Political Freebies in India: Definitions, Economic Impacts, and Fiscal Consequences

The distribution of freebies by political parties and government entities in India has emerged as a contentious issue with significant economic and fiscal implications. While often conflated with welfare schemes, freebies are distinct in their scope, intent, and financial impact. The central government, judiciary, and economic experts have increasingly voiced concerns regarding the sustainability of these promises, particularly their effect on state finances, inflation, and long-term economic growth.

Defining Freebies Versus Welfare Schemes

A primary challenge in the debate is the ambiguity surrounding the definition of "freebies." The central government, during the third National Conference of Chief Secretaries held in December 2023, emphasized the need to differentiate between legitimate welfare schemes and freebies. The conference noted that providing bare essentials such as education, health, food, fuel, water, housing, and electricity at subsidized rates is not inherently a freebie; the classification depends heavily on the target audience and the intent behind the provision.

Political parties often utilize freebies—defined as something given free of charge—as election pledges to secure votes. These typically include items like free electricity, drinking water, monthly allowances for the unemployed, and distribution of laptops, smartphones, and bicycles. Critics argue that while welfare schemes aim to provide a safety net for vulnerable populations, freebies are often short-term measures designed to influence electoral outcomes.

Fiscal Impact and Debt Accumulation

The financial repercussions of distributing freebies are severe, particularly for state governments. Former Reserve Bank of India (RBI) Governor D. Subbarao has advised against the policy of freebies, highlighting that they negatively affect financial discipline. The pursuit of these promises often leads state governments to violate the limits set by the Fiscal Responsibility and Budget Management Act (FRBM). The FRBM Act mandates that revenue deficit, fiscal deficit, and total outstanding liabilities remain within prescribed limits, barring exceptions for disasters or exigencies.

By diverting funds toward freebies, states are forced to compromise on capital expenditure and developmental works. The financial strain is evident in the rising debt levels of various states. According to data compiled from budget estimates for 2024-25, the cost of freebies for some states is estimated to be as high as Rs 96,000 crore, or 2.2 percent of a state’s GDP. To accommodate these expenses, state governments frequently revise their fiscal deficit targets upwards.

Several states have reported debt levels significantly exceeding the recommended threshold of 30 percent of Gross State Domestic Product (GSDP). Punjab leads with a debt of 53.3 percent of GSDP. Other states with high debt burdens include Arunachal Pradesh, Bihar, Goa, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Rajasthan, and West Bengal. This rising debt-to-GDP ratio, calculated by dividing total state debt by state GDP, indicates a precarious fiscal situation where governments must borrow to fund both freebies and essential developmental activities.

Economic Consequences: Inflation and Growth

The allocation of substantial resources to freebies has broader macroeconomic implications, specifically regarding inflation and commodity prices. When the government diverts revenue toward these measures, it often results in a budget derailment, necessitating loans to complete developmental projects. This borrowing can contribute to inflationary pressures by increasing the money supply without a corresponding increase in productive output.

Furthermore, the prioritization of freebies over developmental work slows down economic activities. The government’s inability to adequately fund infrastructure such as roads, schools, hospitals, and utilities hampers the country's growth trajectory. The Supreme Court has also intervened in this debate, questioning the economic viability of promising freebies during election campaigns and urging the central government to consider the long-term economic health of the nation.

Political Dimensions and Criticism

The debate over freebies is also deeply political. The central government has cautioned states against giving freebies, urging them to rationalize welfare schemes and focus on capital expenditure. However, opposition parties, such as the DMK, have challenged the central government's narrative. They argue that tax cuts and loan waivers for corporations are also forms of freebies. For instance, the DMK pointed out that during the first three years of the Modi government (2014-2017), loans worth Rs 72,000 crore for the Adani group were written off, and public sector banks wrote off Rs 7.27 lakh crore in loans between 2017 and 2022. Critics question the justification for preventing welfare measures for the poor while continuing large tax breaks for corporates.

There is a prevailing neoliberal view that subsidies for food, fertilizer, electricity, and similar items are wasteful of public resources. Conversely, there is an argument that transfers to big capitalists are viewed as necessary to promote growth, while transfers to the working people are labeled as fiscally irresponsible freebies.

The Path Forward

Experts and institutions, including the Supreme Court and the Election Commission, have highlighted the need for a concrete policy to stop the proliferation of freebies. There is a call for a deep and meaningful debate among political parties to build a consensus on this issue. Former RBI Governor Subbarao suggested that the government should not hesitate to present a "white paper" on the matter to clarify the fiscal implications.

Additionally, there is a consensus on the government's responsibility to educate the public about the costs and benefits of free gifts. While the government has a duty to provide security covers to the most vulnerable sections of society, the focus should shift toward ensuring that the poor and underprivileged can become economically self-reliant rather than dependent on freebies. Recent measures, such as the extension of the free food grain subsidy scheme by five years at an estimated cost of Rs 11.8 lakh crore, illustrate the massive fiscal commitment required for such programs, necessitating a careful review of their economic sustainability.

Conclusion

The distinction between welfare schemes and political freebies remains a critical point of discussion in India's economic landscape. While the intent behind providing subsidized essentials is to support the vulnerable, the unchecked distribution of freebies to influence elections poses a severe threat to fiscal stability. The resulting debt accumulation, violation of FRBM limits, and diversion of funds from capital expenditure have tangible negative impacts on inflation, commodity prices, and overall economic growth. Moving forward, a balanced approach that protects the welfare of the needy while enforcing strict fiscal discipline is essential to prevent long-term economic damage.