Unsustainable Freebies

Last week, I had written about Freebies promised by Political parties before elections, so on that basis, they can attract voters, to cast the votes in their favour. These political parties without realizing that the freebies are going to cost the exchequer, and will have a financial impact on the state budget, if these freebies are to be provided to citizens.

Two days back, several top bureaucrats flagged their concerns over populist schemes and freebies announced by political parties during assembly elections, going to the extent of warning that some of the states could be heading the way cash–starved Sri Lanka or Greece if the trend remain unchecked.

This happened during their meeting with Prime Minister, some of the secretaries said that the announcements and schemes in several states are economically unsustainable, and there was a need to persuade them to take a balanced call, weighing the political existence with fiscal health. Secretaries, who held important positions in the states before coming to the Centre, cautioned that several states had a precarious financial position and would have gone bust had they not been part of  the Union. Officials said that the announcements made by state govts such as Punjab, Delhi, Telengana, Andhra Pradesh, and West Bengal are unsustainable, and some solutions need to be found. Several political parties are offering free power, burdening the state exchequer, and as such doles must be provided for in the budget. It also limits their ability to allocate more funds for crucial social sectors such as health and education. Bureaucrats pointed out, that even the ruling party BJP promised free LPG connections and other sops for voters in UP and Goa during elections. Officials said that this trend of competition among political parties to offer freebies before every election will have serious repercussions on state and central govt finances in the long run.

While states get a share of central taxes and GST, their own sources of revenue are limited to excise on alcohol, and VAT on petrol in addition to receipts from property and motor vehicle registration, which limits their resource mobilization efforts, denying them based on which they can splurge cash on sops. Some opposition ruled states have blamed the Centre for holding back funds, a charge that has been refuted by Finance Minister, who recently pointed out that arrears dating back decades were cleared during the last financial year.

PM urged the secretaries to take all possible steps to eradicate poverty and come up with ideas on governance considering they have vast experience in the state govts and at the Centre as well.

Why Political Freebies Do Not Work

Uttar Pradesh is one of India’s largest states. To woo voters, the BJP and Samajwadi Party (SP) in the elections concluded recently had offered freebies that include free gas cylinders, a kilo of ghee, free rations for five years, and so on. The SP  had promised to bring in an ‘Urban Employment Guarantee’ and the BJP had announced that it will provide at least one job or self-employment opportunity to each household. There were more freebies like electricity for irrigation, free scootys for meritorious girls, tablets and smart phones. In Punjab Aam Aadmi Party (AAM) had promised free medicines, free parking, pension increases of Rs 2500, free education in primary schools, Rs 1000 per month to all women above 18 years of age, and no tax on electricity.

Economically there are no freebies, because there is someone paying for it, and it eventually catches up with the public in the form of taxes. In Delhi for last so many years, AAP offered free or heavily subsidized electricity, free water, free bus rides for women, free wi-fi, full reimbursement of hospitalization expenses in case of an accident and so on. The Delhi state GDP for 2021-21, at Rs 7,98,310 Cr, is 4% lower than the state GDP for 2019-20. Expenditure at Rs 69,000 Cr in 2020-21, is a nearly 16% increase from 2019-20. The fiscal deficit for 2021 came at Rs 12, 491 Cr, nearly twice the budget estimate.

The above shown is an example of one small state of Delhi, now if you start the fiscal deficit of all states, the figure may come up in lakhs of crore. Only for the state of Punjab, its debt burden till March 2021 stands at nearly 5 lakh crore. How the states are going to sustain the financial stability is very dicey and the situation looks very scary. Secondly, some states have the audacity to tell, when they can not full fill their poll promises, that the Centre is not ready to support the schemes announced by them or Centre is withholding their dues hence the promises can not be full filled.

In my opinion, ‘The Election Commission’ should intervene, and before the election is announced, the political parties should be told that if any political parties announce any freebies to voters during elections, then they have also to explain to voters how they will raise the finance to full fill the promise without raising the current deficit of the state. And if after coming to power they can not full fill their promises, then there should be some mechanism to take them to the task.

These freebies are becoming too much, and honest taxpayers feel that they are being betrayed by these political parties, and at their cost, the freebies are being given. It is high time the freebies should stop instead these political parties should start thinking in terms of how they can uplift the status of voters, so that they do not need the freebies.

Waiting for your response on this blog.

Anil Malik

Mumbai, India

4th April 2022