Economics and politics of freebies

The present central govt under the leadership of Modi has done admirable well on reducing inequity by providing access to basic necessities and facilities (banking, hygiene, water, housing, insurance, electricity…) to the most needy. This then raises the productivity of the Indian human resource. — KK Srivastava

There have been tectonic (and positive) changes in India since 1991 when market friendly economic reforms were ushered in. However, basic structural weaknesses – inequality of wealth being one – have either stubbornly stayed put or even accentuated. This has, inter alia, adverse political consequences. The tap 10% in India earned 57.1% of income in 2018 while the poorest 50% earned only 13.1%, according to world renowned economist Thomas Pickety. The corresponding figures stood at 34.4% and 20.3% respectively, in 1991. Between 1991-2000 the share of wealth of the top 10% increased from 50.5% to 74.3% while the share of the bottom 50% fell from 8.8% to abysmal 2.8%.

Not only have the poor lost out in their share of productive resources but they have also witnessed a significant fall in their rights and access to social protection. One example of this is labour codes which provide no success to the informal sector workers and essentially reinforce the capitalism claim that essentially workers are lazy and greedy; so the labor market worked best in a hire and fire mode. Both these developments – clamour for increasing adoption of market based economy, including in essential provisions (such as food, education, health, etc.), on one hand and alarming rise in inequalities on the other do not augur well for Indian economy, polity, and society. This could undermine the nation’s fragile social stability.

A report commissioned by the Economic Advisory Council to the PM (EAC-PM) estimates that while top 1% earned 6.14% of total income in 2017-18, this percentage rose to 6.82% in 2019-20. Top 10% earned 35.18% and 32.52% respectively. In other words the heavily skewed nature of income distribution is only turning worse. And to alleviate the grim situation it suggested introduction of universal basic income, assurance of better distribution of earnings, launch of MGNREGA type scheme for urban poor, allocation of higher share of expenditure for the social sector, etc. Incidentally in 2017, IMF had approvingly suggested the idea of India launching a fiscally neutral universal basic income by eliminating both food and fuel subsidies that could cost 3% of GDP.

According to UN’s World Population Prospects 2022 India is high on population but low on development indicators (see table below).

Indicator                               Unit                                   Brazil    Russia    India     China      World
Total Population                  Million                                  214        145        1408      1426        7909
Sex ratio at birth                  M per 100 F                         105        106          108        112          106
Life expectancy at birth       Years                                      72.8      69.4          67.2      78.2          71
Mean Child Bearing Age    Years                                      27.7       28.7         27.9       28.8         28.2
Infant Mortality Rate          Per 1000 live births               12.8         3.9         25.5         5.7         27.9

No doubt poorer the country, worse is it likely to perform on development indicators; differential income levels do matter. However, Bangladesh (figures not mentioned in the table: these are 169, 105, 72.4, 25.7, 22.9) with significantly lower per capita GDP based on purchasing power parity (PPP) than India ($6,613 compared to India’s $7,333) has done better on most parameters. This shows it’s not all about income and its spending. What matters more as to how we spend the scarce resources to lift those who are at the bottom of the pyramid. 

It is in this background that we must dispassionately examine the debate about freebies. Take the example of nutrition security.

According to the UN report on the state of food security and Nutrition (2022) while the world is moving backwards in its bid to banish hunger, India is bucking the trend. Thus while globally the count of undernourished people swelled by nearly 45 million over past decade and a half, in India the number fell by nearly 23.5 million. But, having said that, more than 50% of Indian women in the 15-49 age group are anemic. About 45 million children are stunted due to deficiency of vitamins and minerals. One can go on and on. One conclusion, however, is inescapable. Competitive populism of freebies is to be shunned, instead targeted spending are needed that actually benefit those for whom they should be meant. Even the Supreme Court has come down heavily on illogical freebies that the elected governments keep announcing before elections. It went one step further and advised the Centre to consult the Finance Commission on regulating them. The PM has, in his latest outpours, spoken out against the revdi culture. Not that the ruling party can absolve itself of the charge of same culture. In UP, BJP had promised a farm loan write off in 2017 election eve. This waver added up to over Rs. 2 trillion, giving a shiver to banks. Parties of all hues, BJP included, promise massive dosage of subsidies and freebies, including free electricity, water, housing, bicycles, laptops, etc. on top of the cash handouts. This is competitive populism at its peak. To be sure, it is not a new phenomenon; only that no one shies of it anymore. Even it if is a zero sum game, the contesting netas perhaps find themselves in a Prisnor’s Dilemma like situation. No one can dare to bell the cat.

The paramount question is if the freebies are affordable given the perilous state finances; indeed they are not fiscally prudent or sustainable. Punjab, where the Aam Aadmi Party had promised free power, the state’s total outstandings as a percentage of its GSDP have risen to 53% by March 2022; these were only 33% a decade age. NK Singh suggests that the states should be provided annual, not five yearly, grant penalising them for their profligacy. But can it be implemented, given the sentiments about curbs on state autonomy? One really is skeptical. 

More important issue is to decide about the treatment given to merit subsidy vs non merit subsidy. So should the economically weaker be also deprived of free/subsidized water, power, housing, fuel, education …… the list goes on. But, equally, it is a very unsound-economically at least – move to cover all users for providing such benefits. But all parties, without exception, indulge in this reckless populism. Moreover, such ‘unproductive’ spending severely constrain the government’s ability to spend on developmental goals.

The present central government under the leadership of Modi has done admirable well on reducing inequity by providing access to basic necessities and facilities (banking, hygiene, water, housing, insurance, electricity ….) to the most needy. This then raises the productivity of the Indian human resource. It has empowered people.

What is needed is to work out a sustainable welfare provisioning to those deserving, but minus the unaffordable fiscal burden.    

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