Freebies have become a culture. Those who support, argue they should be considered as empowering the people. On the other hand, those who oppose argue that freebies will promote a culture of free lunch, increase financial deficit leading to financial disaster.
In the recent Karnataka elections, five major poll promises were announced.
- Anna Bhagya – 10 kg free rice to every individual of BPL family.
- Gruha Lakshmi – Rs 2000 per month allowance to the woman head of family.
- Yuva Nidhi – Rs 3000 allowance for unemployed graduates and Rs 1500 for unemployed diploma holders for two years
- Shakti – Free bus travel for women
- Gruha Jyothi – 200 units of free electricity
A rough estimate of the cost of these is around Rs 65,000 crore per year which is roughly 20 per cent of Karnataka’s budget and equal to last year’s revenue deficit. Cost breakdown is Rs 5600 crore for Anna Bhagya, Rs 39,000 crore for Gruha Lakhsmi, Rs 1300 crore for Yuva Nidhi, Rs 4600 crore for Shakti and Rs 14,500 crore for Gruha Jyoti.
Everyone knows of the subsidy burden on the exchequer and the needed compromise between competing needs of the voters – providing access to better health, quality education, uninterrupted and quality power supply, etc. Here the ruling party is on strong ground since voters have made the choice – right or wrong, educated or uninformed. As is often said, like everything is fair in war, in electoral war also much criticised freebies can be justified. But, not legally perhaps.
Are Freebies legal?
Last year, the Supreme Court gave a judgment on a PIL filed by BJP’s spokesperson Ashwini Upadhyay to look at the complexity of the issues involved, and the prayer to overrule a judgment rendered by a two-judge bench of the SC in S Subramaniam Balaji case of 2013. In Balaji’s case against Tamil Nadu, the SC had held that the promises made by political parties in the election manifesto would not amount to ‘corrupt practices’ as per Section 123 of the Representation of People Act. However, it did observe that freebies influence all people and “shake the root of free and fair elections to a large degree.”
Even before the pre-poll guarantees, Karnataka’s fiscal deficit was 2.6 per cent. Now the new deficit will be 5.4 per cent which is higher than 3.0 per cent mandated by the Karnataka Fiscal Responsibility Act 2002. This will force the government to reduce budget in some sectors or impose new taxes. Both will be a herculean task.
One of the often-repeated arguments against freebie is that it can result in unmanageable deficit and create economic havoc. Still political parties win election by offering all kinds of freebies. However, our constitution makers anticipated such a situation. They have provided guardrails to stop such behavior on the part of political parties of ever-increasing freebies.
Through articles 292 and 293, the constitution mandates borrowings to be within limits. The Constituent Assembly of India discussed these articles on 10th August 1949 led by H V Kamath and Ananthasayanam Ayyangar. To quote them, ”So far as borrowing is concerned–they may be short or long-term, imposing heavy obligations upon not only the present generation but future generation also”. How true!
Subsidies World Wide
Let us take a look at the research findings of international institutions (International Monetary Fund, International Energy Agency and the World Bank) and academicians who have studied the controversial topic of subsidy in different parts of the world.
Their findings show that a subsidy like Gruha Jyothi (subsidizing power consumption) is harmful and in the long run affect the very poor people, it is expected to help. However, all of them do support giving conditional or unconditional benefits in the form of cash to needed families. In fact, even the concept of minimum guaranteed income is justified if financial conditions of the countries allow such schemes and keep deficit within limits.
In 2010, Iran successfully replaced offering subsidised fuels by giving cash transfer. Even though petrol prices increased by 400 per cent and diesel prices by 900 per cent, subsidy reform was widely accepted. Like Iran, Jordon implemented similar subsidy reform in 2015 with equal success. In fact, way back in 1997, five million poorest families were helped in Mexico with conditional cash transfer (if they send their children to school) and was a great success. Similar success stories of cash transfers instead of subsidy have succeeded in Yemen, Mauritania, and Morocco.
Economic historians will have a challenging task to figure out why India took many years to learn from all these successful efforts. Only in recent years after the introduction of Aadhaar, India started to adapt Direct Benefit Transfer (DBT). The highly subsidised LPG distribution program alone, has prevented the generation of about Rs 25,000 crore of black money in some years. This lesson of DBT could have been applied to Gruha Jyothi.
Gruha Jyothi and its consequences
In recent years, economics of installing roof top solar had improved considerably. Gruha Jyothi offering 200 free units may change this practice. With free power, the will to invest in green power will diminish. When one gets free power, though limited, the will to save power and also switching over to expensive LED bulbs will also decrease.
The long-term impact of free power is quite evident from the power-starved nations like Turkmenistan and Georgia soon after the collapse of the Soviet Union. Turkmenistan has the fourth largest gas reserves in the world and it gave free gas to its population. When I visited one of the houses, I found out that the stove was burning with no cooking vessels. When asked why, the owner responded to my shock that while the gas is free, she has to pay for the match sticks! This is not an exaggeration. It reflects human tendency of not valuing free commodity.
Another example is Georgia. I was the manager to reform its gas sector. After the collapse of the Soviet Union, Georgian gas consumers had to pay for gas and gas consumption fell by 75 per cent. Since Georgians were not accustomed to pay, even after they became free, they were not willing to pay for their gas consumption. Only 25 per cent of gas revenues were collected. What is true of Georgia and Turkmenistan, is true in every country when a commodity is subsidised.
While future generation is unlikely to admire the Gruha Jyothi program because of its anti-environmental impact, it may also be critical of lost opportunity to divert the limited resources to improve education. There is no need to convince anyone how our educational system has collapsed today, especially our government schools. If voters are given the choice of free power and improved schools, which one will they choose?