From UPSC perspective, the following things are important :
Prelims level : Merit goods vs public goods
Mains level : Paper 2- Issues with competitive freebie politics
Against the backdrop of promises of freebies in Punjab, this article deals with the harm caused by such freebies to the economy, life quality and social cohesion in the long run.
Macroeconomic stability of the Union and the States
- India is a Union of states. It is not a confederation of states.
- The Union is indestructible.
- The Union, therefore, is integral to both the Centre and the states.
- The strength of the Centre lies in the strength of the states.
- Therefore, the macroeconomic stability of the Union is contingent on the macroeconomic stability of both the Centre and states.
The complex issue of freebies
- There is great ambiguity in what “freebies” mean.
- Merit goods Vs. Public goods: We need to distinguish between the concept of merit goods and public goods on which expenditure outlays have overall benefits.
- Examples of this are the strengthening and deepening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health, particularly during the pandemic.
- All over the world, these are considered to be desirable expenditures.
- Freebies could be expensive? It’s not about how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.
Issues with the culture of competitive freebie politics
1] It affects macroeconomic stability
- Freebies undercut the basic framework of macroeconomic stability.
- The politics of freebies distorts expenditure priorities.
- Outlays are being concentrated on subsidies of one kind or the other.
- Illustratively, in the case of Punjab, while estimates vary, some have speculated that the promise of freebies might cost around Rs 17,000 crore.
- As we know, the debt-to-GDP ratio of Punjab is already at 53.3 per cent for 2021-22, which would worsen on account of these new measures.
2] Distortion of expenditure priorities
- Take, for instance, the change to the new contributory pension scheme from the old scheme, which had a fixed return.
- Rajasthan announced that it would revert to the old pension scheme.
- This decision is regressive as the move away from the old scheme was based on the fact that it was inherently inequitable.
- The pension and salary revenues of Rajasthan amount to 56 per cent of its tax and non-tax revenues.
- Thus, 6 per cent of the population, which is made up of civil servants, stands to benefit from 56 per cent of the state’s revenues.
- Intergenerational inequality: This is fraught with dangers not only of intergenerational inequality, but also affects the broader principles of equity and morality.
3] Increases social inequality
- The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.
4] It affects the environment
- When we talk of freebies, it is in the context of providing, for example, free power, or a certain quantum of free power, water and other kinds of consumption goods.
- This distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
5] The distortion of agricultural priorities
- The depleting supply of groundwater is an important issue to consider when speaking of freebies pertaining to free consumption goods and resources.
6] Effect on the future of manufacturing
- Lower the quality of competitiveness: Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure enabling high-factor efficiencies in the manufacturing sector.
7] Subnational bankruptcy
- Freebies bring into question market differentiation between profligate and non-profligate states and whether we can have a recourse mechanism for subnational bankruptcy.
- The race to the bottom implies government deregulation of markets and business.
- We must strive instead for a race to efficiency through laboratories of democracy and sanguine federalism where states use their authority to harness innovative ideas and solutions to common problems which other states can emulate.
Consider the question “What are the challenges in dealing with the competitive freebies politics? What are its drawbacks?”
The economics of freebies is invariably wrong. It is a race to the bottom. Indeed, it is not the road to efficiency or prosperity, but a quick passport to fiscal disaster.