N.K. Singh, the chairperson of the 15th Finance Commission, warned about how the race to provide freebies to voters could be a quick path to fiscal disaster.
How do freebies hamper the economic growth?
Macroeconomic stability- Freebies undercut the basic framework of macroeconomic stability.
In the case of Punjab, some have speculated that the promise of freebies is going to be an additional impact of 3% of GSDP.
Expenditure priorities- The politics of freebies distort expenditure priorities.
For instance, Rajasthan’s decision to revert to the old pension scheme is regressive because 6% of the population, which is made up of civil servants, stands to benefit from 56% of the state’s revenues.
Social inequalities- The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.
Unsustainable- Provision of free power, water, etc. distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
Distortion of agricultural priorities- The depleting supply of groundwater is an important issue to consider when speaking of freebies pertaining to free consumption goods and resources.
Manufacturing- Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.
Subnational bankruptcy- It raises the question of whether the time has come to consider recourse mechanisms like subnational
bankruptcy.
Do freebies have any productive role?
Constitutional provision- As per Article 282, the Union or a State may make any grants for any public purpose.
Better workforce- Sometimes, freebies build a healthier and a stronger workforce, which is a necessary part of any growth strategy.
For example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
Increased productivity- Subsidies going into education, such as for laptops have now become necessities for increasing productivity, knowledge and skills.
What is needed in this respect?
Differentiation- We need to distinguish between the concept of merit goods and public goods.
The strengthening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health are considered to be desirable expenditures.
Sustainability- It’s not about how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.
Revisiting the Seventh Schedule- Most of the centrally sponsored schemes are subjects which are classic subjects in the domain of the states, such as employment, food, education.
So the Seventh Schedule which classifies the subjects into three lists requires a revisit.
Revisiting the Article 282- The entry under Article 282 of the Constitution has been used and misused for having all the centrally sponsored schemes.
