The reckless spending on freebies by Indian state governments has historically attracted voters, but it has meant sacrificing a good quality of life.
Splurging on populist measures such as free electricity and bus rides often leads to severe budget crises.
“Freebies are never free… When parties offer plans, they must be required to clarify financing and this trade-off to voters. This will reduce competition for populism temptation,” Ashima Goyal, a member of the Monetary Policy Committee of the Reserve Bank of India (RBI), told PTI yesterday (August 21).
Freebies like this can be translated into lower capital expenditures for healthcare, education and other more important needs, she said.
“Reducing the number of subsidies by ensuring that only the deserving receive them will free up resources to invest in health, education, agriculture, R&D and rural infrastructure, which will help Create more jobs and reduce poverty on a sustainable basis,” said a RBI report (pdf).
On the other hand, reckless freebies damage state finances by imposing large indirect costs. Indian state governments have announced welfare schemes and subsidies worth more than 1 billion rupees ($12.5 billion) during the current financial year.
Theory of Good and Bad Subsidies
According to KR Shanmugam, Dean of the Madras School of Economics, only states with a surplus income can pay Freebies and subsidies.
2021-22 However, only 11 of India’s 28 states recorded surplus revenue.
Shanmugam also called for a distinction between good and bad subsidies. “Good subsidies don’t affect other industries, distorting prices while boosting the target population… Bad subsidies can negatively affect other industries,” he told IANS.
More than half of state spending is pre-committed
Spending on freebies should be 0.1%-2% of state GDP.
However, some states face an acute problem: the cost of subsidies provided by highly indebted states such as Andhra Pradesh, Madhya Pradesh and Punjab are 14.1%, 10.8% and 17.8%, respectively part of its revenue.
Adding committed expenditures such as wages, pensions and interest payments to the subsidy, the 16 states collectively spend 56% of their fiscal year revenue 2022-23, a SBI Research Explain recommendations. This is up from 54.7% in the previous fiscal year.
In such a situation, states generally tend to borrow more money, further increasing their own financial burden.
