From Freebies to Welfare : Daily Current Affairs

Relevance: GS-2 - Government policies and interventions, Governance, Transparency, Accountability

Key Phrases: Governance, Freebies Culture, Universal Subsidies, State Electricity Boards, Discoms, Sustainable Development, Reserve Bank of India, Fiscal Prudence, Fiscal Consolidation, COP21, International Solar Alliance, Glasgow Summit, Model of Welfare Provisioning

Why in News?

Recently a few political leaders including the PM have shared their views on the so-called “revdi” or the freebies culture.
This has come immediately on the back of widespread concerns among domain economists, including a recent report of the RBI on states’ finances.
The report highlighted the perilous condition of states’ finances and enhanced debt stress on account of these flawed policies.

What are Freebies?

Freebies can be defined as “something that is given to you without having to pay for them, especially as a way of attracting your support for or interest in something.”
The issue of Freebies can be seen from the perspective of what Albert Einstein had said long before. He said, “sometimes one pays most for the things one gets for nothing.”

Drawbacks of Freebies:

Free Electricity

Subsidies are promised in the form of free electricity, which further leads to the deteriorating health of state distribution companies by undercutting their financial viability.
Financial constraints, arising out of free electricity and inability to evolve tariff structures, discourages discoms to actively engage and invest in New and Renewable Sources of energy like solar power.
India’s inability to meet an orderly and socially-cohesive transition to an era of non-fossil fuel energy critically depends on the health of state electricity boards, which is undercut by the freebie culture.
The RBI report points out that the free power promised in Punjab undercuts its ability to move to a more sustainable pattern of growth.
Lowering the price for some consumers, offset through overcharging industrial and commercial contracts, reduces competitiveness, ushers slower growth both in incomes and employment.
It irresponsibly undercuts India’s abiding international and national commitments for sustainable development, like initiatives undertaken at COP21 in Paris, International Solar Alliance and at the COP26 in Glasgow where India adhered to intergenerational equity and to exponentially increase sustainable development.
Regulatory capture, a fixation on unrealistic tariffs and cross-subsidy in energy utilisation prevent a credible coal plan, which is central to our energy planning.

General Drawbacks:

Freebies lead to resource constraints for the Union Government that seeks to address the challenge of inequity by ensuring access to a wide range of basic facilities, including banking, electricity, housing, insurance, water and clean cooking fuel.
The shortcut of universal subsidies or freebies often end up ignoring the poor and transferring public resources to the affluent.
- For example, in Delhi, innumerable households from the lower strata continue to remain dependent on expensive tankers for water due to a lack of water connections and the Delhi Jal Board’s limited supply.
Freebies lead to distortion of expenditure prioritisation, away from growth-enhancing items, leading to intergenerational inequity. Though science and economics of intergenerational debt swap are in a nascent phase, the idea is true also of changes in governments between states and nations. One state cannot pass on its debts to another state, nor can a nation pass on its debts to another nation.
Freebies also have debilitating effect on the future of manufacturing and employment. They lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.
Foreign as well as domestic investors and credit rating agencies look to macro stability in terms of sustainable levels of debt and fiscal deficit, which are marred by universal subsidies and freebies.

Substitute of freebies:

Instead of giving freebies, the approach should be of removing barriers for citizens to have access over resources based on their needs.
Benefits under various welfare schemes such as PM Awas Yojana, Swachh Bharat Mission and Jal Jeevan Mission have eliminated the biggest barrier for citizens — the exorbitant upfront cost of access.
This approach also leads to irreversible empowerment and self-reliance. For example, a house built under the PM Awas Yojana is a lifelong asset for the beneficiary household that cannot be taken back by any government.
Identification of beneficiaries through the socio-economic caste census (SECC) and prioritisation based on deprivation criteria enables the government to assist those who need it the most.
Instead of fiscal profligacy, the path of fiscal rectitude mandated by the FRBM Act 2003, is needed to address this issue.

RBI Study on States’ Finances: June 2022

A study of fiscal parameters of states by the Reserve Bank of India (RBI) identified Bihar, Kerala, Punjab, Rajasthan and West Bengal as highly stressed due to their high debt levels, the quality of expenditure and the level of fiscal deficit. These states could face a crisis if they fail to curb non-merit expenditure, the study has warned.
High debt also implies that a state spends a significant share of its revenues on servicing the debt. Several states spend about 10 percent or more of revenue receipts on interest payments, with Punjab and West Bengal spending more than 20 percent.
The study, has identified another five states as fiscally vulnerable due to their high debt levels. These are Andhra Pradesh, Haryana, Jharkhand, Madhya Pradesh and Uttar Pradesh.
Of the 10 stressed states, Punjab seems to be in the most perilous situation, an outcome of years of freebies such as free power to farmers handed out by successive governments. Among all states, Maharashtra is in the most comfortable situation with its debt to gross state domestic product (GSDP) ratio under 20 percent.
The ratio of debt to GSDP of the five most stressed states is in the high thirties The debt to GSDP is an indicator of a state’s ability to repay its debt, and higher ratios mean a high risk of default.
The study also noted that the share of revenue expenditure in total expenditure in these states was 80-90 percent, which leaves them with little resources for capital expenditure or asset creation.
Low capital expenditure hurts in the medium to long term, as the state will continue to experience slow revenue growth and remain deep in debt. States such as Rajasthan, Kerala, Punjab and Kerala spend 90 percent of their revenue expenditure on paying salaries, pensions and interest on loans.

Conclusion:

Freebies are not cheap, rather they are expensive for the economy, life quality and social cohesion in the long run.
Recent remarks about the perils of freebie culture should serve as a timely reminder to those promising fiscally imprudent and unsustainable subsidies.
In place of freebies, model of welfare provisioning and governance that provides balanced development without creating avoidable fiscal constraints, should be adopted and practiced.

As Aristotle said, “the worst form of inequality is to try to make unequal things equal,” the freebie culture is not a road to prosperity, but a quick passport to fiscal disaster.

Source: Indian Express

Mains Question:

Q. What are the drawbacks of the Freebies Culture? How it is detrimental to the fiscal rectitude? Discuss.