FREEBIE RAJ
As political stakes increase and desperation among contenders grows, India risks sinking into expensive competitive populism EPISODE #70
Dear Reader,
A very Happy Monday to you.
Last week N K Singh, chairman of the 15th Finance Commission and former revenue secretary in the ministry of finance, dared to touch 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 last week, 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.”
Singh’s sharp observations come in the backdrop of a raging debate around the decision of the Aam Aadmi Party (AAP), which won a landslide mandate in Punjab, to press ahead and deliver on its electoral promises like supplying 300 units of free power despite the state staring at fiscal bankruptcy.
This week I explore the hot button issue of ‘Freebie Raj’. At the outset let me caution you that reality is far more nuanced than what the ongoing binary debate around subsidies would suggest. Read on and share your feedback.
The cover picture for this week has been sourced from Unsplash. The photo taken by Sikandar Ali is a unique representation of the Indian tricolour.
A big shoutout to Aashish, S T Patil, Premasundaran, Gautam and Vandana for your informed responses, kind appreciation and amplification for 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😊.
COMPETITIVE POPULISM
Delivering the key note address at the annual day of the Delhi School of Economics, N K Singh, chairman of the 15th Finance Commission and veteran bureaucrat, launched a broadside against competitive populism.
Warning against the “culture of competitive freebie politics”, he said:
“Freebies undercut the basic framework of macroeconomic stability.
The politics of freebies, apart from fiscal consequences, distorts expenditure priorities; instead of expenditure being given for overall improvement in life quality of the population, improving health and education outcomes. Outlays are being concentrated on subsidies of one kind or the other.
What, therefore, does this mean to fiscal sustainability for States which are already debt stressed.”
While appreciating the spirit of what Singh said, I would argue that it would be a mistake to place all subsidies in one basket: freebies.
If you are middle class—condemned to a Sisyphean life to earn a living wage and yet be required to pay taxes—then Singh’s words are music to your ears. My immediate circle of friends is constantly incensed about the high taxes they pay and the pathetic quality of basic public services they receive in return. So in our world view subsidies are nothing but wasteful spending.
Bear in mind though that the India story is about the wannabe middle class—800 million people who continue to be vulnerable as the benefits of development bypassed them. They need bankrolling and hand holding. Hence my argument that the reality is far more nuanced than what a binary view would suggest.
The Need
Let me try and reframe the challenge of freebies.
Our problem is not the amount being spent. No Indian wants a fellow citizen to suffer. Instead it is about the leakages that go to line the pockets of the ubiquitous politically connected middleman—and also the worst kept national secret.
The end result is that the targets, whether it be poverty alleviation, improving literacy or ease of living, are never achieved. In turn this legacy of deficits give rise to the virtuous cycle of good money chasing bad money, ensuring a constant feed to the corruption juggernaut. The middle class angst, and rightly so, is triggered by the looting of public coffers in the name of the poor.
Here again it is important to distinguish between the massive spending undertaken by both the union and state governments in the last two years to mitigate the fallout of the once in a century pandemic from the freebies promised by politicians in the run-up to elections.
The former is aimed at shoring lives and livelihood. In fact, but for this massive and costly programme, the devastation at the ground level would have been unprecedented. I am sharing a recent episode capturing the salience of this one-off spend undertaken by India in the last two years.
If you wish to re-read it please click the link below:
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.
The Fix
To address this challenge you clearly needed a massive step-up in funding and efficient delivery, such that the leakages are either minimised or eradicated. The good news is that every government was aligned to this objective. But they failed to walk the talk on execution, looking the other way when vested interests diverted resources for personal gain.
Little over a decade ago two things happened which set in motion a correction. Firstly, the business of corruption came under judicial and public scrutiny; overnight the cost and risks of corruption went up.
Second, the launch of Aadhaar, the 12-digit unique identity number, combined with a person’s mobile number and bank account allowed the authorities to create an economic GPS to identify a legitimate beneficiary.
The Congress-led United Progressive Alliance (UPA) launched the idea of Direct Benefits Transfer (DBT), but failed to exploit the opportunity. The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), which replaced the UPA in 2014, did not miss out though.
They turned targeted delivery of social welfare benefits into a political agenda, which as we saw in the just concluded elections to the Uttar Pradesh assembly earned them rich electoral dividends.
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 case of food and public distribution, the savings are Rs1.01 lakh crore. According to the government, in the seven years ended 2020, DBT enabled them to delete 3.99 crore duplicate and fake/ non-existent ration cards.
Keep in mind that over the last two years the union government has supplied 800 million people free food grains; forget about savings to the exchequer, imagine the humanitarian disaster if the leaking supply chain had not been fixed.
Trade Offs
The freebie story however starts getting complex when we extend them to other services.
In his address Singh dwelled on the decision of the new government in Punjab to provide 300 units of free power universally.
“Illustratively, in the case of Punjab, while estimates vary, some have speculated that the promise of freebies might cost around Rs 17,000 crores for their implementation.
If we take everything impacting the debt ratio of Punjab into account, there is going to be an additional impact of 3% of GSDP (Gross State Domestic Product). As we know, the debt to GDP of Punjab is already at 53.3% for 2021-22, which would worsen on account of these new measures.”
One cannot quarrel with the macro argument being made by Singh. Yet, like I argued in the case of food grains, it would be a mistake to overlook the reality of how bulk of the population is still being denied a basic need like electricity.
Earlier, the nature of poverty was defined around consumption; this was however abandoned in the first decade of the Millennium and replaced with a more holistic measure which took into account issues like access to basic services.
The problem here is not the intent. But the choice of a trade-off that is being made by opting for universalisation of free power.
Till a few years ago the challenge was access to electricity due to limited infrastructure. The good news is that in its 75th year of Independence India has finally reached electricity to every village. Yes, while this is a singular achievement it is low hanging fruit; and this is something which should have been clinched decades earlier.
The bigger issue now is the affordability and availability of 24x7 power provided to these consumers who are finally on the electricity grid. The celebratory headlines bury the reality and overlook the implications of this trade off between affordability and availability.
Limited resources mean that you have to make a choice—affordability vs availability—with the attendant implications. Reportedly, the funding of the free power accounts for 11% of Delhi’s annual subsidy bill; in the case of Tamil Nadu it is a massive 50%. Preempting such large sums is bound to squeeze spending elsewhere.
In this regard, work done by Prayas, a non-governmental, non-profit organisation based in Pune, is very illuminating. Data from their Electricity Supply Monitoring Initiative, sourced from 200 monitors across 23 states, reveal that one in two locations experienced outages of more than 15 hours per month and 2-4 interruptions per day in rural areas.
They also draw attention to government surveys conducted in 2017 which worryingly reveal that 40% of schools and 25% of health sub-centres do not have electricity connections.
What the promise of universal free power does is to potentially worsen this situation. Often what happens is that the politicians are quick to announce free power, but leave the bill with Discoms—most of which are weighed under by unpaid dues of staggering proportions. In turn power supplying companies refuse to sell to fiscally weak Discoms, who therefore have little or no incentive or funds to ensure a healthy and efficient power infrastructure.
The end outcome will be self-defeating for all stakeholders. Some states, like Punjab, will be threatened with fiscal bankruptcy, the power infrastructure will be sub-standard and last but not the least the consumer will be denied reliable 24x7 power.
A better solution would have been to adopt the cooking gas subsidy model. In this the beneficiary pays the market price and the subsidy is transferred directly into their bank account. Not only does this ensure better targeting, it will also not distort the market price and disincentivise leakages.
Like Prayas suggests it may be better to restrict the concession to a subsidised price made available only to the consumer at the bottom of the pyramid. And this could be implemented using the LPG subsidy model—where those who can afford to pay are excluded.
More importantly they question the quota of 300 units of free power and argue instead that this should be capped lower.
“Basic requirements of a small household, such as lighting, fans, mobile charging and TV, require only about 50 units/month, which increases to about 100 units/month with a refrigerator. A low tariff —say, at half the cost of supply —can be justified for such consumers.”
In the final analysis it is clear that at this stage of development India needs freebies. However, unlike what cavalier politicians may aver, it cannot be universalised. India just does not have the resources.
Instead of throwing the baby out with the bathwater it makes more sense to limit the benefits of subsidised products and services to those who need it. And today India has the means, powered by an indigenously developed tech backbone, to identify these beneficiaries. Alternatively, India risks sinking into competitive populism with disastrous consequences.
So what should it be? I leave it you to decide.
Recommended Viewing
Cricket is in the air with the IPL season poised to reach its half-way mark. I stumbled upon this lovely conversation between two legends of Indian cricket: Sachin Tendulkar and Virender Sehwag.
Hope you too appreciate the compelling anecdotes the duo shared among their friendly banter.
Till we meet again next week. Stay safe.
Well written Anil and very educative for our Politicians👏👏sincerely hope they read and adhere to it🙏
This indeed sounds like a practical solution! While we do not have any grudges for the cooking gas subsidy model - every outage is seen as a result of vote bank appeasement policies.This model should perhaps address that!