including ‘Ethics in Governance - Resolution of Dilemmas - with case studies’

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