Parties across the political spectrum play the same game as elections draw near — they announce or implement a slew of giveaways, often in the form of direct cash transfers to beneficiary groups. A disconcerting trend, the focus these days is on women voters in particular. In Maharashtra and Jharkhand, the respective schemes to transfer cash directly into the accounts of women seem to have played a crucial role in the victories of the BJP-led Mahayuti alliance and the Jharkhand Mukti Morcha-led bloc. Direct cash transfers to women are being implemented in Madhya Pradesh, Karnataka, Tamil Nadu, West Bengal and possibly some other States.
Cash transfers have caught on, courtesy digitisation. Other freebies that have been around are farm loan waivers; free electricity and water; free bus travel for women; bicycles, laptops, grinders and sewing machines; and, more generally speaking, free schooling and medicines. Of course, the biggest subsidy of all is free food through the ration system. The other flagship direct transfer scheme is the PM Kisan Samman Nidhi Yojana which transfers ₹6,000 a year to farmers, with the States topping it up generously. So, this is clearly quite an assortment, which gives rise to two issues. First, we cannot right away decide whether freebies as a whole are good or bad, as they are dissimilar in their effects. In its June 2022 Bulletin paper on ‘freebies’, the Reserve Bank of India has sought to differentiate them from “public/merit goods, expenditure on which brings economic benefits, such as the public distribution system, employment guarantee schemes, States’ support for education and health”.
Second, their fiscal impact is a serious concern. The CAG, in its report on Maharashtra this May, has warned about rising debt burden. Over 60 per cent of the State’s expenditure is committed to debt service, salaries and pensions. Maharashtra, among India’s most resource-rich States, has debt as a percentage of GSDP at 18.6 per cent in FY24. It is below the all-States average of 27.6 per cent, and below the limit set by the fiscal responsibility legislation of 25 per cent, but that is no cause for complacency. The Mahayuti alliance’s Majhi Ladli Bahin scheme is expected to cost the exchequer ₹63,000 crore. For some other States such as Punjab (47.6 per cent), Jharkhand (30.1 per cent), Himachal Pradesh (44.2 per cent), Madhya Pradesh (28.7 per cent), Rajasthan (35.7 per cent) and Haryana (29.9 per cent), it’s a different story, as their debt-to-GSDP ratio is way above the national average.
With unproductive giveaways, capital and social sector expenditure could suffer, even as States are persuaded to reduce their deficit. The Reserve Bank of India has rightly said that the 16th Finance Commission should “examine reinstating some fiscal efficiency parameters”. Indeed, free electricity and water disrupts finances as well as energy efficiency. Welfarism that boosts economic and social empowerment is desirable — but not freebies that have a contrary effect. The latter is a race to the bottom.