Freebies might be politically advantageous but it is a ‘economic disaster’: Why SBI is right in its assessment

By: Anshul Vipat

The SBI report makes the air clear that freebies is nothing short of "economic disaster"

There is a growing noise in the public discourse about whether freebies should be promised to the electorates by the political parties or not. Not only the Election Commission but the Supreme Court and the government have also contributed to this debate. Now, SBI has come up with a report arguing a cap on spending on freebies or "hara-kiri" to 1 percent of state’s GDP.

The SBI report states that freebies have large fiscal costs and cause inefficiencies by distorting prices and misallocating resources. It also argued that it is difficult to define freebies and welfare schemes but drew a line nevertheless. “Freebies do not differentiate between those who can afford to pay and those who can’t, thus alleviating the crucial distinction between who should be and those who shouldn’t be the beneficiaries. Entitlement or welfare on the other hand, is a bonafide benefit for those who can’t afford. A clear example being free power for everyone is freebies, while free food grain for the 80-crore population during the pandemic is an entitlement”, said the report.

Freebies in politics

The country has seen political parties rampantly offering freebies to vote for them at the time of elections. Historically, it was limited to foodgrains and subsidies for farming but it has got expanded in recent years. In 2008, the then-UPA government had introduced a massive farm loan waiver of Rs 60,000 crore. Since then, the following states have waived off farm loans: Andhra Pradesh (Rs 240 billion; 2014-15); Telangana (Rs 170 billion; 2014-15); Tamil Nadu (Rs 52.8 billion; 2016-17); Maharashtra (Rs 340.2 billion; 2017-18); Uttar Pradesh (Rs 363.6 billion; 2017-18); Punjab (Rs 100 billion; 2017-18); Karnataka (Rs 180 billion; 2017-18); Karnataka (Rs 440 billion; 2018-19); Rajasthan (Rs 180 billion; 2018-19); Madhya Pradesh (Rs 365 billion; 2018-19); Chhattisgarh (Rs 61 billion; 2018-19).

In 2015, saw Aam Aadmi Party (AAP) offering a certain amount of free water and electricity to urban voters. Two years later, the BJP promised to wave off farmers’ debt in tune of 80,000 crores if elected to power. In the run-up of 2019 Loksabha elections, Congress had promised Rs 6,000 every month to the bottom 20 percent of the population of around 5 crore families or 25 crore individuals. Sensing the danger, the Supreme Court took up the matter, setting up a three Judge bench for examination.

The dangers of freebies

The SBI report makes the air clear that freebies is nothing short of "economic disaster". Take the example of Punjab for instance. The state, which was the wheels of Indian economy, is expected to remain in the worst position as its debt-GSDP ratio is projected to exceed 45 per cent in 2026-27. The recently-elected AAP government in the state had announced 300 units of free electricity to every household. Even by the most conservative estimates, it is expected to increase the subsidy bill, by at least Rs 5,000 crore or more than 5 percent of states' GDP. Just like Punjab, freebies have exceeded 2 per cent of GSDP for Andhra Pradesh.

Thanks to freebies, the off-budget borrowings by states (loans raised by state-owned entities and guaranteed by the state governments) have reached around 4.5 percent of GDP in 2022. The extent of such guarantees have achieved significant proportion of GDP for various states. The guarantee amount is significant at 11.7 percent of GDP for Telangana, 10.8 percent of GDP for Sikkim, 9.8 percent of GDP for Andhra Pradesh, 7.1 percent of GDP for Rajasthan, 6.3 percent of GDP for UP. While the power sector accounts for almost 40 percent of these guarantees, other beneficiaries include sectors like irrigation, infrastructure development, food and water supply.

The alarming figure also raises a serious question on freebie schemes given away by newly-elected governments. Comptroller and Auditor General of India (CAG) data suggests the state governments' expenditure on subsidies has grown at 12.9 percent and 11.2 percent during 2020-21 and 2021-22.

The added burden on the economy also put breaks on states' capacity to commit more finances to critical social sectors like health & education. This speaks volumes for the deleterious impact of the culture of freebies that can spell doom for the economy of a state. Freebies being at the foundation on which victory is secured, the concerned parties are prone to promising them election-after-election.