Freebies Fetish

IF THE PINK FULL SPREADS IN NEWSPAPERS proclaiming subsidised gas cylinders as a “festival of ben­eficiaries” is anything to go by, economic populism is in the pink of health. From Karnataka to Rajasthan and from Himachal Pradesh to Chhattisgarh, state governments are busy dishing out unemployment doles, free electricity, a return to a fiscally ruinous pension scheme, and much more. Suddenly, as India approaches 2024, freebies are in the air.

But this is a deceptive claim. The reality is more complicated. Subsidies and welfare schemes are ever-present in India. After the Narendra Modi government took office in 2014, these were reca­librated to macroeconomic stability and other economic goals. It has been a mixed bag. But the idea of ‘welfarism’ has never really died. Even in the absence of government commitment for ever-higher expenditures on this score, there has been no dearth of intellectual support for dole.

The result is that as 2024 nears, and with every single major state election, the promises of freebies are likely to gain heavy political traction. But if politically the idea is appealing, in terms of its economic effects, the results are bound to be negative. But such is the irrationality of India’s political system that even when the negative effects of such expenditures are known there are no corrective mechanisms in the system to restore a semblance of economic order.

Karnataka is the latest example of the dangers inherent in a free run of freebies. Congress, as part of its electoral campaign, had made five promises that fall in the class of freebies. Once the party won in the recent Assembly election, it came under immediate pressure to fulfil these promises. Reports began to appear that consumers in the state stopped paying electricity bills and even the fare on state-run buses. After the state cabinet met and took stock, Chief Minister Siddaramaiah told reporters that the five promises were discussed threadbare and that it was decided to implement them within the current financial year.

The episode was interesting. The chief minister’s assurance was categorical but before that there was a silence of sorts when the new government realised the bill that would be due over the years. For starters, all households in the state have been promised 200 units of free power under the Gruha Jyothi scheme. Then there is the ₹2,000 monthly assistance to senior women of house­holds under the Gruha Lakshmi scheme. Unemployed youth between 18 and 25 years of age have been promised an unem­ployment allowance that ranges from ₹1,500 (in case of diploma holders) to ₹3,000 in case of graduates every month. Over and above these promises is permission for free travel for women on state public transport buses and 10kg of rice to every member of a Below Poverty Line (BPL) household under the Anna Bhagya scheme. The bill for all these promises comes to a tidy ₹50,000 crore every year, a sum that will total to a minimum of ₹2.5 lakh crore over the tenure of the Congress government in the state.

The combination of political prudence and intellectual consideration ought to be a part of India’s political economy of ‘welfare’. The reality is that political prudence is rare. Very often, such programmes are just a tool for garnering electoral approval

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Karnataka is among a handful of states in the race to become trillion-dollar economies. But here’s the paradox: the more these states tend to redistribute income the less they have to invest in growth-furthering activities. This is a hotly disputed and conten­tious claim: people of different ideological persuasions view this differently. Proponents of ‘welfare’ believe that spending money on individuals, especially those who are poor, is not a ‘waste’. This has been a known position of the Left for as long as one remem­bers. But the other side of the story is that precious little is left to in­vest once money is spent on schemes of the kind being rolled out in Karnataka. In 2022-23, Karnataka is expected to spend around ₹16,114 crore on subsidies, an increase of 2.5 per cent over 2021- 22. This does not include the expenditure on the new schemes cleared by the Siddaramaiah cabinet. (The new state budget is yet to be presented.) Then there are committed expenditures on salaries, pensions and interest payments. These add up to a tidy ₹ 94,699 crore in 2022-23. This amounts to nearly 50 per cent of Karnataka’s net receipts for 2022-23.

The state is among a handful that can afford this kind of ex­travagance. But what is alarming is that the trend of ruinous distribution and subsidisation, which is the preserve of laggards like Punjab, is now catching up with states that are the economic powerhouses of India.

Very often the implications of these promises are realised after they have been made. Karnataka, Chhattisgarh and Rajasthan are examples in this respect. Earlier this month, Siddaramaiah said the average consumption of the last 12 months will be taken into con­sideration to calculate the free units of electricity to consumers. A 10 per cent “top up” will be given over and above the 12-month average. There are also concerns about Fuel Cost Adjustment Charges to be paid by consumers. In addition, arrears till July will have to be borne by consumers and the state government will not pay for them. On top of everything else, Karnataka has just announced an increase in electricity tariffs. This could be a prelude to cross-subsidisation of one set of consumers by another. A similar experiment—one that has fared badly—has been tried in Punjab.

Similar stories about such promises have emanated from Rajasthan and Chhattisgarh. In February this year, in response to a question raised in the state legislative Assembly, it was revealed that Rajasthan has 18.4 lakh unemployed candidates registered with its Department of Skill, Employment and Entrepreneur­ship. Of these, only 1.9 lakh are getting unemployment allowanc­es. On paper, of course, the state government runs an ambitious unemployment assistance programme. A somewhat similar story has panned out in Chhattisgarh where the state govern­ment had promised unemployment assistance to educated youth back in 2018-19 during the election campaign. Now at the end of the political cycle, the state government has begun delivering un­employment allowances. But the definition of ‘unemployment’ and the eligibility conditions are narrow to the point that the pool of people who can avail these benefits is extremely limited.

In April, when the state government operationalised the scheme, 1.27 lakh individuals applied and 70,000 were found eligible. To be eligible, one has to belong to a family whose income is less than ₹2.5 lakh per year (roughly ₹21,000 per month). Only one member of a family will be eligible for the unemployment allowance. In case one is unable to get a job, the benefits will be extended for a year. The monthly allowance is ₹2,500.

The other extreme, where a state’s coffers have bled dry after decades of freebies is Punjab. On paper, the state government gives free and subsidised power to various consumers; in real­ity, precious little power is generated to satisfy the demand for electricity. The bill due to the state’s power utilities is always in arrears. Today, Punjab is known for its parlous fiscal condition and not as the richest state it once was.

What Karnataka, Rajasthan and Chhattisgarh are trying to do should be understood sympathetically given the huge fiscal burden freebies entail. But the question is: Why make such prom­ises in the first place and then try to wriggle out of them later?

AT A RECENT POLITICAL RALLY IN AJMER, Prime Minister Narendra Modi highlighted the perils of freebies. The speech was political—Assembly elec­tions are due in the state by the end of the year—but the speech had a core message of wider national importance. The prime minister outlined the danger of freebies and “guar­antees” made by Congress. He said that if these guarantees were implemented, the state and the nation would be bankrupted. He reminded his audience about countries going bankrupt in the recent past. The message was clear: excessive spending, well beyond what is prudent, is dangerous.

Many years ago, in February 2015, Modi had criticised the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in the course of a speech in Lok Sabha. Citing the scheme as a failure of the erstwhile Congress government, Modi had said he would continue the programme. Some of the high­est allocations for the programme came under the Modi govern­ment. In 2021-22, the allocation for MGNREGA touched an all-time high of ₹98,467 crore. This was understandable: in the year of the pandemic, many migrant workers in urban areas were forced to return home. The programme proved a lifeline.

Next year, in 2022-23, when the allocation was reduced, as nor­malcy returned and migrant workers began returning to urban areas again, a number of intellectuals were up in arms. From ar­guments about fall in rural wages to plain pique at the reduction in allocation for the programme, the government was criticised for being “anti-poor”.

Karnataka is among a handful of states that can afford this kind of extravagance. But what is alarming is that the trend of ruinous distribution and subsidisation, which is the preserve of laggards like Punjab, is now catching up with states that are the economic powerhouses of India

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In a way, this combination—political prudence and intellectual consideration—ought to be a part of India’s political economy of ‘welfare’. The reality is that political prudence is rare. Very often, such programmes are just a tool for garnering electoral approval. A politician who may want to limit spending on such programmes or tailor spending to some specific goals runs the risk of losing elec­tions. Instead of highlighting the perils of excessive expenditures, intellectuals provide the argumentative foil for ‘pro-poor measures’. The result is a combination that is nearly unbeatable.

In its nine years, the Modi government has seen its own variety of welfarism. This has included cheap houses, cooking gas con­nections, potable tap water, and direct cash transfers to farmers (PM-Kisan). But in almost all cases, the programmes have had a tangible outcome in terms of creating useful assets while keeping a sharp eye on macroeconomic stability. It is only in recent years that inflation—a product of war elsewhere and supply disruptions— has gone out of its acceptable band. Deficits, the other consequence of open-ended commitment, have also been kept in check. This has come at a political cost. In Himachal Pradesh, the Bharatiya Janata Party (BJP) lost because it would not commit itself to restoring the Old Pension Scheme. The very powerful (and pampered) lobby of government officials was instrumental in voting the BJP out. Similarly, in Karnataka, the Basavaraj Bommai government did not spend its way out of an imminent electoral morass and it certainly did not match Congress’ “five guarantees”. The question, foremost in many minds, is what will happen in 2024 when the freebies genie has been uncorked once again? In all these years, the Modi govern­ment has been prudent in not shutting down some very expensive welfare schemes as that would have opened it to charges of being anti-poor. But now the political climate in India is being pushed to the far left, reminiscent of the bygone socialist era.

There is a paradox in India. High economic growth is essential to end poverty and provide a better life to those concentrated just above the poverty line. The way to ensure that on a sustainable basis is through better education, industrialisation and investments in key sectors. But no sooner does growth touch the 7 per cent mark that cries for redistribution gain ground. The last time this hap­pened was in 2006 when MGNREGA was launched. It was a pro­gramme with a gigantic financial outlay and the assumption was that growth “would take care of itself”. No thought was spared for what savings and investment levels were necessary to sustain that level of growth. Unsurprisingly, when the global financial crisis hit India, the government of the day had to indulge in fiscal expansion to maintain growth. It was unsustainable. Now, after a long time, when India seems to be on the cusp of sustaining higher levels of growth, the redistributive agenda is back.

About The Author

Siddharth Singh

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