From UPSC perspective, the following things are important :
Prelims level : FRBM Act
Mains level : Paper 2- Freebies and related issues
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.
The poor state finance position should serve as a timely reminder to those promising fiscally imprudent and unsustainable subsidies.