Are freebies affecting the economic growth of India?

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Are freebies affecting the economic growth of India?

  • Over the years the politics of freebies has become an integral part of the electoral battles and the scenario is no different in the forthcoming assembly polls in five states.
  • There are arguments both in favour and against this practice. In this article, we shall learn to analyse all aspects of this issue

Freebie Politics in India

  • The term Freebies is not new; rather it is a prevalent culture in Indian politics (in the name of socialism).
  • The political parties are always trying to outdo each other in luring the Indian voters with assorted freebies.
  • From free water to free smartphones the Indian politicians promise everything to attract prospective voters in favour.
  • This trend has gained more momentum in recent times with the political parties being innovative in their offerings as the ‘traditional free water and electricity is no longer sufficient as election goodies.

Are freebies a reason for the deterioration in the financial situation of States

  • Some of them are extremely justifiable, and some of them are not.
  • In terms of financial stability and financial deterioration, if welfare spending of the States is sustainable and affordable, then that is fine as it is the prerogative of the political executive but one must understand what exactly is meant by fiscal stability.
  • Fiscal stability is a situation in which the government is able to deploy its fiscal policy towards long-term economic objectives, which are high employment and growth rates.
  • Outstanding debt reduction has progressed quite well in the case of the States.
  • From a high of 31% of GDP, it came down by almost 10 percentage points to about 22% of GDP by 2014-15.
  • After that, it has gone up about five percentage points by FY 2020.
  • In comparison, the Central government has never been able to adhere to fiscal deficit limits.
  • In debt reduction, the Central government’s debt-to-GDP limit is supposed to be 40%, but it has now crossed 90% of GDP.
  • So, the problem of financial stability is more pressing at the level of the Centre.
  • Certain kinds of expenditure that are done under populist pressures or with elections in mind may be questionable.
  • But in the last 30 years, there has been rising inequality and also some level of distress, and some kind of relief to the population in the form of subsidies may not be unjustified.
  • It may actually be necessary for the economy to continue on its growth path.

Growth versus the welfare measures

  • The only estimates that we have are from a number of independent studies by private researchers.
  • It is hard to agree with the claims of N.K. Singh that the rate of poverty reduction has doubled under the present government.
  • None of the studies, including the IMF study, the World Bank study, or consumption surveys, confirm that.
  • There is at least one study that concludes that the rate of poverty reduction has slowed down under the Modi government.
  • The strengthening of some government programmes has definitely contributed to poverty reduction. This does not mean that growth does not have a role to play in reducing poverty.
  • There is a need to question estimates of poverty coming from both the World Bank and the IMF.
    • This is for two reasons.
    • When the government is claiming that formalisation has increased, there's no basis to believe that income distribution has not worsened as an outcome of formalisation.
    • When free food is being given, where is the proof that the underlying income of the poor has remained intact in the absence of any consumer expenditure survey?
    • There's no way that this can be established.
    • Also, the latest survey was junked and has never been published creating the suspicion that poverty may have risen.

The productive proportion of spending by States

  • Some schemes and programmes are favourable for example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
  • These go a long way in increasing the productive capacity of the population.
  • So, they're not just doles. They build a healthier and stronger workforce, which is a necessary part of any growth strategy.
  • That is similar to State spending on education or health.
  • But, there are cases where State governments have gone astray and have gone into providing all sorts of freebies or gifts.
  • But simply giving away loan waivers is not favourable because they have undesired consequences such as destroying the whole credit culture and it blurs the very basic question as to why is it that a large majority of the farming community is getting into a debt trap repeatedly.
  • There is absolutely no justification for promising 200, 300 or whatever number of units of power to the middle class or urban populations who are by and large regular income earners.
  • Loan waivers are one of the riskiest activities to undertake compared to, say, manufacturing or any of the services segment.
  • And there are always ways to restructure bank loans to medium and small enterprises in the event of a downturn in the business cycle or any kind of extraordinary shock.