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Source: The post is based on the article “Spend it, hide it and forget about it” published in The Times of India on 22nd August 2022.
Syllabus: GS 3 – The Union Budgeting
News: Recently, the debate has risen on freebies, from the highest political levels to RBI to the Supreme Court.
Importance of welfare measures (or freebies)
(1) Freebies (or Welfare) have helped to ensure most citizens had access to clean, smoke-free cooking gas through public sector energy companies
(2) Mid-Day Meal in a school is universally acknowledged to be the key driver for dramatically improving school enrollment ratios.
(3) Welfare measures provided piped water to all households; a service so basic that most of the world got it nearly a century back.
Issues in the freebies
(1) As per the RBI’s report on state government finances, states have stressed overall deficits and debt. The debt sustainability of Bihar, Kerala, Punjab, Rajasthan, and West Bengal could be an issue.
(2) Pension is a big liability on state government budgets. Some states like Rajasthan and Chhattisgarh have moved back from NPS to the old pension scheme /defined benefit plan, having the potential to increase liabilities.
(3) In the power sector, the state government-owned power discoms are facing high debt levels. As per RBI estimates, aggregate DISCOM debt is nearly Rs 4. 5 lakh Crore. If a bailout is provided to all discoms, then it would cost a sum of Rs 4. 3 lakh Crore, or 2. 3% of GDP to the exchequer.
(4) Today, the true state of state government finances is hidden in myriad layers. Some debt is reflected in the budget, some in power companies, some in other state government-owned PSUs, etc. For example, to finance discoms, “off balance sheet” borrowings are resorted due to restrictions imposed on the total debt that can be raised by a state government via the FRBM Act.
(5) Freebies are intensely political in nature in India. It is a part of the grand bargain between the voter and the politician/policymaker.
What should be the course of action?
There should be transparency in the state government balance sheet. All state government borrowings and debt should be aggregated in the state budget and reported. For example, The Centre brought FCI’s outlay, a large chunk of GoI’s subsidy bill, above the line in the budget.
The FRBM caps should be revised upwards to reflect the new accounting reality. The new FRBM caps should apply to aggregate state debt. This will force the finance ministers to optimize between several competing demands and show bond markets the true color of the government’s fiscal situation.