With five more Assembly elections due this year before the Lok Sabha polls in 2024, incumbent governments and political parties have been announcing a slew of welfare schemes, reigniting the debate over “revdi (freebie) culture”.
In July last year, while inaugurating the Bundelkhand Expressway in Uttar Pradesh, Prime Minister Narendra Modi had cautioned against “revdi culture”, calling it a danger to development. In the lead up to the Karnataka Assembly polls earlier this year, Modi had criticised the Congress’s pre-poll guarantees as “revdi culture”. The incumbent BJP, however, went on to lose the election, and the Congress government has, so far, implemented four of its five guarantees, including the Gruha Lakshmi scheme to give Rs 2,000 a month each to about 1.1 crore women heads of families – touted as the biggest such cash handout – announced on Wednesday.
On Tuesday, the Centre itself cut LPG cylinder prices by Rs 200, which is expected to benefit around 33 crore households, inviting attacks from Opposition leaders, who called the move an “electoral gimmick”. In a dig at Modi, Rajya Sabha MP Kapil Sibal asked if this was not “revdi culture”. Though Uttar Pradesh won’t see a major election till next year, Chief Minister Yogi Adityanath has just announced a raise in the amount to be given under the Kanya Sumangla Yojana, a social security programme for girls and women, to Rs 25,000 from Rs 15,000 starting next year.
In the poll-bound states of Madhya Pradesh, Chhattisgarh and Rajasthan, parties are fighting anti-incumbency with welfare schemes. In MP, the Shivraj Singh Chouhan government is promoting its Ladli Behna scheme, which sends Rs 1,000 to married women aged between 23 and 60 years every month. In Congress-led Rajasthan, CM Gehlot is banking on schemes like the Chiranjeevi health insurance programme, which provides free medical treatment up to Rs 25 lakh. Some of the criticism towards the Chiranjeevi scheme likely stems from the fact that it is competing with the Centre’s Ayushman Bharat insurance programme.
Though the difference between welfare and freebie is a grey area, political parties are only likely to ramp up such announcements in the coming months.
What’s a freebie, and what isn’t?
The Reserve Bank of India (RBI) defines freebies as “public welfare measures provided free of charge”, distinguishing them from “merit goods”, which provide “wider and long-term benefits” and spur development. For instance, under the RBI definition, free household electricity is a freebie but not free education or healthcare, which aid in broader human development.
But some experts argue that measures like direct cash transfers or free mixer-grinders, laptops, and televisions handed out before elections can also have long-term benefits. Bihar’s free bicycle scheme for school girls in 2006, for instance, not only improved access to education, but also led to better learning outcomes and employment opportunities while delaying marriage, according to a 2016 survey.
Some argue that corporate tax cuts, bank bailouts and non-performing asset write-offs are also types of freebies, primarily given out by the Central government.
In the political discourse, though, it appears the timing (close to an election) and the political affiliations of the government in question, play a larger role in whether a scheme gets tagged as a freebie or not.
A fiscal Sword of Damocles?
Whatever the impetus, political or otherwise, welfare schemes come at a cost. In a 2022 risk analysis on freebies, the RBI described them as “Swords of Damocles” – programmes that failed to anticipate their detrimental fiscal impact.
More often than not, the finger is pointed at state governments, particularly those with high debt burdens, over reckless spending. But spending on welfare schemes, regardless of their impact, has increased across states and at the Centre in recent years.
Data compiled by the RBI shows that overall expenditure on the social sector, which includes welfare schemes and essential programmes like education and healthcare, more than doubled between 2014-15 and 2022-23. Revenue expenditure, which does not lead to the creation of fixed assets but covers salaries, pensions and subsidies among other expenses, accounts for a vast majority of social sector spending.
In 2023-24, the top 11 states are expected to spend Rs 4 lakh crore, or 1.7% of the states’ GDPs, on social welfare programmes alone, including direct transfers, cash incentives and distribution of personal or household goods, according to a report published earlier this month by analytics and ratings firm Crisil. Expenditure on these schemes rose by 16% CAGR (compound annual growth rate) between 2018 and 2024, a higher rate than 11% CAGR for overall revenue expenditure. The report noted that without steady increases in revenues, these schemes could hurt states’ credit profiles.
The RBI, in its report, estimated the cost of freebies announced by state governments in 2022-23, including cash transfers, subsidies and loan waivers. The cost of these freebies, though, ranged from 0.1% to 2.7% of the various states’ GDPs. Only in Andhra Pradesh and Punjab did the cost exceed 2% of the state GDP. Andhra alone launched at least 11 schemes, followed by Rajasthan at 7 and Haryana at 6 in 2022-23.
Freebies accounted for as much as 17.8% of revenue receipts and 45.4% of own-tax revenue in Punjab. In Andhra, Jharkhand, Madhya Pradesh and West Bengal, freebies accounted for around a quarter or more of own-tax revenue, as per the RBI.
Nationally, expenditure on subsidy programmes has also grown steadily, almost doubling between 2018-19 and 2021-22 from Rs 1.9 lakh crore to Rs 3.5 lakh crore, before declining slightly in 2022-23 to Rs 3 lakh crore. Tamil Nadu, Karnataka, Rajasthan, Uttar Pradesh and Gujarat saw the highest increases in subsidy spending during this period. Debt-ridden states like Punjab also have among the highest subsidy expenditures as a share of total revenue expenditure.
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But fiscal risk only ‘moderate’ even in high-debt states
The RBI’s analysis found that Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana had the highest debt burdens. In terms of the debt-to-GDP ratio, Bihar, Kerala, Punjab, Rajasthan, and West Bengal were among the worst off.
Among these states, only Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded the debt and fiscal deficit targets set by the Finance Commission. In 2022-23, Rajasthan and West Bengal were expected to meet both debt and deficit targets. But the RBI contends that with declining tax revenues, particularly in Madhya Pradesh, Punjab and Kerala, states could grow increasingly reliant on market borrowing to fund their programmes.
But the RBI also noted that among the five most indebted states, freebies and subsidies financed through borrowings pose only a “moderate financial risk” to the debt-to-GDP ratio. Punjab, which spends a large amount on the provision of free utilities, had the highest projected increase of 2.7-percentage points in its debt-to-GDP ratio.
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