From freebies to welfare

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act

Mains level : Paper 2- Freebies and related issues

Context

In a recent address, the prime minister shared his anguish on what he called the “revdi” or the freebies culture.

Populist policies and its impact over the states’ finances

  • What are freebies? N K Singh defined freebies as “something that is given to you without having to pay for them, especially as a way of attracting your support for or interest in something.”
  • A recent report of the RBI on states’ finances highlighted the perilous condition of states’ finances and enhanced debt stress on account of flawed policies.
  •  Nothing undercuts more irresponsibly India’s abiding international and national commitments than the perils of this reckless populism.

Factors that need to be considered in devising welfare policies

1] Quest for sustainable development

  • The initiatives undertaken at COP21 in Paris, the International Solar Alliance and subsequently at the COP26 in Glasgow represent India’s national consensus to forge a path of growth geared towards intergenerational equity and to exponentially increase development.
  • Our ability to adhere to this commitment depends on two other commitments.
  • 1] An increase in the percentage of renewable energy in our energy consumption.
  • While subsidies are being promised in one form or the other by way of free electricity, the deteriorating health of state distribution companies seriously undercuts their financial viability.
  • Lowering the price for some consumers, offset through overcharging industrial and commercial contracts, reduces competitiveness, ushers slower growth both in incomes and employment.
  • 2] The inability of discoms to actively encourage solar power is stymied by their financial condition and the inability to evolve tariff structures.
  •  Regulatory capture, a fixation on unrealistic tariffs and cross-subsidy in energy utilisation prevent a credible coal plan, which is central to our energy planning.

2] Challenges in providing basic facilities

  • The government seeks to address the challenge of inequity by ensuring access to a wide range of basic facilities.
  • These include banking, electricity, housing, insurance, water and clean cooking fuel, to mention a few.
  • Removing this inequity to access helps boost the productivity of our population.

3] Issue of access

  • Benefits under various welfare schemes such as PM Awas Yojana, Swachh Bharat Mission and Jal Jeevan Mission have eliminated the biggest barrier for citizens — the exorbitant upfront cost of access.
  • Moreover, they are leading to irreversible empowerment and self-reliance.
  • For instance, a house built under the PM Awas Yojana is a lifelong asset for the beneficiary household that cannot be taken back by any government.

4] Use of technology in direct benefit transfer

  • Identification of beneficiaries through the SECC and prioritisation based on deprivation criteria has enabled the government to assist those who need it the most.
  • Governments that end up taking the shortcut of universal subsidies or freebies often end up ignoring the poor and transferring public resources to the affluent.

5] Expenditure prioritisation

  • The next issue that needs to be considered is of expenditure prioritisation being distorted away from growth-enhancing items, leading to intergenerational inequity.
  • Investors, both domestic and foreign, and credit rating agencies look to macro stability in terms of sustainable levels of debt and fiscal deficit.
  • After years of fiscal profligacy, we returned to the path of fiscal rectitude in 2014.
  • The last time such an effort was made was by enacting the first FRBM Act on August 26, 2003.

6] Impact on future of manufacturing and employment

  • The next factor that need to be considered is the debilitating effect of freebies on the future of manufacturing and employment.
  • Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.
  • They stymie growth and, therefore, gainful employment because there is no substitute for growth if we wish to increase employment.

Conclusion

The poor state finance position should serve as a timely reminder to those promising fiscally imprudent and unsustainable subsidies.

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