What’s the difference between ‘freebies’ for the poor and ‘business incentives’ for the rich?

There is a notion that populist measures are politically attractive but end up hurting everybody –including the poor. They are often described as “sops” that increase the fiscal burden of the government. A subset of these measures tagged as “freebies” have come under the scanner, with the connotation that they only further political gain.

Responding to a petition urging a ban on freebies, the Supreme Court in October suggested that the government and institutions such as the NITI Aayog, Finance Commission, Law Commission of India, Reserve Bank of India and opposition parties consider possible ways to regulate promises by political parties about welfare schemes.

But it does not make sense to evaluate policies and budgets in this limited way, ignoring the welfare and human rights considerations at stake.

As Budget 2023-’24 is around the corner, it is worth revisiting the discussion on freebies and populism.

Income support and PDS

With the agriculture sector facing structural problems and challenges in long-term profitability, a number of state governments have introduced direct income support for farmers. Odisha was the first. In 2019, it launched the Krushak Assistance for Livelihood and Income Augmentation scheme, which promised a transfer of Rs 10,000 annually to vulnerable farmers. Such a measure may not achieve long-term goals in terms of addressing capacity issues in the sector. Similarly, debt waiver schemes have been implemented by several states to settle long-pending outstanding loans and provide relief to the distressed farming community. Both schemes have been met with criticism, as they burden the state exchequer, without providing long-term gains.

However, such kind of measures with short-term benefits are justifiable, as they maintain a basic level of social protection or prevent the deterioration of development outcomes for target groups. Besides direct income support helps in increasing the investment and consumption level of households, which also contributes to economic growth.

Likewise, subsidies also enhance consumption and have positive externalities. For example, under the Public Distribution System, wheat and rice are provided to target groups at a highly subsidised price. This subsidy, which is the difference between the procurement price and the price at which the grain is supplied, amounted to Rs. 2.06 lakh crore in the Union Budget 2022-’23. The Public Distribution System has found acceptance among political parties, given its role in addressing hunger and malnutrition.

Thus, the larger question should be: which commodities need to be subsidised?

Merit and non-merit subsidies

In a Reserve Bank of India report last year, freebies have been defined as “a public welfare measure that is provided free of charge”. It adds that freebies are different from public/merit goods such health and education, expenditure on which has wider and long-term benefits. With reference to this distinction, how should we classify schemes such as granting Rs 25,000 to girl children on completion of Class XII, provisioning free bicycles to all students, or free distribution of sanitary napkins? In a technical sense, these may be non-merit subsidies, but they have a role in increasing enrolment and retention of children, especially girls, in schools, as these are added incentives to educate girls, at least up to secondary level.

Similarly, was the distribution of communication devices to children during the Covid-19 pandemic a freebie or a critical measure to bridge the digital divide and improve access to education? The definition of “freebies” on offer, thus, may not be useful in discerning whether the relevant expenditure has welfare implications.

Free distribution of water and electricity is frequently criticised as being instances of non-merit subsidies. The argument is that these interventions distort prices through cross-subsidisation, and make people lazy, leading to a drop in labour force participation. While a criticism is that they should be targeted, should the right to food and the right to water, which are otherwise Constitutionally mandated, not have universal form of public support?

Consider the provision of free public transport for women, which impacts women’s mobility, safety, and employment. A critique of such a measure is that by making a group eligible for a free service, the state is forgoing revenue from those who can afford to pay for it. However, in a situation where the use of public spaces remains highly gendered, and women face risks of violence, the value of promoting mobility may need a more nuanced understanding, than just estimating revenue loss.

While such interventions have implications on states’ fiscal health, given their limited revenue mobilisation capacity, it is the state’s responsibility to build an ecosystem in which all citizens can avail essential services. In the absence of this, and in the face of inequality, stopgap measures are often necessary. It is in this context that such spending should be seen as subsidising public goods. Moreover, such spending can also create positive externalities that can accelerate economic growth.

Populism vs welfare

Governments forgo revenue by giving tax exemptions to the corporate sector, loan waivers to big farmers and industrialists, bank recapitalisation due to nonperforming assets of banks, giving land to industries at subsidised rates, or perks to legislators. These measures also create constraints on the fiscal exchequer but do not feature in the discussion on freebies. Such discussion is often confined to the expenditure side of interventions, targeted towards the economically deprived or marginalised communities. The measures like those mentioned above, are often tagged as incentives, consciously provided to promote economic growth and development. Is it not possible to view free provision of essential goods and services to disadvantaged groups in the same way?

The debate on populist policy vis-a-vis welfare measures has nuances, and it may not be useful to categorise a measure as one or the other. It is also not judicious to tag any populist policy as detrimental for the economy; it is subjective and needs to be analysed in the context of the particular sector or demography.

One cannot deny that there are measures that are inefficient, distortionary, or a waste of resources; and it is also true that leakages or mismanagement of resources in development schemes is a persistent problem. This cannot be the sole argument for scrapping social protection-oriented welfare measures. The question that should be asked in the context of this debate is whether a policy is good or bad for development outcomes and fulfilment of human rights.

Protiva Kundu, Shruti Ambast and Gurpreet Singh work with the Centre for Budget and Governance Accountability, which aims to increase transparency and accountability in governance through rigorous analysis of policies and budgets.