FREEBIE CONUNDRUM
The Supreme Court's intervention together with shrinking fiscal space is forcing an unprecedented scrutiny of electoral freebies EPISODE #84
Dear Reader,
A very Happy Monday to you.
Last week the Supreme Court weighed in on an already contentious debate on the business of electoral freebies. Taking a strong stance against these electoral handouts—the constant calling card of some political parties—the apex court directed the government to file a response by 3 August.
This intervention comes on the heels of a similar broadside by Prime Minister Narendra Modi a fortnight ago. In his unique style he dubbed it “muft ki revadi” (free sweets) and warned that this trend of electoral freebies is causing a diversion of scarce resources and jeopardising long term development and jobs of youth.
So this week I revisit the good, bad and the ugly of so-called freebies.
This week’s cover picture is an installation I came across at the entrance to an office. While I leave it to your interpretation, I was absorbed by a very appealing play of geometry.
A big shoutout to Atul, Gautam, Premasundaran, Aashish, Lakshmipathy, Raj, Vandana and Arvind for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
RECKLESS POPULISM
Last week the Supreme Court, while hearing a public interest litigation, launched a diatribe against fiscally expensive freebies promised by political parties in the run-up to elections to lure voters. Calling it a “serious issue of national importance”, the apex court directed the union government to submit a mitigation plan by 3 August to regulate subsidies.
“The issue before us is the way freebies are given to bribe the electorate. Even if the EC (Election Commission) issues model guidelines it is of no value; the government must put its stand before the (Supreme) Court.”
Coincidentally, a fortnight ago Prime Minister Narendra Modi too had railed against freebies, dubbing it as “muft ki revadi”.
Launching the 300 km expressway in Bundelkhand, Uttar Pradesh, PM Modi warned that unchecked this trend could jeopardise growth and thereby future job prospects of the youth.
I am sharing the clip below:
In his inimitable style PM Modi positioned freebies as a trade-off with development—one comes at the expense of the other.
Freebies are not sustainable, he said in a veiled reference to the Aam Aadmi Party (AAP), which made such electoral inducements a part of its stunning wins—first in Delhi and most recently in Punjab—by offering free electricity (300 units) and drinking water. Since then it has made this its calling card in every election cycle, though with no success, implicitly suggesting that freebies is not a magic electoral wand.
And in April this year N K Singh, the chairman of the 15th Finance Commission and former revenue secretary in the ministry of finance, had similarly dwelled upon the third rail of Indian politics—the electoral business of freebies.
Delivering the key note address at the annual day celebrations of the Delhi School of Economics, he said:
“It is not how cheap the freebies are, but how expensive they are for the economy; for life quality and for social cohesion in the long run.
We must dread the thought of replicating the culture of competitive freebie politics.”
Taking all three interventions together it is clear that subsidies are under the most severe scrutiny ever.
At one level it is a sign of the maturing of India that it is willing to not just discuss subsidies, but also whether they should be weeded out. Previously, the outrage would have forced a quick retreat with electoral consequences.
Another aspect though is that there is a risk of viewing this debate in binary terms—good vs bad. This, in my view, would be a mistake. It is one thing to rein in runaway populism, but another to view subsidising development objectives—in an attempt to rebalance society such that the bottom of the pyramid are included in the growth process—as freebies.
Why Subsidies?
You may recall that I had taken up from N K Singh’s remarks at the D’School event to explore the debate on subsidies in the newsletter sent out in April.
If you wish to read it again, please click the link below:
To recap briefly, the rationale for subsidies was as follows:
“The obvious question then is why do we still need to spend so heavily on social welfare, especially in fixing extreme poverty, even seven decades after Independence. The answer is simple: abject neglect and failure of public policy, compounded by corruption.”
Course Correction
From the above it is clear that spending on subsidies had become an instance of good money chasing bad money—the endless cycle was gradually undermining the annual spending budget of both the union and state governments.
One fix that has helped partially stem this leakage has been the shift to Direct Benefits Transfer (DBTs)—a process which was half-heartedly introduced by the Congress-led United Progressive Alliance by linking distribution with an individual’s Aadhaar, and then taken up on a war footing by the Bharatiya Janata Party (BJP)-led National Democratic Alliance in the last eight years.
As argued in my previous newsletter:
“Besides improving delivery DBT also nixed retail corruption, which was previously the bane of social welfare spending. At the end of March 2021, the cumulative savings on account of DBT was a staggering Rs 2.28 lakh crore.”
The graphic below, though not exhaustive, sums up the big savings under select overheads.
In the two years since the covid-19 pandemic struck, threatening both lives and livelihoods in India, the union government has undertaken the world’s largest social welfare spending programme—which entailed DBTs in both, cash and kind—extending to 800 million people.
The graphic below captures this trend.
Imagine the bleed on the exchequer and the corruption this welfare programme would have fostered if the DBT structure had not been in place.
The big lesson is that indeed India still needs social welfare programmes. If targeted it is a double whammy: reaches the ultimate beneficiary and limits corruption by cutting out the middleman.
Shades of Grey
Clearly all subsidies (or freebies) are not bad. The problem is when it gets tagged with populism indulged in by politicians desperate to lure support—ends justify the means as it were.
At the moment, the spotlight is on free power and water. Here again the framing of the debate is skewed. The mistake AAP made in Delhi was to universalise this offering; to be sure they have begun, after seven years, to pivot from the initial position and are nudging better-off cohorts to opt out voluntarily.
More importantly this argument is stretched to suggest that all the problems in the power sector stem from the idea of free power. Yes, it does contribute. But then so does the inefficient power administrative structure.
The latter is becoming critical as India moves to include non-conventional power among its options and is also encouraging the shift to Electric Vehicles—while the former is introducing sharp spikes in the power grid, the latter is going to cause a massive increase in the load; in short the current power distribution system and architecture needs a reset.
The largest damage to DISCOMs is inflicted by state governments—whose errors of commission vary from non-payment of dues, mismanaging investments in power and giving short shrift to processes. All of this leads to a build-up of sloth in the system and is also causing fiscal slippage.
Inspired by the 15th Finance Commission’s recommendations, the union government has adopted a carrot and stick approach over the last two years to nudge fiscally strapped states to undertake much needed reforms in the power sector.
As an incentive states willing to undertake mandatory power sector reforms are allowed additional borrowings in the year.
The list is as follows:
State government to take over the losses of public sector power distribution companies (DISCOMs);
Bring in transparency in the reporting of financial affairs of power sector including payment of subsidies and recording of liabilities of Governments to DISCOMs and of DISCOMs to others;
Timely rendition of financial and energy accounts and timely audit;
Compliance with legal and regulatory requirements.
Thereafter an audit of the reforms is undertaken and measured against the following metrics, only after which is the state allowed to avail of the incentive:
Percentage of metered electricity consumption against total energy consumption including agricultural connections;
Subsidy payment by Direct Benefit Transfer (DBT) to consumers;
Timely payment of electricity bills by Government Departments and local bodies;
Installation of prepaid meters in government office;
Use of Innovations and Innovative technologies;
Bonus points for privatisation of power distribution companies.
Ten states, cutting across party lines, have availed of this option. Not a bad start for such a politically sensitive public good like electricity. Further, it demonstrates bi-partisan political commitment to address such a vexing challenge.
There are two takeaways from the conversation so far:
One, not all subsidies are bad. Yes the best practice is to teach people how to fish. But in a developing country context like India some people still need to be handed the fish.
Second, recent changes in processes has introduced transparency, which is a precondition for the rule of the law. The same needs to be extended to document the cost of freebies and the subsidy payout be reflected in the annual budget.
In the final analysis it is clear that the debate on freebies needs to be nuanced. More importantly it should not distract from the mission of hitting the reset on the structure and administration of the power sector.
In my view therefore, any action should be initiated by elected officials after a considered public debate, rather than a judicial intervention. The judiciary, like other arms of the Indian democracy, should stick to wielding oversight as an unbiased referee.
The good news is that freebies is now a topic of debate. Remember this was not conceivable even a decade ago. As they say better late than never.
Recommended Viewing
If you recall the topic of last week’s newsletter was India’s incredible achievement in delivering a record 2 billion jabs.
StratNews Global followed this up in a conversation. Please find the link to this conversation between Surya Gangadharan and me.
And before I sign off, there is a small announcement. Beginning this week—Thursday, 7 pm—a video avatar of Capital Calculus will be part of the StratNews Global footprint. I am delighted to collaborate with Nitin Gokhale and team.
This weekly show too will review policies and developments through the intersection of politics and economics, mostly in conversation with a guest. In short Capital Calculus will come to you in two different formats and platforms.
Look forward to your support for this venture too. This time as a viewer. 😊
Till we meet again next week. Stay safe.
Dear Anil,
Well written and well timed article!! On Wednesday supreme court has decided to set up an expert committee to study the impact of freebies on the economy and tax payers money.It has to give its recommendations and measures to regulate it.
The issue of freebies is of political and economic nature and no party will agree on curbs ahead of polls.Our country s economy is heading towards a disaster because of mindless announcement of free benefits by opportunists. In Punjab , AAP is unable to fill its promise of free electricity and medical care due to lack of resources and pending payments.There are no teachers in school as no salaries have been paid . We are moving towards a disaster due to the vested interest of our corrupt politicians.
A very topical and important article Anil, considering that the CJI has been constrained to remark on 27th July, that "God help the ECI", if it cannot control the announcement of freebies before elections. The freebies v/s development debate is critical for the nation and I feel needs to be discussed in Parliament, in order to get all parties on board. Effective legislation needs to be passed for not only this but also to put a ceiling on election spending, so that all political parties and politicians are equally equipped to contest the elections. This may sound like a wishful suggestion but in the absence of this, the smaller political parties will opt for a freebie announcement spree to win elections. By writing off loans, the bank/financial institutions recover the amount from the funds that the government would have allocated for development. The future economic growth in terms of GDP and employment gets curtailed. Glad that at least this is being discussed. Keep enlightening us Anil. Very well written and presented.