Should India regulate freebies?

What exactly are freebies? In simple terms, it refers to a public welfare measure – any good or service – that is offered free of cost by the government to its citizens. But our existing legal or policy framework does not provide a precise definition for the term. 

In the current context, it is often used as a political term by the Centre to express disapproval of certain state-level schemes. Therefore, it seems the meaning changes depending on whose perspective you hear. 

Free colour TVs, grinders, food grains, laptops, cycles, gold, washing machine, cows, sheep, cash transfers to farmers, health insurance and fertiliser subsidies – Indian voters have been beneficiaries of all this and more. But which of these are vote-catching freebies and which are legitimate welfare measures?

Making that distinction is a near impossible exercise. 

Let us take a famous example from Tamil Nadu, home to the two big Dravidian parties notable for freebies, the DMK and the AIADMK.

In 1982, when the then Chief Minister, MG Ramachandran or MGR, expanded the mid-day meal scheme for schoolchildren that was pioneered by K Kamaraj in the late 1950s, he faced opposition from all quarters. The scheme drastically improved enrolment, attendance and absenteeism. About a decade later in 1995, it was rolled out nationwide by the Centre. Similarly, today, the Centre’s PM KISAN scheme is modelled on the lines of Telangana’s Rythu Bandhu scheme. 

These are just two of the many examples where state-level welfare schemes once derided as freebies served as a template for the central government to emulate. 

Given the ambiguity, 15th Finance Commission Chairman NK Singh in a recent column said there was a need to distinguish freebies from merit goods, expenditure on which brings economic benefits, such as the public distribution system, employment guarantee schemes and states’ support for education and health.

On the other hand, a June RBI paper said that the provision of free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidisation. This erodes incentives for private investment and disincentivise work at the current wage rate leading to a drop in labour force participation.

But this exercise is also fraught with risk. 

Because in the long run, the social and economic benefits of certain freebies can far outweigh the fiscal costs they impose, even if they seem cumbersome in the short term. States see it as an investment in human capital. This makes labelling expenditure as merit or non-merit at the time of rollout difficult. 

Alok Prasanna, Co-founder, Vidhi Centre for Legal Policy says, there is no way to define a ‘freebie’, it’s a pejorative term. Politicans responding to people’s wishes is part of political process. Can’t make blanket fiscal prudence argument as states’ finances vary, he says.  

If the Supreme Court is not the right institution to regulate freebies, can the Parliament legislate on it?

Alok Prasanna, Co-founder, Vidhi Centre for Legal Policy says, it is not the Parliament’s business to regulate freebies. States are free under the Constitution to make laws on such topics. 

Prasanna says income tax deductions or exemptions and corporate tax reductions could be classified as freebies but they are also conscious political decisions.

Does something stop being a freebie because it has the approval of the Centre?

Experts broadly agree that states should be free to decide on freebies if it has the money. The problem arises when states dole out freebies, merit or non-merit, beyond their fiscal capabilities. 

As a percentage of GSDP, revenue receipts and own tax revenue, Punjab’s freebies in Budget FY23 is among the highest in India

Consider the financially weak state of Punjab. It is among the most indebted states and its own tax revenue has been declining over time. Punjab spends over 13% of its revenue expenditure on subsidies, one of the highest. 

Yet, the ruling Aam Aadmi Party recently fulfilled its poll promise of providing free electricity to every household up to 300 units.

In the backdrop of the poor fiscal health of some states, is there a way to set guard rails in place to ensure that the freebies don't become excessive?

NR Bhanumurthy, Vice-Chancellor, Dr B R Ambedkar School of Economics University says, many states' policies are creating long-term debt sustainability issues. Need organisations like inter-state fiscal council to monitor spending. There needs to be more discussion around public debt to GDP ratio. States and Centre can bring out a debt paper every six months, he says. 

The debate on freebies also needs to be looked at from the perspective of income of states.  

As the Centre imposed more cesses, the share of tax revenue that the Centre gives them has dropped.

The end of Centre’s GST compensation payout has further reduced the headroom available with states for social sector expenditure.

As such, freebies should continue to remain a conversation between the states, political parties and the voters with prudent measures in place to check the largesse in case of fiscally stressed states.