• Which states give what Freebies and their three-fold classification? Downside of Freebies! Some humble suggestions for the 16th Finance Commission.

Tamil Nadu was amongst the freebie leaders with laptops, mixers grinders, TVs, gas stoves etc. “DMK founder CN Annadurai introduced the scheme to provide 4.5kg of rice for ₹1 in 1967 before abandoning it due to the financial burden. The “freebie culture” gained momentum when DMK’s M Karunanidhi promised free colour TVs and swept the 2006 polls.” Hindustan Times The state was a pioneer in starting the mid-day meal scheme for school going children and Amma’s canteen. 

Ever since the Aap Aadmi Party (AAP) rode to power in Delhi on the promise of free and power, the concept of freebies and their use to win elections has caught on. Actually, the original freebee was given by the Akali Dal-BJP state government who around 1997-98 gave free power to farmers of Punjab.

Some say one of the reasons why the Congress won Karnataka was because of the five guarantees namely 200 units of free power to all households (Gruha Jyoti), Rs 2,000 monthly assistance to the woman head of every family (Gruha Lakshmi), 10 kg of free rice to every member of a BPL household (Anna Bhagya), Rs 3,000 every month for unemployed graduates and Rs 1,500 for unemployed diploma holders, both in the age group of 18-25 (YuvaNidhi), and free travel for women in public transport buses (Shakti). Estimated cost of guarantees is Rs 50,000 crores.

In Madhya Pradesh, S S Chouhan, the then BJP CM of Madhya Pradesh in 2023 announced the Ladli Behna Scheme that gives women, who qualify, Rs 1,000/ per month. Besides that he also announced payment of Rs 6,000/ p.a. to farmers. This is in addition to what they will receive under PM Kisan Yojana. Total cost of this and other schemes app Rs 20,000/ cr per annum    

West Bengal has its own version of the Ladli Behna scheme.

In Andhra Pradesh, the Telegu Desam Party promises the super six guarantees. Rs 3,000/ per month for unemployed youth, 3 Gas cylinders free per year for every household, Rs 15,000 per year to eligible school going children, free bus travel for women, Rs 1500 per month allowance for women between age 15 to 59 and Rs 20,000 per year financial assistance to farmers. Indian Express

In Maharashtra the Mahayuti government has recently promised “Rs 46,000 crore for the Mukhyamantri Majhi Ladki Bahin Scheme (Rs 1,500 per month to women between age 21-60), Rs 10,000 crore for the CM Yuva Karya Prashikshan Scheme (Rs 10,000/ per month to 10,000 interns), Rs 14,761 crore for the electricity bill waiver scheme for farmers using agriculture pumps up to a certain horsepower, and the Annapurna scheme promising three free cylinders per year to over 52 lakh families across the state.” Indian Express  

In Jharkhand 2020 budget, “In a first, the Budget, presented by Finance Minister Rameshwar Oraon, also proposed to institute annual unemployment allowances of Rs 5,000 and Rs 7,000 for all unemployed graduates and postgraduates, respectively. Rs 146 crore has been earmarked for this in the 2020-21 Budget, he announced.” The state government proposed to start its own health insurance scheme, worth Rs 5 lakh each, on the lines of the Centre’s Ayushmaan Bharat scheme. Indian Express

 RBI definition of Freebies

“The Reserve Bank of India (RBI) defines freebies as “public welfare measures provided free of charge”, distinguishing them from “merit goods”, which provide “wider and long-term benefits” and spur development. For instance, under the RBI definition, free household electricity is a freebie but not free education or healthcare, which aid in broader human development.” Indian Express

Broadly freebies (amounts spent in the social sector) can be classified under 3 categories – targeted at women, welfare schemes and doles.

1. Women Schemes are monthly allowance, free bus ride, free cycles and three gas cylinders. These provide long-term benefit.

2. Welfare Scheme

a. For e.g. the purpose of the Ujwala scheme was to draw away women from using wood to gas.

b. So also the Amma Canteen Scheme in Tamil Nadu that offered subsidized food, cooked by women self-help groups, was brilliant. Read  Why Amma’s canteen must be replicated nationwide a and b provide long-term benefit.

c. Free food grains has an outlay of atleast Rs 1.9 lakh crores and MNREGA outlay atleast Rs 60,000 crores p.a. provide wider benefit. However, with poverty rates falling there is scope to reduce the number of beneficiaries under the free food grains scheme. Read  Ideas to reduce number of beneficiaries

3. Doles – 

a. Free power to farmers, free power up to 200 units and Free water.

 Should a scare commodity like water be given free? In Delhi the capital depends on other states for nearly all of its   supply?  Anything free encourages wasteful consumption. 

b. Others are unemployment allowance, free TV’s, free smartphones, free scooter, free laptops, free mixer grinder, free gas stoves etc.

c. Financial assistance to farmers through flat amounts per year provided by the Centre. Even if the government gave farmers Rs 20,000/ per annum they would be discontent because the root cause of the problems are not being addressed by state governments.

d. Farm loans waiver.

States with high debt to state GDP levels will need to limit freebies and subsidies for e.g. in 2022-23 Punjab, Rajasthan and Bihar percentages were 53, 40 and 39. To read more  

Amounts spent on the Production Linked Incentive Scheme (PLI) or interest subventions cannot be termed as a freebie.

 So how does one look at these benefits?

 1. No scheme must provide natural resources free for e.g. water and power. Their supply is limited and impacts the environment adversely too.

It is not known how much of the recent water crisis in Delhi is because of the free water scheme by the Delhi government.

 2. Women schemes as stated in 1 and 2 are welfare in nature. However, these need to be funded from the state budget.

 3. Farm loan waivers and items in three above are a clear no even though production of some items included in Doles contribute to economic growth, in India and China.

 4. The Centre already subsides farmers through the annual grant of Rs 6,000/ and sale of fertilizers at discounted prices. Any financial assistance needs to be funded from the state budget.

Niti Aayog must keep track of the cost of freebies and welfare schemes spent by the Centre and state wise. These should be part of the annual Budget documents.

 Freebies have to be funded

Falling short of funds due to freebies States raise revenue from sources where they have control for e.g. taxes on petroleum products, stamp duty registration, property tax and tax on liquor.

For e.g. Punjab decided to levy a registration fee of .25% on vehicle and home loans given by banks and states increase VAT on petroleum products or tax on real estate. Himachal Pradesh increased VAT on diesel by Rs 6/ in 2023. Karnataka recently increased price of fuel by Rs 3 to 3.5 per litre. Read Why did Karnataka increase fuel prices  Taxes on petroleum and liquor is a favourite tool to raise revenues. Demand for both is inelastic.

 When rates are raised, people crib about high prices without realizing that freebies have to be funded.

Monetary Policy Committe member Ashima Goyal said, “"Freebies are never free... especially harmful are subsidies that distort prices," she told PTI in an interview.   Noting that this hurts production and resource allocation and imposes large indirect costs, such as the water table falling in Punjab due to free electricity, Goyal said such freebies come at the cost of low-quality health, education, air, and water that hurt poor the most.” MINT 8  

 Read  Cost of freebies to be funded by the States

When rates are raised like in the above examples it increases the operating cost of manufacturing and services adversely affecting the state’s competitiveness. Eventually, it affects investment and economic growth in the state. 

 Myth of the Delhi Model 

Some are calling for emulating the Delhi Model. Unlikely, because the gains from GST that Delhi makes due to its location cannot be replicated. Further, it is not a full-fledged state like say Punjab or Gujarat, so does not have to incur costs that other states do for e.g. police.

In case of Delhi the amount of unfunded subsidy on account of water and electricity is unknown.

 Read    Decoding Delhi’s Budget Why its freebie model cannot be replicated

 Thoughts for the 16th Finance Commission

 1. The 15^th Finance Commission had recommended a fiscal deficit limit of 3% of State Gross Domestic Product during FY24 with an additional .5% available for power sector reforms. Placing limits on fiscal deficit need to continue. If the fiscal deficit (FD), declared and unfunded subsidy, falls within this limit it might be fine.

 2. States must be compelled to spend a percentage of their total revenue on capital expenditure so they do not fritter away revenues on revenue expenditure including freebies. This capex number must exclude capex on account of interest free loans being currently provided by the Centre. 

 3. Farm loans waiver must be funded by the states within the overall fiscal deficit limit. After all, agriculture is a State subject under the colonial Constitution. 

 4. Doles or Freebies have to be limited to a pre-determined percentage of the state GDP.

 5. The FC must set up state wise Disinvestment Targets for a five year period. We are focused on disinvestment by the Centre but not the states!

The FC must ask the CAG to report state wise give the amount of unfunded subsidy. This must be added to the state’s declared fiscal deficit. This must be done for the Centre as well.

According to a June 2022 RBI Bulletin titled State Finances: A Risk Analysis freebies “potentially undermine credit culture, distort prices through cross-subsidisation eroding incentives for private investment, and disincentivise work at the current wage rate leading to a drop in labour force participation.”

 But why is capital expenditure important

Capex creates assets that give long-term benefit and generate demand for core sectors whilst freebies i.e. revenue expenditure is used in the present. “Capital expenditure has a much larger multiplier effect on the economy than revenue expenditure does,” said Manish Gupta, Associate Professor at the National Institute of Public Finance and Policy. Source ThePrint It creates jobs, demand and spurs economic growth.  

 Conclusion

Welfare schemes are fine but doles and freebies spoil the working culture and make people lazy. It is for the people of India, through the governments, to decide if they wish to enjoy freebies and high prices or demand productivity/efficiency and lower prices. A healthy national debate would help. Can Courts keep out of this discussion please?

We have reached a situation where freebies, salaries, pensions and interest eat a significant portion of the state revenues leaving little for development, irrigation and urban infrastructure. Thereafter, states expect the Centre to do the heavy weightlifting.

 The Centre must make the ordinary man realize what it is responsible for and what states/local bodies are supposed to do. 

States must realize that maintaining macro-economic stability is not the responsibility of the Centre alone.

Also read 

1. Decoding Delhi’s Budget – Why its freebie model cannot be replicated

2. Are Freebies a gateway to financial disaster

3. Karnataka government scrambling to generate more revenue

4. Negative Impact of Free bus ride in Punjab

5. Why Amma’s canteen must be replicated nationwide

6. Freebies could damage hard earned fiscal success

7. Impose restraints on freebies says former RBI Governor

8. Freebies are never free says Ashima Goyal

9. Cost of freebies to be funded by the States

10. Losses going up, HRTC may review bus fares

11. Sources of Delhi Water Supply