Five questions which we must answer on freebies
Comments by the PM and the Supreme Court have pushed the issue of freebies back into the headlines. But questions remain about State capacity, the state of fiscal federalism, and the political incentive to prioritise fiscal health over electoral considera
On July 26, a three-judge bench headed by the Chief Justice of the Supreme Court (SC) of India chided the Election Commission of India ( ECI) for its expressed inability to regulate political parties from promising freebies during elections. We have probably not heard the last word from the country’s highest court on the issue. The bench asked the Union government to come back with clear comments on the issue with the help of the Finance Commission by August 3, which is when the matter will be heard again. The issue of freebies is not being debated for the first time in the country. Without prejudice to what the court might or might not decide in the next hearing, here are five questions that need to be answered to understand the issues at stake when it comes to freebies.
The first question is, what exactly should be considered freebies? The literal interpretation of the term, which requires clubbing everything which the State provides to its citizens for free or at lower than market cost, as freebies, will not suffice. A government spending more money on improving things such as health and education is very different from a government spending money on, say, providing free electricity which leads to depletion of water tables or arbitrarily designed cash transfers. Higher spending on health and education may, in fact, be necessary to compensate for what economists term as market failure in the provision of public goods. Because the potential beneficiaries of such public goods lack the ability to pay for these things, there will not be enough demand for them. Poor access to such services generates headwinds not just for present, but also for future growth. Had the government not made the Covid-19 vaccines free, where would India be in terms of containing the pandemic today?
The second question is regarding the capacity of the State to provide for all such public goods. No one can dispute the fact that the State can do a lot more in terms of provision of social services. However, such good intentions must confront the reality check of fiscal limitations, both at the level of the Centre and the states. On this count, checks and balances already exist in the form of the Fiscal Responsibility and Budget Management (FRBM) Act. While there are genuine arguments for relaxing fiscal rules for countercyclical contingencies, there is no shortcut to boosting the State’s coffers if one wants a long-term expansion in State-sponsored provision of social services. Unlike what many Left-leaning critiques say, India’s welfare net has actually expanded in the post-reform period, the reason being an increase in growth rates and, consequently, revenues. This is why India must do all it can to push up its medium- to long-term growth rates.
The third question deals with the reason for the spread of the freebie culture in recent times. The answer follows from the second question. India was caught in a prolonged slowdown even before the pandemic led to an economic contraction. As is to be expected, the slowdown has been accompanied by large-scale economic distress, especially for the non-rich. Serious political parties always have their ears to the ground as far as the material wellbeing of the electorate is concerned. They know that when things are difficult on the macroeconomic front, even insignificant-looking doles or promises of giving them, can translate into electoral support. If India’s economic growth were to improve significantly, the political traction for something like a Rs 20,000 cash transfer per year will automatically come down.
The fourth question concerns political incentives. A government can very well decide to prioritise long-term fiscal health over freebies. However, unless there is reciprocation on this front from its political adversaries, the strategy can backfire politically. So, what will it take to build a political consensus towards responsible fiscal behaviour when it comes to spending which can have political rewards? On this front, India’s recent successes might have become its biggest challenge. Thanks to the evolution of the Jan Dhan-Aadhaar-Mobile (JAM) trinity, it is far easier for governments to deliver targeted welfare benefits rather than ensure quality provision of social services such as health and education which bring long-term gains. Unlike bank transfers to beneficiary accounts or giving colour televisions to voters, ensuring an improvement in the quality of government schools or hospitals is a more tedious and long-term process. The latter also involves taking on politically entrenched lobbies which have benefitted from the mismanagement of government spending in such sectors. The teachers’ recruitment scam in West Bengal is a good example of this.
The fifth, and perhaps, the most vexing question on this front is the political economy of India’s fiscal federalism. State governments, especially ones ruled by non-Bharatiya Janata Party (BJP) parties, are increasingly finding it difficult to counter the BJP’s narrative of “double-engine” growth, which seeks to usurp the Opposition’s voter base by evoking the welfare programmes of the central government. Most such schemes have been linked to the office of the Prime Minister, who is arguably the biggest mass leader this country has seen after Indira Gandhi. The Opposition realises that it must come up with an additional welfare portfolio of its own if it has to survive the political offensive of the BJP. States have very little fiscal autonomy left after the imposition of GST, in terms of raising taxes and the Centre’s effective transfers are far less compared to what the Finance Commission recommendations stipulate. The combined effect of these two factors is, in a way, making state governments both dangerously reckless and increasingly vulnerable. The BJP, which is ruling at the Centre and is the hegemonic political force at the moment, has no political incentive to undo the squeeze on states.
Chanakya believes that a comprehensive solution to the rightful concerns about the long-term adverse effects of the freebies culture must engage with each of the five questions listed above. SC judges were not pleased by the response of the Union government and the ECI, both of which acknowledged their limitations in finding a silver bullet to fix the growing freebie problem. However, the truth is closer to what the government and the ECI think than what the judges would like the answer to be. The judiciary has played an important role in preserving the sanctity of the Indian State and protecting the rights of the people in the last sevenand-half decades. But for some problems, there is no option other than traversing the more difficult route of consensus-building, hopefully in the right direction, via the churn of democracy.