Deciding the terms of debate on freebies, subsidies and compensation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 2- Debate on subsidies

Context

The Reserve Bank of India, in a report published in June, linked the precarious state of state finances to “freebies”, particularly power subsidies, and last week, the Supreme Court, waded into the debate, recommending the creation of an expert body to examine the matter.

Political, economic and institutional context

  • The determination of what is a good or bad freebie is and always will be a political choice.
  • A constructive debate must necessarily locate itself in the underlying political, economic and institutional context in which these so-called freebies are a feature of our electoral politics.
  • In the Public Interest Litigation filed in the Supreme Court, the petitioner has argued that “irrational freebies… is analogous to bribery”.
  • Commodification of electoral process: The problem with this framing is that it commodifies the electoral process and strips voters of their agency.
  • Voters, in this framing, are passive, unsophisticated actors who can be bought and therefore there is a need to be vigilant.
  • The honourable court had gone a step further, arguing for an expert, independent body, rather than Parliament, to tackle the issue.
  • This is judicial overreach and it privileges “experts” over legitimate democratic negotiation and strikes at the core of the political bargain.
  • Politics is central to welfare, not experts.

Economic context

  • In that spirit, a debate on the merits and demerits of freebies is important but this debate cannot be divorced from the economic context.
  • India’s structural transformation, particularly since 1991, has been slow and unique.
  • Despite abundant low-skilled labour, our growth trajectory has mostly skipped manufacturing, growing instead on the back of a far smaller, high-skilled services sector.
  • Consequently, as economist Amit Basole has shown the bulk of jobs our economy generated even in its peak growth years were in the largely informal, low value add construction sector.
  • The distributional consequences of this have been significant.
  • Under-employment and low inter-generational mobility have been persistent features of the Indian economy resulting in deep inequalities.
  • Growth lifted a large population out of poverty.
  • However, as the World Bank data show, most of those who escaped poverty between 2005-2012 moved into the vulnerable group — one income shock away from falling below the poverty line.
  • Somewhat reassuringly, democracy created pressure on our politics to respond to these economic failures.
  • It is in this context that the demand for so-called freebies has found legitimate place in our democracy.

Challenges

  • While democratic pressures led to the halting creation of limited social protection in the form of PDS and MGNREGA, they did not translate into investments in core public and merit goods — health and education being the most critical.
  • It is these accumulated failures that have created the new political logic that we confront today.
  • A logic where welfare freebies are being offered to compensate citizens for what economic growth has failed to do.

Conclusion

The answer does not lie in rapping state governments on the knuckles for being profligate. It lies in building a renewed democratic consensus on our economic and institutional growth path.

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