Policy debate: Decoupling freebies from politics

Freebies pose serious fiscal challenges, but they need an economic policy response

Economic policy debates are part and parcel of a functioning democracy. Such debates allow differing opinions on a proposed policy to be discussed in an open and healthy environment. Even when some differences remain unresolved, a decision taken after those debates has a greater chance of acceptance also by those who may have opposed it. This is what makes a functioning democracy more participative and effective.

India, with an argumentative society, has seen many debates on economic policies. The idea of setting up the Planning Commission was preceded by a lively debate in the Nehru government. His finance minister was not entirely in agreement to the idea of such a body and quit the government. But there was a debate within the government. As prime minister, Nehru stuck to his views and the Planning Commission was set up.

Even bank nationalisation as an idea was debated intensely within the Indira Gandhi government. After some resistance, a middle path in the form of imposing social control over banks was adopted by her finance minister. But eventually Indira Gandhi decided that social control of banks would not serve her objectives and she went in for bank nationalisation, after getting rid of the finance minister and keeping many of her senior colleagues in the dark about her move.

Remember that political considerations were strong behind each of those economic policy decisions. There was some debate and many differences of opinion within the government, but the political considerations were strong enough for the leaders of the day to go ahead and implement the ideas that were dear to them.

In the last few years, economic policy debates have become less frequent. There was hardly any debate before the Modi government took its most disruptive economic decision of demonetisation in November 2016. In contrast, the rollout of the Goods and Services Tax (GST) or the Insolvency and Bankruptcy Code (IBC) was widely discussed and debated before they were implemented.

There were problems and shortcomings, but nobody could say that there was no discussion before the decisions on GST and IBC were implemented. There was some discussion of the new farm laws, but the Bills were rushed through Parliament during Covid days and in the face of political agitation, the government repealed the laws, just as a few years earlier the land reform legislation too was put in cold storage.

It was, therefore, a welcome development a few weeks ago, when the Modi government kicked off a debate on freebies. It is an important economic policy issue. Should governments offer goods or services to the people free, without charging their economic cost? Should genuine welfare schemes contributing to public good be allowed to continue and schemes that only enhance private good be curbed? For instance, will the Ujjwala scheme of the Modi government, providing cooking gas connection to the poor, be treated as a freebie? It could be argued that the Ujjwala scheme helps achieve a larger public good. Hence, it should not be treated as a freebie scheme.

Illustration: Binay Sinha

Two other yardsticks have been mentioned in this debate to determine if a certain scheme is a freebie or not. One, any scheme meant for promoting education for all and improving health, hygiene and nutrition should not be frowned upon as a freebie even when they are provided free or at less than their economic cost. Two, any scheme that is fully financed through the Budget in a transparent way without pushing the state towards fiscal irresponsibility should not be criticised as a freebie.

Both the yardsticks are extremely relevant and inter-connected. The state must provide for education and health facilities to its citizens. Such services may need to be subsidised to ensure that  they are not denied to the poorest of the poor. But equally important is to ensure that such subsidies are provided without undermining the principles of fiscal prudence.

Of late, some states are not transparently showing the costs of these services in their budgets, resulting in a rise in their off-budget liabilities. This is an unhealthy trend and must be discouraged. In the last few years, the Centre has made commendable progress in eliminating its off-budget liabilities by bringing them under the Consolidated Fund of India. More needs to be done by the Centre in this area and the states must also follow suit.

Unfortunately, however, the freebies debate has got mired in politics. The debate has intrinsic merit. But the way the terms of this debate have been framed shows how this important issue is being used by all parties to settle political scores against each other. With the forthcoming elections in many states, the ruling party at the Centre appears to be treating freebies as a major electoral issue. Not allowing the states to continue offering the freebies seems to be part of the ruling party’s political goal to counter the freebies-based political campaign launched by the opposition parties.

Many states are at fault as they are indulging in fiscal profligacy by showering freebies on the people to fulfil the promises they made before the elections. But the way out is not to make it into an electoral issue. Freebies are a serious economic policy challenge. But to face up to this challenge, it would be necessary to rescue this economic issue from being hijacked by the current political and electoral battle.  It is necessary to frame the norms through discussion, cooperation and collaboration between the Centre and the states so that they do not indulge in freebie politics that undermine their fiscal situation.

The consolidated fiscal deficit for the Centre and the states in the current year would be in double digits, for the third year in a row. Worse, the current account deficit this year could well touch the dangerous level of 4 per cent of gross domestic product. With the danger of a twin deficit looming large, managing the fiscal impact of freebies through a pragmatic and sensible policy debate among the Centre and the states is the need of the hour. Scoring political points just won’t do, unless the country wants to embrace yet another economic crisis.