Political Freebies and Economic Stability: Lessons from Sri Lanka and Indian States

The term "freebies" refers to goods or services provided free of charge or at minimal cost, often as part of political promises to secure voter support. These can include free electricity, water supply, medicines, insurance, monthly allowances for the unemployed, laptops, free network services, food grains, hospital treatment, and more. In recent years, political parties have increasingly used such promises as a strategy to form governments, particularly in India, where examples range from free education and food in schools to more extravagant items like salt, fans, loans, scooters, gold, laptops, sarees, goats, and cows. While proponents argue that certain freebies, such as those under public distribution systems or employment schemes like NAREGA, can foster economic growth by improving individual productivity and building a healthier workforce, critics highlight long-term risks to economic stability.

The debate intensified with announcements like the AAP government's promise of free electricity up to 300 units for residents, drawing parallels to Sri Lanka's economic collapse. In 2019, the Rajapaksa government in Sri Lanka cut taxes and provided free goods and services to fulfill election pledges, leading to a fiscal crisis. Global rating agencies downgraded Sri Lanka, citing undermined fiscal and debt sustainability. This resulted in severe shortages of essentials, long power cuts, and an inability to pay for imports, ultimately causing nationwide protests. The World Bank guidelines indicate that a controlled GDP-to-debt ratio of 20% is ideal for developing countries, with serious challenges emerging above 60% and bankruptcy above 100%. Sri Lanka's debt-to-GDP ratio exceeded 100%, marking it as bankrupt by IMF standards.

Indian bureaucrats have warned that similar practices in states like Punjab, Andhra Pradesh, and West Bengal could lead to a Lanka-like crisis. These states' financial parameters, such as debt levels and limited revenue sources post-GST (restricted to excise on alcohol, VAT on petrol, property sale receipts, and motor vehicle registration), mirror Sri Lanka's vulnerabilities. Experts from economic think tanks like ICRIER emphasize that poorly directed freebies, distinct from welfare expenditures, are a fiscal mistake with adverse consequences, potentially pushing countries toward bankruptcy. The Supreme Court has also noted that such freebies at taxpayers' expense may lead to imminent economic peril, prompting calls for balancing fiscal health with political compulsions.

Arguments in Favor of Freebies

Supporters of freebies argue that they can facilitate economic growth when strategically implemented. For instance, state or central government expenses on programs like the Public Distribution System (PDS), which provides free distribution of wheat, sugar, and rice, contribute to individual growth and overall economic development. Similarly, initiatives like NAREGA (National Rural Employment Guarantee Act) and free COVID-19 testing during the pandemic have demonstrated positive impacts on the economy by enhancing productivity and strengthening the workforce, aiding in achieving national and family goals. Additionally, freebies are claimed to boost industrial growth indirectly by increasing consumer spending power.

However, these benefits are contingent on proper economic management. The Sri Lankan example illustrates how unchecked freebies without regard for fiscal health can lead to financial burdens, indebtedness, and long-term economic hampering. Critics argue that while some subsidies serve welfare purposes, populist freebies often exceed sustainable limits, eroding state finances.

Historical Evolution of Freebie Practices in Politics

The concept of freebies in political contexts traces back to early Indian leaders. K Kamaraj introduced free education and free food in schools, setting a precedent for welfare-oriented promises. CN Annadurai later expanded this by promising 4.5 kg of rice for Rs. 1, making it more accessible to the masses. Jayalalithaa in Tamil Nadu elevated the practice to unprecedented levels during her tenure, distributing a wide array of items including salt, fans, loans, scooters, gold, laptops, sarees, goats, and cows. Over time, these practices proliferated across other Indian states, evolving into a common electoral tool.

This historical progression underscores how freebies have transformed from basic welfare to more elaborate, costly promises. While initially aimed at addressing poverty and inequality, they have increasingly been criticized for prioritizing short-term electoral gains over long-term economic sustainability.

The Sri Lankan Crisis: A Case Study in Freebie Fallout

Sri Lanka's economic downfall serves as a stark warning. In 2019, the Rajapaksa government implemented tax cuts and free services to honor election commitments, disregarding the nation's fiscal capacity. This led to a downgrade by global rating agencies, highlighting the erosion of debt sustainability. By 2022, the country faced a complete economic meltdown, with no funds for essential imports like food and fuel. Citizens endured prolonged power cuts and formed protest lines, emblematic of broader societal instability.

The crisis was exacerbated by a debt-to-GDP ratio surpassing 100%, far exceeding the World Bank's recommended 20% for developing nations and the critical 60% threshold. The IMF classified Sri Lanka as bankrupt, emphasizing how poorly directed subsidies can spiral into national disaster. Bureaucrats in India have drawn direct parallels, noting that states like Punjab exhibit similar financial strains, including high debt and constrained revenue streams under the GST regime.

Risks to Indian States and Economic Implications

Top Indian bureaucrats have repeatedly cautioned that unchecked freebies could propel states toward a Sri Lanka-style crisis. During a meeting with Prime Narendra Modi in March, secretaries expressed concerns over populist schemes in Punjab, Andhra Pradesh, and West Bengal, warning of unsustainable economic impacts. These states' reliance on limited revenue sources post-2017 GST implementation—such as alcohol excise, petrol VAT, property sales, and vehicle registrations—leaves little room for fiscal flexibility.

Economic experts, including ICRIER Chairman Pramod Bhasin, contend that freebies, unless during emergencies like COVID-19, are fiscal errors with significant adverse consequences. They differentiate them from welfare expenditures, which are targeted and productive. The Supreme Court's recent observations reinforce this, stating that taxpayer-funded freebies risk pushing the economy toward bankruptcy. Without balancing fiscal health and political necessities, states may face long-term harm, including financial burdens and indebtedness similar to Sri Lanka's trajectory.

Distinction Between Freebies and Welfare Expenditure

A critical aspect of the debate is defining freebies versus welfare spending. Welfare expenditures, like PDS or NAREGA, are designed for long-term societal benefits, such as poverty alleviation and productivity enhancement, and are often evaluated for economic returns. In contrast, freebies are viewed as broad, populist giveaways aimed at immediate voter appeal, potentially without regard for fiscal prudence.

Experts stress the importance of this distinction to avoid conflating essential support with unsustainable promises. In Sri Lanka, the lack of such clarity contributed to the crisis, as did in Indian states where similar patterns emerge. Policymakers are urged to prioritize targeted welfare over blanket freebies to ensure economic resilience.

Supreme Court Involvement and Legal Perspectives

The Supreme Court of India has played a pivotal role in scrutinizing freebie practices. A plea was filed to halt political parties from promising freebies, arguing they misuse public funds. The Court highlighted that such promises may lead to imminent bankruptcy, emphasizing the need for regulatory frameworks. This judicial attention signals growing recognition of the economic perils posed by unchecked populist measures.

Legal experts and economists alike advocate for guidelines to differentiate permissible welfare from detrimental freebies, potentially through electoral reforms or fiscal oversight mechanisms.

Global Comparisons and Broader Economic Lessons

Beyond Sri Lanka, comparisons to Greece highlight the universal risks of fiscal mismanagement through freebies. Both nations faced debt crises fueled by populist policies, underscoring that economic fundamentals cannot be ignored. For developing countries like India, maintaining a balanced GDP-to-debt ratio is essential to avoid similar pitfalls.

The Quartz India report and other analyses suggest that Indian states must heed these lessons by curbing reckless measures. Bureaucratic advice to the Prime Minister stresses the urgency of aligning state fiscal health with political realities to prevent a domino effect of economic distress.

Recommendations for Sustainable Fiscal Policies

To mitigate risks, experts recommend several strategies: First, rigorous economic impact assessments before announcing freebies. Second, diversification of revenue sources beyond the constraints of GST. Third, focusing on productivity-enhancing welfare rather than unconditional giveaways. Fourth, enhancing transparency in political promises to hold parties accountable.

By adopting these measures, states can pursue growth-oriented policies without endangering economic stability, learning from Sri Lanka's missteps and India's own warnings.

Conclusion

The discourse on freebies underscores a delicate balance between political promises and economic sustainability. While they can drive growth through targeted welfare, poorly directed freebies—exemplified by Sri Lanka's collapse and warned against in Indian states—pose severe risks of debt, bankruptcy, and societal unrest. Policymakers must prioritize fiscal prudence, distinguishing essential support from populist excess, to safeguard long-term prosperity and avoid crises that echo global precedents.