How To Think About Freebies

India is in the grasp of a debate ignited by the Prime Minister over 'Revdi culture'.

Context: What is a freebie meant to lure voters and what is genuine welfare expenditure — this is a grey zone, with beneficiaries of each type unwilling to give up their benefits.

Redefining the 'state': The state was once expected to carry out only basic functions, more or less: internal and external security, policing, and administration of justice.

• Then came the provision of public education and health and then public infrastructure to facilitate economic activities that no one else is able or willing to finance.

• The line becomes hazy when it comes to 'necessary public infrastructure'.

Example: About 82 crore people get 5 kg wheat/rice per month at a token price of Rs 1, 2, or 3 per kg under a law enacted in 2013.

• They have also been getting 5 kg free cereal extra under PM-GKAY since April 2020, currently valid up to September 2022.

• Whether 82 crore people require it at this point is debatable.

• Some argue that more people deserve this benefit while others want a reduction in the current numbers.

Provision of public goods is meant to benefit the general public and the community at large and nobody can be excluded from enjoying its benefits.

If governments stuck to their traditional roles, there wouldn't be such a debate. But governments worldwide have expanded their role even beyond their current taxation capability and providing benefits to people from borrowed money.

The government's case: In 2020-21, the central government’s tax revenue (excluding states’ share) was Rs 1,426,287 crore.

• Committed liabilities of interest payment was Rs 679,869 crore and pensions, Rs 208,473 crore.

• Expenditure on defence was Rs 340,094 crore, on police was Rs 91,610 crore, and on salaries/allowances of non-defence, non-police manpower was Rs 264,790 crore.

• After using all the revenues (tax and non-tax) for these essential expenditures, the centre is left with just about Rs 49,000 crore.

• After paying these mandatory expenses, the government resorts to borrowings for the expenses that remain.

• Governments don't finally repay any debt using revenues; they keep refinancing old loans by taking fresh ones.

Hello to subsidies: The government's subsidy bill comes up to Rs 707,707 crore for three major ‘subsidies’ — food, fertiliser, and petroleum subsidies.

• The centre has schemes of subsidy/subvention or income supplementation like old-age pensions, scholarships, and income support to farmers; government paying part of health insurance or life insurance premiums, interest subsidy/subvention for loans to farmers, affordable housing, MSMEs, export credit to offset high cost of capital, and subsidies for buying electric vehicles, so on.

• There are cross-subsidies like the Indian Railways charging less than the actual cost of passenger transport by charging extra on freight of goods transported or charging less from students, employees, senior citizens, and freedom fighters.

• The centre also has a host of subsidy/incentive schemes to promote industrialisation in industrially backward states or startups.

• Tax concessions are a special form of subsidies where for some people, some items are taxed at a rate lesser than the standard or given various exemptions or deductions to reduce tax liability.

States' participation in the subsidy-freebie debate is understandable.

• One of the most common provisions is concessional tariffs for power supply to poor households and farmers.

• High-end power consumers are charged more, so that low-end power consumers don’t pay for some units or pay less than the cost of power supplied.

• Under-recovery of the full cost of supply of water for irrigation or drinking is also an established subsidy.

• Free passes to women commuters or free-pilgrimage type of freebies or free WiFi, etc, can be categorised as freebies/subsidies.

• Loan waivers are another form of subsidy.

Consequences of these subsidies/freebies are visible on the finances.

• For example, the cultivation of rice in water-scarce areas using high-power pumps to draw groundwater from the depths is an environmental disaster. Rice export is as good as water export.

• The power sector is the worst hit by these subsidies. The unpaid dues of power sector companies have piled up to some Rs 250,000 crore. This is more than one-third of the total value of annual electricity supply. States’ subsidy dues to power distribution companies alone are over Rs 75,000 crore.

• After repeated interventions to bail out cash-starved DISCOMs, the centre has moved to amend the Electricity Act 2003 to insert new DISCOMs, giving consumers choice to switch DISCOM (like switching from one telco to another telco), etc.

Capital privilege: Delhi is able to fund a lot of subsidies from revenues because major expenditures, like for Delhi Police, are incurred by central ministries. All pre-1993 loans are serviced by the central government.

Making it work: State government finances are reeling and need swift corrective measures.

• Tax to subsidise is still a preferable strategy over borrow to subsidise.

• The real issue is to determine who deserves government subsidies.

• Most can claim to be relatively poor and needy. A line must be drawn somewhere.

Bottom line: Even though the Supreme Court has expressed concerns about freebies, it is not something for the courts to decide. However, the intervention can perhaps help develop political consensus around some core principles and basic criteria for state fiscal support to individuals.

(Adapted from Dr Subhash Chandra Pandey's article posted here)