Freebies Debate: Are They Road To Economic Disaster?

Prime Minister Narendra Modi in July spoke against political parties for their promotion of a culture of freebies 'Revdi' to gain votes in a public rally in MP. The Supreme Court also referred petitions calling for a ban on freebies given out by political parties before elections to a three-judge panel and said "The issue raised by petitioners requires an extensive hearing before any concrete orders can be passed."

But in an order to woo voters in Himachal Pradesh and Gujarat assembly elections, both BJP and AAP have promised their voters' lucrative gifts. In Gujarat, the AAP made a number of announcements, including 300 units of free electricity for every home, a monthly allowance of Rs 1,000 for women, a monthly jobless benefit of Rs 3,000, and a debt forgiveness programme of up to Rs 2 lakh for farmers. While, in Himachal, the BJP promised three free LPG cylinders for low-income women, bicycles and scooters for female students, financial aid of Rs 25,000 for all pregnant women, and so forth.

What differentiates Freebies from Welfare expenses?
While there is no precise definition, expenditure which brings economic benefits, such as the public distribution system, employment guarantee schemes, and states’ support for education and health are considered welfare expenses. On the other hand, the provision of free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies.

Burden Of Freebies on the Fiscal Health of States
As per estimates, expenditure on freebies range from 0.1 - 2.7 per cent  of GSDP for different states. The freebies have exceeded 2 per cent of GSDP for some of the  highly indebted states such as Andhra Pradesh and  
Punjab. Moreover, as per the latest data from the  Comptroller and Auditor General of India (CAG),  
the state governments’ expenditure on subsidies  has also grown at 12.9 per cent and 11.2 per cent during  2020-21 and 2021-22. The share of subsidies in total revenue expenditure by states has also risen from 7.8 per cent in 2019-20 to 8.2 per cent in 2021-22.

Current Fiscal Vulnerability Of Indian States
RBI's Department of Economic and Policy Research  
under the guidance of Michael Debabrata Patra wrote a report on fiscal risks confronting state governments in India,  
with emphasis on the heavily indebted states. Based on the debt-GSDP ratio in 2020-21, Punjab (53.3), Rajasthan (39.5), Bihar (38.6), Kerala(37.2), Uttar Pradesh (34.9), West Bengal ( 34.2), Jharkhand (33.0), Andhra  Pradesh( 32.5), Madhya Pradesh(31.3), and Haryana (29.4)  turn out to be the states with the highest debt burden. These 10 states account for around half of the total expenditure by all state governments in India.

The Report further on 'quality of expenditure' by states said "The share of revenue expenditure in total expenditure of these states varies in the range of 80-90 per cent. Some states like Rajasthan, West Bengal, Punjab and Kerala spend around 90 per cent in revenue accounts. This results in poor expenditure quality, as reflected in their high revenue spending to capital outlay ratios. Although welfare-enhancing, the impact of revenue spending on economic activity lasts for just about a year. In contrast, the impact of capital outlay  is stronger and lasts longer, with the peak effect  materialising after two-three years."