From freebies to welfare

Earlier, speaking at the annual day lecture of the Delhi School of Economics on April 19, I had mentioned that these freebies are “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.” Is it ironic that much earlier, Albert Einstein had said, “sometimes one pays most for the things one gets for nothing.” What Einstein said is embedded with deeper meaning.

The PM’s anguish emanates from the serious consequences of this malaise. Nothing undercuts more irresponsibly India’s abiding international and national commitments than the perils of this reckless populism. Consider the following:

First and foremost, is the issue of upsetting India’s 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 inter alia is predicated on two other commitments.

To begin with, 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. Isn’t it somewhat ironic that while free power sometimes becomes universal, then optional, then a halfway house through surcharges, these promises are only valid till incumbents face fiscal constraints and are forced to withdraw benefits? The Delhi government’s decision to make the electricity subsidy optional was largely due to rising costs. In Punjab, as pointed out by the RBI, the free power promised undercuts its ability to move to a more sustainable pattern of growth. Lowering the price for some consumers, offset through overcharging industrial and commercial contracts, reduces competitiveness, ushers slower growth both in incomes and employment.

Equally, the inability of discoms to actively encourage solar power is stymied by their financial condition and the inability to evolve tariff structures. India’s inability to meet an orderly and socially-cohesive transition to an era of non-fossil fuel energy critically depends on the health of state electricity boards, which is undercut by the freebie culture. 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. Therefore, it is not how cheap the freebies are, but how expensive they are for the economy, life quality and social cohesion in the long run.

Second, the Modi 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.

Third, the 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.

Fourth is the use of technology in direct transfer benefits. 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. In Delhi, innumerable households from the lower strata continue to remain dependent on expensive tankers for water due to a lack of water connections and the Delhi Jal Board’s limited supply. The free water policy has no value for these households.

Fifth is the issue of expenditure prioritisation being distorted away from growth-enhancing items, leading to intergenerational inequity. The science and economics of intergenerational debt swap are at best in a nascent phase. This is true also of changes in governments between states and nations. Illustratively, one state cannot pass on its debts to another state, nor can a nation pass on its debts to another nation. Investors, both domestic and foreign, and credit rating agencies look to macro stability in terms of sustainable levels of debt and fiscal deficit. One of the biggest achievements of the Modi government is that after years of fiscal profligacy, we returned to the path of fiscal rectitude in 2014. Ironically, it seems the last time such an effort was made was also by an NDA government, which enacted the first FRBM Act on August 26, 2003, while this government only re-emphasised the need to address this issue.

Sixth 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 PM’s recent remarks about the perils of freebie culture should serve as a timely reminder to those promising fiscally imprudent and unsustainable subsidies. His opposition to this culture should not be misconstrued as an objection to extending state support to citizens, especially the lower strata. Rather, PM Modi has demonstrated a successful model of welfare provisioning and governance that provides balanced development without creating avoidable fiscal constraints. It was Aristotle who said, “the worst form of inequality is to try to make unequal things equal.” The freebie culture is not a road to prosperity, but a quick passport to fiscal disaster.

The writer is president, Institute of Economic Growth and was Chairman, 15th Finance Commission