The discussion on freebies (revadi) has been going on for last ten months. PM’s speech at Bundelkhand was the trigger. It is likely that the interest in this area will get rekindled after new Karnataka government starts its full-scale operation. Five major electoral promises were made. These are 1) two thousand rupees monthly assistance to women heads of families, 2) 200 units of power to all households, 3) three thousand rupees per month for unemployed graduate youth and fifteen hundred rupees for diploma holders, 4) ten kilo rice per person per month and 5) free travel facility for women in State transport buses. Assuming that these promises remain untrammelled the cost of keeping them according to one estimate would be Rs. 65,000 crores. A spokesman of the incumbent political party puts it at Rs. 50,000 crores. Possibly the truth will be somewhere in between. In 2023-24, the Government was supposed to have a fiscal deficit of 3%of GSDP, this is expected to go up to 5.0% to 5.4%. The States are allowed to have 3.5% fiscal deficit of which 0.5% is for electricity reforms, etc. Given this scenario, the State’s fiscal position won’t be sustainable. The scope of reducing revenue expenditure is limited as bulk of it is in the form of committed expenditure. There is some scope of increasing taxes through additional taxes on liquor, stamp duty, property tax, etc, provided it can take on well entrenched business interests in these areas. The scope of revenue increase appear to be limited, so borrowings have to go up year after year for the next five years. This could be detrimental for the fiscal health of the State. However, given its debt to GSDP ratio of 27.5%, things won’t go out of hand immediately.
In a developing country which is confronted with issues of unemployment and inadequate per capita income growth, certain redistributive and welfare measures are needed. Astute politicians recognised it way back in the fifties, midday meal scheme was introduced in schools of Madras State (Tamil Nadu) by Mr. Kamaraja. This was followed by a period of roll out of freebies in the form of cash, gold coins, electronic gadgets, home accessories, etc.
The focus was on short term electoral gains. Welfare schemes, infrastructure projects which have positive externalities or economic benefit took a back seat. Unfortunately, this trend has not got reversed even today in many States . So availability of resources for long term efficiency enhancing projects is limited.
RBI recently has done a study- 'State Finances: A risk analysis'. According to this study Karnataka is not a highly stressed State, from debt to GSDP ratio perspective. For Indian States, government expenditure on subsidies has grown at 11to 12% in recent years. Many of the State governments according to RBI are switching to freebies from subsidies. There is a definitional issue about freebies. So far as RBI is concerned Non-merit goods which don't provide long term economic benefit or positive externalities are categorised as freebies. According to RBI health and education come under merit goods. However, bicycles which are distributed by State Governments to girl students are non-merit goods. The fact that such an item can improve attendance, allow the student to spend less time on commuting and possibly help her (albeit indirectly) to continue with her studies in distant educational institutions are not considered when labelling it as a freebie or non-merit good. This can happen in many categories. Given this context, what is important from the point of view of State finances is, can the State afford these freebies. Secondly, if debt levels for the State go up on account of freebies will that create any financial stress for the State. Thirdly, the SDL yield rates would go up.
Till now we have discussed the nature of problems from the freebie offerer’s perspective. However, to get a total picture it may be useful to look at the issue from the voter's point of view. Have you ever stood in a long queue for one kilogram of free sugar in a large retail outlet after making a two thousand rupees worth of purchases? In case you have done so, your affinity with freebies is confirmed. The length of such queues during festival would reveal that there are thousands of consumers who like ‘zero price offers'. Interestingly these consumers are voters too. The concept of freebies resonates with them. By the way this choice preference is not typically Indian, noted behavioural economist Dan Ariely’s experiments in USA indicate similar choice pattern. Any zero price product or service offer, in other words, a freebie has a major attraction.
Secondly, many a times the freebies which are promised get changed or withdrawn, in other words there is trammelling of original terms and conditions. This is like a loss for the freebie induced voter. Behavioural experiments tell that the dislike from a loss is much more that the joy from a gain. Loss aversion is normally a strong behavioural trait. Getting back to Karnataka, it may not be wise to withdraw freebie offerings in the initial days on account of fiscal constraints.
Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.
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