Politics of handouts: Freebies walk thin line between welfare and wasteful

Thin line between welfare and wasteful, debates on freebies always contentious,as those offering them often see them as social benefit

Prime Minister Narendra Modi has once again sparked a debate on state-provided freebies, emphasising that the long-term consequences of such policies not only harm the economy but also society, with the poor bearing the brunt.

Populism gains momentum during election periods, and this trend is evident in at least four states: Telangana, Rajasthan, Madhya Pradesh, and Chhattisgarh. Along with Mizoram, these states are scheduled to hold Assembly elections in late November and early December.

Debates on political freebies are always contentious, as those offering them often see them as a form of social welfare. A more constructive approach is to assess whether a state has the financial capacity to provide such benefits.

Among these four states, Telangana and Chhattisgarh have the financial means to offer freebies, while Rajasthan faces significant fiscal stress. Madhya Pradesh, despite having high debt, has been running a revenue surplus in recent years, suggesting it has room to provide freebies.

Rajasthan allocates half of its revenue to committed expenditures, such as salaries, pensions, and interest payments. Even during the tenure of the Vasundhara Raje-led Bharatiya Janata Party (BJP) government from 2013 to 2018, committed expenditures remained high at 55 per cent of revenue expenditure. This figure is expected to decrease to 49 per cent in 2022–23 and 50.2 per cent in 2023–24, partly due to the state’s switch to the Old Pension Scheme (OPS). However, pension liabilities under OPS will increase after 2034 when employees who joined the state government on January 1, 2004, start retiring.

Rajasthan has reduced its allocation to NPS from approximately Rs 1,926 crore in 2021–22 (Actuals) to about Rs 5 crore in 2023–24 (Budget Estimates, or BE).

Chhattisgarh, another state that adopted OPS on April 1, 2022, has slightly lower committed expenditures, ranging from 49 per cent to 43 per cent during the five years of the Bhupesh Baghel-led Congress government. This was still higher than the 41 per cent left by the Raman Singh-led BJP government (2013–18) in its final year (2018–19).

Committed expenditures as a proportion of revenue expenditure are expected to decrease slightly to just over 43 per cent in both 2022–23 (Revised Estimates) and 2023–24 (BE) after the state transitioned back to OPS. The state will also experience increased pressure on pension liabilities as NPS participants start retiring.

Some include subsidies, social security, and other pensions, as well as grants-in-aid for salaries and wages, in the list of committed expenditures. If these are added, the expanded committed expenditure would further increase in these states. For example, it was 70.5 per cent in Rajasthan and 59 per cent in Chhattisgarh in 2021–22.

Increased subsidies would put pressure on revenue expenditure, leaving limited room for capital investments. Capital outlays constituted 10–13 per cent in Rajasthan in recent years, compared to slightly less than 8 per cent in the first two years of the Ashok Gehlot government.

In Chhattisgarh, capital outlays were around 15 per cent, compared to 10–11 per cent in the initial two years of the Baghel government. This may result from long-term loans for capital expenditure (capex) provided to states by the Centre in recent years.

Although Chhattisgarh’s own tax revenues contribute only 34–36 per cent of revenue receipts, less than Rajasthan’s, which could reach around 49 per cent in the current financial year (BE), the former has managed its resources efficiently.

Chhattisgarh had a revenue surplus of approximately 1 per cent of gross state domestic product (GSDP) in 2021–22 and is projected to maintain a surplus in 2022–23 and 2023–24, albeit a smaller one. Moreover, its debt never exceeded 26.3 per cent of GSDP during the Baghel government, although it was much lower at 17.4 per cent in the final year of the Raman Singh (BJP) government.

On the other hand, Rajasthan has not achieved a revenue surplus in the past five years, and its debt-to-GSDP ratio has consistently exceeded 35 per cent. The Raje government left behind debt amounting to 33 per cent of GSDP in its last year.

Salaries, pensions, and interest payments constituted 37–48 per cent of revenue expenditure in Madhya Pradesh over the past five years, including the period when the Congress ruled for the first year and nearly three months under Kamal Nath. When subsidies, wages, and other expenses are factored in, the committed expenditure rises further, reaching 52.9 per cent in 2021–22.

This situation allowed for capex in Madhya Pradesh, with capital outlays representing 18–19 per cent of total expenditure in recent years, compared to 16 per cent during the first two years of the government, including the initial 15 months led by the Congress. The state also maintained a revenue surplus, albeit a modest one, amounting to 0.4 per cent of GSDP in 2021–22. It projected a slight revenue surplus in 2022–23 and 2023–24. In fact, in the first four months of the current financial year, the state reported a revenue surplus of approximately Rs 7,038 crore, surpassing the Rs 413 crore projected for the entire year in the Budget, according to data from the Comptroller and Auditor General (CAG) of India. This occurred despite the Shivraj Singh Chouhan government’s announcement of new schemes.

However, the state’s debt position is not as robust, with debt projected to approach 30 per cent in 2022–23 and 2023–24.

A study by the Reserve Bank of India last year categorised Madhya Pradesh as one of five high-debt states. In contrast, Rajasthan was included among the five highly stressed states.

It can be argued that if a state like Madhya Pradesh, despite having high debt, maintains a revenue surplus, this should not pose a problem, as part of it can be allocated for capital investments to build assets.

Telangana is a relatively well-managed state financially. Despite its reputation for freebie politics, the state’s debt never exceeded 26 per cent during any of the five years of K Chandrashekar Rao’s (KCR’s) government. Debt was as low as 20.3 per cent of GSDP in the final year of the previous KCR government.

However, the state’s committed expenditure remained at 44–47 per cent of revenue expenditure until 2021–22. When subsidies are included, the committed expenditure rises to 54 per cent of revenue expenditure in 2021–22.

Telangana also projected a revenue surplus of less than 0.5 per cent of GSDP in 2022–23 and 2023–24. However, in the first four months of the current financial year, a revenue deficit of approximately Rs 3,458 crore was reported, contrasting with the projection of a Rs 4,882 crore surplus for the entire year, according to CAG data.

The state’s capital outlay saw an increase in 2021–22, accounting for 17 per cent of total expenditure. Nevertheless, it is expected to decrease to 12 per cent and 13.5 per cent in the following two years.

Modi recently told the news agency PTI, "Populism may yield political results in the short term, but it will exact a great social and economic price in the long term. Those who suffer the most consequences are often the poorest and most vulnerable."

FREE-FOR-ALL OVER FREEBIES

RAJASTHAN
 

The Congress government opted for the Old Pension Scheme starting on April 1, 2022. It introduced a minimum income guarantee scheme of Rs 2,500 crore, subsidised gas cylinders, provided free electricity, and implemented a welfare scheme for gig workers.

CHHATTISGARH

Similarly, the Congress government in Chhattisgarh chose the Old Pension Scheme on April 1, 2022. It also announced free coaching for students preparing for engineering and medical entrance tests, along with offering free bus rides for school and college students, a monthly pension of Rs 1,500 for labourers aged above 60, and a monthly allowance scheme of Rs 2,500 for unemployed youth.

TELANGANA

The KCR government has initiated several schemes, including the Rythu Bandhu, which provides investment support to farmers; the Dalit Bandhu; the Aasara pension scheme for vulnerable sections; and free power for farmers for three crops.

MADHYA PRADESH
 

The BJP government in Madhya Pradesh recently announced an increase of Rs 250 in the monthly allowance for women aged 21 to 60, which now stands at Rs 1,000. It has also introduced subsidies for LPG cylinders. Additionally, the state runs the Mukhya Mantri Kisan Kalyan Yojana, providing Rs 6,000 per farmer annually to complement the Pradhan Mantri Kisan Samman Nidhi.