Recent political debate in India has become obsessed with freebies. Typically, no one really defines freebies. This causes a lot of futile discussion. A few days ago I came across two articles on the nature of political competition in India. One was on an Indian platform. The other was on a foreign one.

The Indian writer argued that freebies are perfectly justified because inequality is high and rising. The foreign writer was more nuanced but the message was the same.

One may or may not agree with this formulation but, regardless, it reminds me of the post-1973 Indian paradoxes of political competition and public goods provision. That was the year when the Congress party, under the domination of Indira Gandhi, gave up the pursuit of growth in favour of distribution oriented welfarism.

The formula was to take from the relatively well-off and give to the relatively badly-off. Over time this led to several paradoxes, the most important of which was that even though the politicians talked of increasing the supply of public goods, they either increased the provision of private goods as after the reforms of 1991 or simply denoted some private goods as public goods.

Thus India, because of politics, although a capital scarce country, treated capital as an abundant factor of production and also because capital formation happened out of taxation, not commercial surpluses.

Passenger rail pricing is another good example of this sort of misleading categorisation.

Sen’s approach

So, all in all , no one really knew what was being discussed. They still don’t. But a simple definition has existed since 1983 when Amartya Sen discussed the subject in a paper titled ‘Poor, Relatively Speaking’. You can find it in Oxford Economic Papers, New Series, Vol 35, No 2. (Jul 1983).

Sen argued that improved and enhanced human capabilities were crucial for poverty alleviation. These days we call it skill development. More broadly, it’s called social capital.

But how could you develop capabilities or skills or social capital if people were both sick and hungry? So the objective had to be to increase the availability of health and education. But were these public or private goods?

So far so good, However, it quickly became clear that many of these things couldn’t be provided entirely free or, further, that if Mr A consumed one unit, it would always leave the amount available to Mrs B unchanged. Pure public goods are required to satisfy both conditions: the marginal cost of producing one extra unit is zero and consumption by one citizen does not reduce what’s available to the other citizens.

So a new idea developed, that of quasi-public goods, i.e., partly private, partly public — or what the Punjabis derisively call aadha teetar, aadha batayr (half partridge, half quail).

There is a twist in the tale, namely, good and bad public (or quasi-public) goods.

Thus, if the mid-day meal schemes that were started in the early 1980s were a perfect example of the ‘good’, low rail fares are a perfect example of ‘bad’.

In the former society as a whole benefits. In the latter case, only politicians benefit.

What about things like subsidised cooking gas and bank loans or government built toilets? The social benefits of these are clear. But what about political benefits? Politicians can’t take these for granted. So they keep coming up with more.

And that’s where we are stuck now, entangled in a debate that was conclusively resolved 40 years ago. We don’t know whether they are public, private or quasi-public goods.

Rules are needed

This is why clear rules are needed to ensure that supply and prices are consistent with sound economic logic. I propose three such rules below.

First, if a political party or the government in power wants to supply things free or at below cost, it must seek the approval of an independent authority or agency. Ideally it should be a constitutional authority so that its funding is guaranteed.

Second, this agency should check if whatever is being proposed adds to social capital or not, such as Sen’s capability criteria. There can be other criteria, too. There’s a lot of literature on this for guidance.

Third, all the things that this body approves should be funded out of the grants that the States receive from the Centre so that the pay-as-you-go practice can stop. In fact, this practice ought to be banned by law.

You may well ask why this extra tier of governance is necessary. The answer is simple: public and quasi-public goods will be needed in increasing amounts. But they can’t be funded indefinitely and infinitely.

To that the riposte from political parties will be the sovereign right to spend on the public. No one can disagree. But definitions must be devised and rules can and must be laid down.