Should there be limits on ‘freebies’?

Source: The post is based on the following articles

“Should there be limits on ‘freebies’?” published in The Hindu on 19th August 2022.

“Freebies In Our Bonnet” published in The Times of India on 19th August 2022.

Syllabus: GS 2 – Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Relevance: India’s freebies burden.

News: The Supreme Court, while hearing a petition to curb the practice of offering freebies, said that the term “freebie” should not be confused with genuine welfare measures.

What are the Supreme Court’s remarks on freebies?
Read more: Voters prefer to earn a dignified earning over freebies: Supreme Court
What about welfare and freebies?

Directive Principles can certainly guide state policy. But it is not easy to define welfare and freebie. This is because of the ripple effect they create on society.

But from an economic and public policy perspective, a freebie is any public policy intervention that will have a long-term impact on production as well as productivity. Hence, any public policy intervention that doesn’t support medium-term to long-term production and productivity may be termed a freebie.

Read more: The ‘freebies’ debate
About India’s spending on subsidies

No advanced economy spends more than 1% of GDP on subsidies across all sectors. For example, the total subsidy in Germany is 0. 9% of its GDP, in France just 0. 4%, but in India, agricultural subsidies alone eat up around 2. 25% of our GDP.

What are the recent findings on the state’s welfare expenditure?

Welfare spending in India is woefully low. It is low in comparison to other developing countries. For instance, public spending on health and education was 4.7% in India, compared to 7% in sub-Saharan Africa. And it is also declining in many States.

According to the Reserve Bank of India’s Study on State Finances, from 2014 onwards, the social sector expenditure at the State level has been declining even after States were given more resources.

Must read: State Finances: Trends and Concerns – Explained, pointwise
What are the revenue expenditure side impacts of freebies?

Revenue decline: Though Goods and Services Tax is a game changer for indirect taxes, there is less than 6% of the people pay income tax in India. The tax exemption limit in India keeps getting raised year after year.

India is raising 0.2% of GDP through property tax, whereas the developing country average is 0.6% of GDP and in OECD countries it is 2% of GDP.

On non-tax revenues, there is a significant growth at the Central government level. But there is a substantial decline at the State government level.

Impact on Expenditure: Universal health and education are not quick fix solutions and need a 10-15 year gestation period. So, the government find this wait difficult and choose an easy path to get a vote i.e., freebies and subsidies. Freebies will lead to a further decline in tax resources. 

As States are not spending on productive activities, it ends up depleting the tax revenues. This again leads to a revenue decline.

Read more: From freebies to welfare
What should be done?

1) India needs to have an institutional mechanism to control wasteful expenditure, 2) Instead of having a blanket policy — for instance, giving free electricity to all — the state needs to identify the beneficiary of a particular public policy, 3) India needs to have a good tax framework, where the government have much better resources for more social sector expenditure while also ensuring medium-term debt sustainability, 4) According to a private report, more than 8% of GDP actually gets spent on implicit subsidies. The government must assess and reduce them so that the state has more resources for welfare or social sector expenditure.

Most developed countries invested in universal health and education when they were poor. They cut down subsidies before they became freebies and used that resource for universal welfare. India too has to follow that approach.

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