Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Key Phrases: Fiscal Cost of Freebies, De-recognition of Political Parties, Irrational Freebies, Undermine Credit Culture, Distort Prices Through Cross-Subsidization, Free and Fair Elections, Model Code of Conduct (MCC), Public Expenditure Efficiency

Why in News?

• The Supreme Court has recently drawn attention to the substantial fiscal cost of freebies while hearing a petition demanding the de-recognition of political parties that promise “irrational freebies” to voters.

Freebies vs Welfare Measures:

• A Welfare measure is a public policy intervention that will have a long-term impact on production as well as productivity if it is limited to the economic and public policy perspective while any public policy intervention that doesn’t support medium-term to long-term production and productivity may be termed a freebie.
• It is necessary to distinguish freebies from public/merit goods which include expenditure that brings economic benefits such as the public distribution system, employment generation schemes, and state support for education and health.
• Provision for free electricity, free water, free public transportation waiver of pending utility bills, and farm loan waivers are regarded as freebies, which potentially undermine credit culture, distort prices, through cross-subsidization, and disincentivise work at the current wage rate leading to a drop in labour force participation.

Recent Examples of welfare measures and freebies by States:

• In the recent elections to the UP assembly a major factor of victory of the ruling party was the vote they got from the “beneficiary class”.
• These were voters who benefitted from schemes like Pradhan Mantri Awas Yojana (housing for all) and the distribution of free rations to those who had been pushed into poverty due to the Covid pandemic.
• These schemes would come under the category of welfare measures that a government must take to address the problem of the poor and the underprivileged.

Origin and Mainstreaming of freebie culture:

• The roots of the freebie culture’s expansion lie in the distribution of free sarees, pressure cookers, television sets, and washing machines by AIADMK in Tamil Nadu during the 1990s.
• Around the same time, the Akalis in Punjab pioneered a free-power regime.
• In many cases, parties resorted to the freebie culture to cover up their governments' failure in providing adequate jobs or skilling or ensuring decent livelihood for the people through appropriate economic policies.

Costs of Freebies:

1. Huge burden to Exchequer:
   • Public debt stock is accumulating over a period of time.
   • Too much emphasis on freebies disrupts state finances and throws governments into a debt spiral.
   • The RBI report says freebies undermine credit culture, distort prices through cross-subsidisation, erode incentives for private investment, and disincentivise work at the current wage rate leading to a drop in labour force participation.
2. Huge tax Burden to states:
   • According to a report by analytical firm CRISIL, most states are in precarious debt situations, which will constrain their ability to spend on more significant public welfare measures.
   • For example, Punjab’s electricity subsidy and its rising cost to the state exchequer is over 16 percent of total revenues.
   • Moreover, expenditure on freebies ranges from 0.1 -2.7 percent of gross state domestic product (GSDP) for different states.
3. Thwarting of financial discipline:
   • Many political parties promise loan waivers and win elections on this basis which is a regressive measure and it leads to a lack of financial discipline, impacts future loaning by banks, and creates a big burden on the State.
   • Most States which have promised and implemented loan waivers have had to reduce the expenditure on essential, physical, and social infrastructure in order to manage the deficit in the budget.
4. Social Impact:
   • The Reserve Bank of India (Study on State Finances), has showed that from 2014 onwards, the social sector expenditure at the State level has been declining even after States were given more resources.
   • Health and education are important sectors are to be funded by State governments the allocation to those sectors by the States is actually declining.

SC’s intervention to address the issue of freebies in India:

• The Supreme Court, while hearing a case in 2013 asked the Election Commission to frame guidelines to curb the freebie culture in consultation with political parties as freebies shake the root of free and fair elections to a large degree.

Election Commission guidelines:

• In 2014, the Election Commission issued its guidelines that were made part of the MCC which included:
  • Parties won’t make promises that may influence voters.
  • Manifestos should also reflect the rationale for the promises and broadly indicate the ways and means to meet the financial requirements.
  • Trust of voters should be sought only on promises which are possible to be fulfilled.
• In 2015, the commission asked parties to provide a copy of their manifestos but the problems of freebies have not ended.

Why then Freebie Culture has not been curbed?

• The Election Commission needs more powers to ensure that its guidelines are implemented.
• In 2004, the commission sent 22 proposals to the Centre for electoral reforms, including powers to de-register political parties.
• Then in 2016, the commission sent a proposal to the Union law ministry to amend the rules and enable it to de-register a political party for gross electoral malpractices.
• Any political party promising freebies in their manifesto must indicate from where they will get the resources to implement the promises if elected to power.
• The voter must be alert to ask these questions and be aware of the financial impact on promises being made.
• In reality this is generally not true and freebies do help parties in getting votes and the voter does not go into the financial aspects.
• This is the prime reason why the political parties race against each other to promise freebies.
• For example, many states promise free power to farmers.
• This leads to excess extraction of groundwater and also a continuation of traditional cropping patterns.
• The long-run impact of this on economic development is adverse.

Current SC case:

• The Supreme Court is hearing a Public Interest Litigation (PIL) that seeks directions to freeze the election symbol or de-register a party for offering freebies ahead of elections.
• The court noted that legislation banning freebies is not advisable, but at the same time called for a balance between welfare measures and loss to the public exchequer.

What is the Stand of the Election Commission on the Case?

• ECI said it has no power to regulate the same or take action against parties making such poll promises.
• As per its opinion, offering/distribution of any freebies either before or after election is a policy decision of the party concerned, and whether such policies are financially viable or their adverse effect on the economic health over the state, is a question that has to be considered and decided by the voters.

Way Forward:

1. Tracking of allocations to the social sector: This will improve public expenditure efficiency in the country.
2. Increase Welfare Spending: There is a need to spend more resources on welfare schemes. Welfare spending in India is woefully low in comparison to other developing countries with public spending on health and education being 4.7% in India, compared to 7% in sub-Saharan Africa.
3. Good tax framework: Reduce the money that is flowing to the privileged. For example, the big bad loan waivers, are given to big corporations.
4. Role of Finance Commission: When it makes allocations to various states, can take into account the debt of the state and in the context of that find out whether the state’s economy will be sustainable over the years in the context of the freebies.
5. Institutional mechanism to control wasteful expenditure: It is important to understand and identify the real beneficiary of a particular public policy.
6. Better Tax Compliance mechanism for wealth redistribution: The reason why India has not been able to expand its income tax base, like China or Brazil, is that the tax exemption limit in India keeps getting raised year after year. Only 6% of Indians pay tax in the country.

Source: The Hindu

Mains Question:

Q. A legislation banning freebies is not advisable, but a balance between welfare measures and loss to the public exchequer is needed. Discuss. (250 words).