Are freebies affecting the economic growth of India?
11th May, 2022
The recent collapse of the Sri Lankan economy has engendered a fresh debate on the ‘state’s role’ It’s government provided several free goods and services, the economic collapse and the heavy-indebtedness has left the country no choice but to default on its commitments. As a corollary, the issue of freebies given out by Indian states has come under the lens here.
- Since independence India has faced several challenges on the various front, like food security, farmers' distress and social discrimination etc.
- The green revolution has ended narrowed down the scope of food insecurity in India, along with several subsidized schemes.
- In recent times the challenges have emerged differently, the freebies and subsidy schemes which were introduced for the betterment of the public and to promote public welfare not it has taken a turn into a populist and political agenda.
What is the present financial position of the Government?
- For central Government:
- The debt to GDP ratio has increased from 40% to 90% of the GDP, which accounts for high instalments payments and repayment of loans.
- The target of 3% of the GDP as the fiscal deficit suggested by Fiscal legislation has crossed the limit by several times.
- For the state government:
- The debt to GDP ratio has progressively decreased from 31% of the GDP to around 22% of the GDP by the year 2014.
- On the front fiscal deficit, state governments are also lacking behind meeting the target of 3%.
What does the Fiscal Responsibility and Budget Management Act suggest?
- The Fiscal Responsibility and Budget Management (FRBM) Act was passed by the government in the year 2003, to regulate the fiscal discipline of India.
- The act suggested that:
- 3% of the GDP as the Fiscal Deficit of the government
- The ratio of revenue deficit and fiscal deficit should be zero so that the excess expenditure of the government can create capital which will further give a potential return to the country. Increasing the quality of expenditure of the government.
- Monetization of the government’s deficit should be the last resort for the central bank.
How freebies are impacting the fiscal discipline of the government?
- Pressure on Revenue Deficit: Freebies and subsidies create pressure on the Revenue budget of the government.
- No capital formation: Revenue expenditure accounts for negligible capital formation in the economy which cannot generate future returns to the government.
- Widening up the Fiscal Deficit: Rise in revenue expenditure and no capital formation cumulatively widen up the fiscal deficit of the government.
- Increase in interest burden: Rise in the deficit will lead to an increase in interest payment for the government and expenditure with no capital formation and no future returns will rise the burden of interest payments.
Other impacts of Freebies and subsidies?
- Rise in Inflation: Freebies demanded for the distribution system increases the scope for inflation in the economy.
- No social incentive to work: Youth of the nation gets no incentive to work and earn due to availability of the freebies.
- Reduces financial credibility of the Country: High deficit of the government and more subsidy schemes will result into lowering the financial credibility of the government.
Are freebies and subsidies needed for developing nations like India?
Despite several impacts on the fiscal management of the government, it becomes very important for the developing nation to incentivize such subsidies and freebies because of various reasons:
- Food security: To ensure proper Food Security and the Right To Food as a fundamental right under Article 21 of the constitution it becomes mandatory for the government to implement schemes for subsidized food.
- Nutritious food: The demography of developing nations is usually prone to nutrient-deficient diseases. Subsidized nutritious food can reduce the deficiencies among the children and women especially.
- Better Demography: Ensuring nutritious food to the citizens can create healthy and productive demography and help in the creation of Human Capital.
- SDG goals: Sustainable Development Goals have objectives to eradicate hunger (SDG-2) and good health and wellbeing (SDG-3) which can be achieved by the subsidized food schemes in developing nations.
- Farmers Welfare: India faces severe cases of farmers' distress, to improve the condition of the rural economy government needs to ensure schemes and freebies.
- Social Welfare and security: The welfare principle of the state encourages the states to introduce such schemes to promote social welfare and reduce inequality in society.
- Reducing social inequality: Providing food for all can reduce the prevailing social inequalities on various grounds.
- Gender Equality: SDG -5 says about Gender Equality in the society, in developing nations gender inequality remained a severe constraint. To reduce gender inequality and provide a secure social status and recognize all the gender and their sexual orientation it becomes a compulsory step for the government to take such steps.
- Induce demand: During the slowdown and low demand phase these subsidies and freebies can induce demand in the market that can bring up the growth at a certain level. Developing nations facing such abnormalities in the growth process introduce such schemes to increase the demand in the economy and make the market at an equilibrium position.
What measures can be taken by the government to rationalize the fiscal burden?
- The capability approach: A theory is given by Noble Laureate Amartya Sen that speaks about increasing the capability of the demography, ‘One should not get a gift of free fish rather one should be taught how to catch fish. The state should focus on the development of the demography along with ensuring food security.
- Targeted Subsidy Schemes: Targeted subsidy schemes should be introduced to provide proper benefits to the needy that can rationalize the fiscal discipline of the government.
- POSHAN Abhiyaan: Government should target PoshanAbhiyaan to promote and distribute nutritious food to the people which will give space to develop the demography of the nation.
- Social Capital Formation: Along with food security government must focus on the creation of social capital like health care centres and properly managing the hospitals, and educational institutions.
- Marginalized section: Ensuring food and nutritious food security for the marginalized sector of the society poses a big hurdle for the government. Women and children of lower social strata are kept away from such nutritious food, government should focus on women and child development for better demography in the future.
- Should not be populist measure: The schemes should focus on the welfare of the nation, not on the political agenda.
Freebies and subsidies are very much important for the growth and development of the nation, especially for the developing nations with so much diversity in the society. Implementing such schemes increases the fiscal burden of the government in that respect government should rationalize the schemes using various technology spaces available like Artificial intelligence and machine learning. Both the aspects of the subsidy schemes and fiscal discipline helps to decide the financial stability of the government, there should be a fine balance between exhausting fiscal limit and providing rationalise subsidy schemes to the people.
Q1. Freebies culture is good politics but bad economics. Critically analyse.
Q2. Populist measures such as subsidies provide an immediate relief and are not a sustainable solution. Comment.