Finance Commission of India chief speaks out against rising culture of freebies by states

Amidst a race to expand political popularity by announcing freebies, Chairperson of the Fifteenth Finance Commission NK Singh has raised a red flag against the culture of competitive freebie politics. He warned that freebies undercut the basic framework of macroeconomic stability and distorts expenditure priorities by leading to spending on revenues away from the overall improvement in quality of life.

In a strong vote against freebies, he said, “The economics of freebies is invariably wrong. The economics and politics of freebies are deeply flawed. It is a race to the bottom and it is not the road to efficiency or prosperity, but a quick passport to fiscal disaster. ”

In what could be a major talking point in the coming future, Singh asked “whether the time has come to consider recourse mechanisms like subnational bankruptcy,” which in simple terms means excessively stressed states being identified as bankrupt.

He argued that freebies bring into question “market differentiation between profligate and non-profligate states” and whether India can have a recourse mechanism for subnational bankruptcy.

He said, “We must consider a consultative process for policies designed to differentiate between well managed states and less well managed states as long as there is a sovereign guarantee. For instance, Article 293 (3) of the Constitution reads: A state may not, without the consent of the Government of India, raise any loan if there is any part still outstanding. ”

He added, “In a classic example, a state which has become profligate and is unable to pay its bills, they immediately rush to the Center. There is no recourse mechanism outside the Finance Commission. There may only be options for recourse mechanisms in times of emergency such as pandemics and natural disasters like earthquakes. We must consider constitutional provisions such as Article 282 in cases of subnational bankruptcy. ”

Speaking at the Annual day celebration of the prestigious Delhi School of Economics, Singh said that the political dialogue built around freebies is fraught with danger. Citing Albert Einstein, Singh said, “Sometimes one pays most for the things one gets for nothing.”

He explained that there was a need to distinguish between the concept of merit goods and public goods on which expenditure outlays have overall benefits.

The statement of the chief of the Finance Commission is significant as it is a constitutionally-mandated body that is at the center of fiscal federalism with a core responsibility to evaluate the state of finances of the Union and State Governments, recommend the sharing of taxes between them. , lay down the principles determining the distribution of these taxes among States.

He said that examples of expenditures that generate overall benefits in the Indian economy are strengthening and deepening the public distribution system, employment guarantee schemes, support for education and enhanced outlays for health, particularly during the pandemic.

He cautioned that it’s important to calculate how expensive freebies are for the economy, for quality of life and for social cohesion in the long run, instead of projecting how cheap the freebies are or how little they cost.

“We must dread the thought of replicating the culture of competitive freebie politics. We must go on the route of achieving higher rates of economic growth. The race to efficiency is the race to prosperity, he added.

To back his argument that freebies undercut the basic framework of macroeconomic stability and distort expenditure priorities, instead of expenditure being given for overall improvement in life, he said that outlays are being concentrated on subsidies of one kind or the other.

Singh’s comments are in sync with concerns expressed by a group of secretaries of the Union government in a meeting with the Prime Minister. The bureaucrats had warned that the freebies were threatening the fiscal sustainability of states, which are already debt stressed and the credit rating for each state annually to do fiscal management.

Using Punjab as an example to underline the kinship between freebies and financial stress, he said that in the case of Punjab, some have estimated that the promise of freebies made in the recent Assembly election might cost around 17,000 crores for their implementation.

He said, “If we take everything impacting the debt ratio of Punjab into account, there is going to be an additional impact of 3 per cent of GSDP. As we know, the debt to GDP of Punjab is already at 53.3 per cent for 2021. -22, which would worsen on account of these new measures. “

The bureaucrats in their meeting with the prime minister had listed Indian states in north, south and north east regions facing stress due to freebies. They highlighted that the culture of zeroing in on freebies as a quick fix to win over the low-income voters and crucial voter groups is being replicated across the country.

For example, in January, one month away from Assembly polls, UP’s Yogi government announced a 50 per cent reduction in the power tariff on agricultural use, to directly benefit over 13 lakh users in rural and semi-rural areas. The BJP’s Campaign in UP, for example, included a promise of free electricity for 2.3 crore farm holdings, free scooters for female college-goers and two free LPG cylinders. The AAP in Punjab vowed 300 units free power to every 55 lakh households and a Rs 1,000 monthly allowance for every woman.

Singh in his lecture cited the example of states like Rajasthan, where the cost of sops announced will have around one per cent additional impact on the state’s debt to GDP, which stands at 39.8 percent for 2021-22.

Expanding the issue of freebies distorting expenditure priorities, he cited the change to the new pension scheme of contributory pension scheme from the old scheme, which was a fixed return on Rajasthan.

He was informed that the budget of Rajasthan’s Gehlot government announced the return to the old pension scheme. He said, “This decision is regressive considering that the move away from the old scheme was based on the fact that it was inherently inequitable. Civil servants make up a small fraction of the population. Such a small fraction capturing a large part of the state’s revenue resources is invariably disproportionate and raises issues of equity. “

Quoting data from the state budget, he said that the pension and salary revenues of Rajasthan amount to 56 per cent of its tax and non-tax revenues. Thus, the 6 per cent of the population which is made up of civil servants stand to benefit largely from this 56 per cent of the state’s revenues, which would amount to a small fraction of the salaried classes consuming a disproportionate part of public expenditure.

Singh stated, “This is fraught with dangers not only from intergenerational inequality but the broader principles of equity and morality.”

He listed more reasons why a departure from the culture of freebies needs to be ushered in imminently. He added, “one state cannot pass on its debts to another state, nor can one nation pass on its debts to another nation.” “

He also underlined that free power, or a certain quantum of free power, free water and other kinds of free consumption goods distracts outlays on environmental and sustainable growth, renewable energy and more efficient public transport systems.

Singh’s remarks bring to fore the petitions by state governments for greater allocation of funds as the freebies are leading to huge mounting dues for power distribution companies to consider here and failure to introduce major power reforms. “

“These are the single biggest factor which does not enable us to get away from fossil fuels and move into practices which are more environmentally friendly,” he said.

Singh’s caution echoes the concerns expressed by experts who claim that free electricity and water are distorting agricultural priorities as they cause extensive use of water and fertilisers.

“The consequences of a depleting supply of ground water is an important issue to consider when speaking of freebies pertaining to free consumption of goods and resources,” he added.

He also pointed out that the spreading culture of freebies is having a debilitating effect on the future of manufacturing as they lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure, enabling high factor efficiencies in the manufacturing sector.

This, he said, stymies gainful employment because there is no substitute for growth if we wish to increase employment.

Offering a solution out of the freebie trap, he suggested that the race to the bottom implies government deregulation of markets and business and states competing to underbid each other in lowering taxes, expenditure and regulations.

He said they must strive instead for a race to efficiency through innovative ideas and solutions to common problems, which other states can emulate.

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