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Freebies Vs Economic Growth

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April 29, 2022

What is the issue?

N.K. Singh, the chairperson of the 15th Finance Commission, warned about how the race to provide freebies to voters could be a quick path to fiscal disaster.

How do freebies hamper the economic growth?

  • Macroeconomic stability- Freebies undercut the basic framework of macroeconomic stability.
    • In the case of Punjab, some have speculated that the promise of freebies is going to be an additional impact of 3% of GSDP.
  • Expenditure priorities- The politics of freebies distort expenditure priorities.
    • For instance, Rajasthan’s decision to revert to the old pension scheme is regressive because 6% of the population, which is made up of civil servants, stands to benefit from 56% of the state’s revenues.
  • Social inequalities- The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.
  • Unsustainable- Provision of free power, water, etc. distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
  • Distortion of agricultural priorities- The depleting supply of groundwater is an important issue to consider when speaking of freebies pertaining to free consumption goods and resources.
  • Manufacturing- Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.
  • Subnational bankruptcy- It raises the question of whether the time has come to consider recourse mechanisms like subnational
    bankruptcy.

Do freebies have any productive role?

  • Constitutional provision- As per Article 282, the Union or a State may make any grants for any public purpose.
  • Better workforce- Sometimes, freebies build a healthier and a stronger workforce, which is a necessary part of any growth strategy.
    • For example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
  • Increased productivity- Subsidies going into education, such as for laptops have now become necessities for increasing productivity, knowledge and skills.

What is needed in this respect?

  • Differentiation- We need to distinguish between the concept of merit goods and public goods.
  • The strengthening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health are considered to be desirable expenditures.
  • Sustainability- It’s not about how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.
  • Revisiting the Seventh Schedule- Most of the centrally sponsored schemes are subjects which are classic subjects in the domain of the states, such as employment, food, education.
  • So the Seventh Schedule which classifies the subjects into three lists requires a revisit.
  • Revisiting the Article 282- The entry under Article 282 of the Constitution has been used and misused for having all the centrally sponsored schemes.

 

References

  1. https://indianexpress.com/article/opinion/columns/freebies-are-a-passport-to-fiscal-disaster-7879244/
  2. https://www.hindustantimes.com/india-news/competitive-freebies-politics-calls-for-considering-sub-national-bankruptcy-n-k-singh-10165039043882html
  3. https://www.thehindu.com/opinion/op-ed/are-freebies-affecting-the-economic-growth-of-india/article65363024.ece
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