A fundamental problem of democracies: What constitutes good and bad freebies?

Chief Justice N V Ramana has, astonishingly, waded into the controversy of political parties promising endless freebies that could plunge countries into disaster. He says political parties do not want to curb such excesses, so a specialised body should tackle the problem. Sorry, subsidies lie squarely in the province of politics, not the judiciary or technocrats. Voters and political parties must decide what freebies to have.

Last month, Narendra Modi criticised the culture of revadis. These are north Indian sweets, and in colloquial jargon mean freebies. Modi said the myopic revadi culture in Delhi and Punjab – both ruled by the Aam Aadmi Party (AAP) – lavished scarce funds on freebies at the expense of long-term investments in infrastructure and education that alone could bring prosperity. Arvind Kejriwal fired back that the BJP distributed revadis to contractors, whereas he distributed them to the people.

The Best Party Mix
Subsidies lie at the heart of liberal democracy. Markets can spur high efficiency and GDP, but cannot create a desirable income distribution. A vital function of liberal politics is to decide whom and what to tax, and whom and what to subsidise. Different parties have to convince voters on the best mix.

Many freebies can rightly be castigated as revadis, but many others are highly desirable, and can be hailed as jalebis. Opinions will differ on what are revadis or jalebis. But while criticising excessive revadis, don’t lose sight of insufficient jalebis. Indeed, the best reason for cutting some freebies (revadis) may be to finance other freebies (jalebis).

Economists Sudipto Mundle and Satadru Sikdar recently estimated total subsidies – which they defined as the difference between cost of providing goods and services and sums recovered from users – had fallen from 12.9% of GDP in 1987-88 to 10.28% in 2015-16. These included subsidised schooling and primary health, which some would not regard as subsidies. It excluded transfers that many would regard as subsidies, such as the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) grant to farmers, or concessional prices and interest rates for favoured beneficiaries. However, the Mundle-Sikdar model is a reasonable starting point.

The economists recognise the difference between non-merit subsidies (revadis) and merit subsidies (jalebis). They estimate non-merit subsidies at a whopping 5.7% of GDP, of which 4.1% comes from state governments, which are the chief culprits and most in need of reform.

What are the key revadis? I would begin with free power to farmers. This encourages wasteful pumping that destroys aquifers, discourages the replacement of inefficient by efficient pumpsets, and encourages inappropriate water-guzzling crops like paddy and sugarcane in low rainfall areas like Punjab and Maharashtra. Free canal water has similar evils. Many canal systems are moribund, since bankrupt irrigation departments have no funds for maintenance or de-siltation.

Urea is supplied to farmers at a quarter of the international price. Phosphoric and potassic fertilisers are less subsidised. So, farmers are induced to use excessive urea and insufficient other nutrients, leading ultimately to the ruination of farm soil. Urea is made so cheap that large quantities are smuggled to neighbouring countries or diverted to chemical industries.

Sell at MSP, Buy Back at PDS
Cancelling electricity dues of farmers is a terrible revadi that discourages honest folk from paying bills. Electricity subsidies to farmers and urban consumers have bankrupted electricity distribution companies in most states, which have payment arrears of ₹2.5 trillion to suppliers. High rail freight rates are used to subsidise passenger fares, another revadi that ends up taxing and discouraging exports.

Sometimes revadis and jalebis are mixed together. The Food Security Act provides wheat and rice at ₹2 and ₹3 per kg. What goes to poor households is a jalebi. But the scheme covers two-thirds of the population, and what goes to the better-off is a revadi. Some farmers sell their grain at the high procurement price, get it back as subsidised grain for consumption, but re-sell the same to procurement agencies.

Outright grants to farmers like PM-KISAN are revadis. There is no logical reason for preferring farmers over others. But there is an excellent political reason – they constitute an important vote bloc. Many other revadis also reward vote blocs.

What are the key jalebis? I would stress expanding the volume and quality of the police-judicial system to improve safety and justice for all. Quality education is a badly needed jalebi, and public health is a little recognised jalebi. Good infrastructure provides livelihood opportunities to those most lacking them. Corruption- free safety nets for those hit by misfortune are jalebis.

There are grey areas. Kejriwal justifies modest amounts of free electricity for urban consumers as meeting basic needs. But direct cash transfers to the needy would achieve the same result while excluding the undeserving – such as myself.

Democracy helps countries choose the right priorities. But it can also spur myopic competition in freebies that destroys economies, as in Sri Lanka. Former European Commission president Jean-Claude Juncker put it pithily, ‘We all know what is to be done. What we don’t know is how to get re-elected after doing it.’ That is a fundamental problem of democracy. But it has to be resolved by political parties and voters, not judicial or technocratic commissions.

This article was originally published by The Economic Times on August 10, 2022.

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