The freebie debate has raised a hornet`s nest regarding its definition, implications for the poor, impact on fiscal consolidation, propriety of judicial system usurping the domine of the legislature and political process and so on. But a dimension that has not received adequate attention has been the consequences for the federal structure.
The states are supposed to be steeped in “revadi culture” and distributing too many freebies risking their financial stability. According to union finance minister Nirmala Sitharaman “making provisions for freebies without understanding the state’s financial status will “burden” future generations. The burden of what is not paid by the one who is promised (freebies) will be on somebody else and on future generation”.
Burden and Future Generations?
The question is whether the states have been irresponsible in distributing freebies and burdening future generations. This allegation can become a reality only if the freebies are financed by public borrowing, in which case the liability would lie on future while the benefits accrue to the present. Therefore, the key question is how freebies, whatever be it` scope, is financed.
Freebies are a part of the revenue expenditure. A key provision of the FRBM Act is that the revenue deficit must be eliminated, which means no borrowed money can be used for revenue expenditure including freebies. On an average expenditure of salaries, pensions and interest constitutes 50-55 per cent of the total revenue expenditure of the states. After other committed expenditures on social and economic development, the residual available for freebies would be very limited, unless governments flout the condition of zero revenue deficit.
The Asymmetry Between State and Central Expenditure
The key question is who has been performing in a fiscally responsible manner - the states or the union? In 2000-01 the combined revenue deficit of the union and states had reached a dangerous level of 6.45 per cent of GDP, the Union`s deficit being 3.91 and the states` being 2.54. After the passage of FRBM acts the deficit ratio has tended to come down and in 2010-11 the combined deficit was 3.20 per cent, which was entirely union government`s contribution. In 2010-11 the union government`s revenue deficit was 3.24 while the state governments together had a revenue surplus of -0.4.
The average revenue deficit of the states since then have been negligible until Covid at 0.05 per cent while that of the union government hovered around 3.15 per cent. The lesson that can be drawn from these simple figures is that the states on whole have been fiscally responsible while the union government has behaved imprudently. This asymmetry between the Union and the States is even sharper with respect to the fiscal deficit. Therefore, the Prime Minister should do more introspection of his governments performance rather than exhorting the states about danger of excessive freebies.
The Prerogative of the Union Government Alone
The stand of the BJP seems to be that freebies should be the prerogative of the union government alone while the states stick to prudent fiscal stance. The role played by freebies in winning the UP election by BJP is an open secret. UP had, according to 2011 census, 3.34 crore households. In the runup to UP elections under the PM Jan Dhan Yojana 7.86 crores accounts have been opened of which 5.33 crores were issued Rupay card.
According to Bank Officers Leader Thomas Franco, approximately 3.4 crore borrowers in UP have availed loans of ₹ 18000 crores Mudra Loans. These loans are covered under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). So even if they are not repaid, banks won’t bother much. Under the PM Svanidhi Scheme, meant for street vendors, 7.8 lakhs received financial help. Under the Atal Pension Yojana from 2019-2022, in UP, 5 crores persons have been covered. And interestingly, without the government spending big money, all these have been achieved through the public sector banks.
But in the Gujarat election campaign the AAP seems to have upstaged BJP in poll promises. This is what seems to have prompted the PM to make his anti revadi culture speech. If BJP feels that AAP`s freebies are going to thwart development take it to the people and make it a poll issue. And the Supreme Court should not abrogate to itself the functions of legislature or the political choice of the electorate. There are more important and vital issues corrupting the election process in India, like the electoral bonds, that require more urgent attention than freebie. The entire episode is bizarre.
Threat of Squeeze on the Poor
The union government may well be also considering yet another squeeze on the social and welfare expenditure on the poor. BJP leader and advocate Ashwini Upadhyay seeking to prevent political parties from promising freebies to the electorate before elections also referred to MGNREG as an example of undesirable expenditure.
Freebies to the Rich
The basic question is freebies to whom? To the rich or the poor? How, can the union government justify its corporate and other tax concessions to the rich while running continuous revenue deficit? Every year the direct taxes totaling more than a lakh of rupees are forgone as disclosed in the annexures to the annual budget. Besides, in 2019 union government reduced the corporate tax from 30 per cent to 22 per cent on the eve of prime minister`s visit to US, just to create a hurrah in the stock market and, perhaps, under the impression that such a gesture would please the tax cut philosophy of Trump and Co.
The current GST rates on consumer durables are 30-50 per cent lower than the burden of taxes subsumed under GST. Such instances of freebies by union government to rich can be multiplied. Interestingly Tamil Nadu government`s submission to the Supreme Court, among other points had raised the issue of loan waiver to corporates. They pointed out in the first three years of Modi government ₹ 75,000 crores of nonperforming debts of Adani group had been written off. Since the NDA government assumed office more than ₹ 10 lakh crores of total nonperforming assets of banks, mostly of the corporates, have been written off. The asset restructuring companies have so far been able to recover less than ₹ 2 lakh crores of bad debts. Is this not a corporate freebie or only loan wavers of farmers qualify to be freebie? And what about Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing which is under consideration to be extended to other manufacturing sectors?
Widening Inequality and Necessity of Ameliorative Measures
India is one of the countries with worst inequality in distribution of income and wealth. The share of the richest 1 per cent in national wealth has increased from 16.1 per cent in 1990 to 42.5 per cent in 2020. In contrast the share of the poorest 50 per cent declined from 8.8 per cent to 2.8 per cent during the same period. In terms of income distribution also the inequality has been widening. While the share of richest 1 per cent increased from 10.4 per cent in 1990 to 21.7 per cent in 2020, the share of the bottom 50 per cent declined from 22 per cent to 14.7 per cent.
In the background of acceleration of inequality, the obsession that the prime minister is exhibiting on freebies is perverse. The discourse of some pundits on appropriate and efficient support system for the poor also in the context of freebie debate would qualify to be in the same perversity brand.