Take the recent Cabinet decision to increase the cooking gas subsidy for beneficiaries of the Ujjwala scheme by ₹100 per cylinder. It comes at a time crude oil prices are on a boil, and tops up the ₹200 universal cut in cylinder prices in August. Does it make for a freebie? Or is the tag better suited to free electricity up to 100 units for families in Rajasthan or e-scooters given away to meritorious female students? To be sure, there is no legal definition: parties position their plans as welfare for the needy, and dismiss others’ as wasteful giveaways.
Last year, the Reserve Bank of India (RBI) released a report on state finances in the wake of Sri Lanka’s economic crisis, raising red flags over the fiscal health of some states and the risks emanating from ‘freebies’. Madhya Pradesh and Rajasthan, both poll-bound next month, have budgeted their fiscal deficits at 4% of their economic outputs this year. That’s the highest allowed, conditional on 0.5% of it being used on power sector reforms. Telangana, Chhattisgarh and Mizoram, the other three poll-bound states this year, have kept their targets at 3.5% or less.
Both central and state government finances have improved since the covid-19 disruption. The Centre’s deficit came down to 6.4% of GDP in 2022-23 after spiking to 9.2% in 2020-21, while that of the states fell to 3.2% from 4.1%.
Welfare or freebie?
One thumb rule to make the distinction could be whether a state has the fiscal wherewithal to be able to fund a policy move. That’s perhaps why the central bank has noted that the financial risks from freebies seemed moderate for four of the five most indebted states—Bihar, Kerala, Rajasthan and West Bengal. (It wasn’t so for Punjab, the fifth state, which spends large on free utilities.)
“A welfare scheme is interpreted as a freebie purely based on the timing of announcement, such as prior to elections,” said Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy. Education, health, public transport, and energy infrastructure including clean fuel may not be strictly “public goods”, she said, but as long as the fiscal space is identified, subsidizing them or giving them for free can have positive effects in terms of tackling widening inequalities in the post-pandemic or post-war period.
While states are returning to fiscal consolidation after the pandemic, debt levels of several of them, such as Punjab, Andhra Pradesh, Madhya Pradesh, Bihar, Kerala, Rajasthan, Uttar Pradesh, and West Bengal, remain over 30% of their gross state domestic product (GSDP). Worse, the Centre and several states have in the past resorted to off-Budget borrowings that hide fiscal stress, raising the question whether schemes are being planned despite the lack of fiscal room.
The spike in the Centre’s fiscal deficit in 2020-21 was not only due to pandemic relief, but also due to the clean-up exercise by bringing past food subsidy spends on to the books. The Comptroller and Auditor General of India (CAG) has also flagged off-Budget borrowings by Andhra Pradesh, Kerala, Karnataka, and Rajasthan, among others, each of which has high debt, an analysis by PRS Legislative Research pointed out.
Winning formula?
Not only have promises of free electricity in Delhi and Punjab by Aam Aadmi Party aided their victory, they have also forced other parties to announce similar promises to woo voters. While the Narendra Modi government takes pride in providing food and gas subsidies and job guarantees as well-targeted upliftment measures, it used the 2019 interim Budget to retrospectively launch PM-KISAN, an income support scheme of ₹6,000 per year to all landholding farmer families, right before the elections.
While pre-election schemes are common, experts say as long as governments are keeping their financial position in check, legal intervention into the matter could undermine democratically elected political parties’ rights to use public funds to improve voters’ lives in ways they deem fit. The states’ financial situation, like the Centre’s, has improved, with their own tax revenue growing 17.5% in 2022-23, in line with the nominal GDP growth. However, the pension burden, a committed expenditure, is huge and the promises by some of restoring the old pension scheme under which the entire amount is paid by the government—as against a contributory structure under the new scheme—could drain states’ coffers.
With the political heat intensifying, several announcements that can be considered both welfare and freebies are already being made, and more are expected. The fiscal costs of these schemes may need a closer scrutiny—but a ban or a legal intervention will be a stretch.
This is the first part of a series that will run until May 2024, to cover the top election issues as well as the current government’s report card after nearly 10 years in power.