Trajectory correction is a must to stop freebies

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A consensus between political parties is needed to avoid the financial disaster that freebies will lead to in the long run

India has already suffered a lot because of the freebies. Unfortunately, all regional parties, and to some extent the Bharatiya Janata Party and the Congress, engage in senseless populism and reckless welfarism. There may be a justification for free education and health care, but none for the distribution of grinders, washing machines, televisions, laptops, subsidized pilgrimages, free electricity and exemptions agricultural loans.

The culture of free is blamed only on political elites, while the bureaucrats who write the policies are not penalized. The judiciary conveniently ignores its responsibility to correct the course because it will displease the political class and, of course, the media will never address the issue because the influx of government advertisements will suffer. The country’s poor taxpayers enjoy the visual site of watching their own elected government rip apart hard-earned cash handed out to large swathes of the population seeking the comfort of sitting at home since the government has no vision to generate jobs for a dignified life. It is about failing governance and voter corruption to overcome this monumental failure.

Real income growth for the bottom 30% of Indians slowed from 1992, when India began to “open up” and “liberalize” its economy by encouraging the private sector. Since everyone has a vote, that means politicians can’t ignore them. Freebies and gifts to the poor buy the necessary votes. It’s a small price that India’s wealthy have to pay to ensure that the economy continues to disproportionately reward them.

Political parties in India try to outdo each other to lure Indian voters with assorted gifts called giveaways. This trend has gained momentum lately, with political parties being innovative in their offerings, as “traditional free water and electricity are no longer sufficient as election freebies”. The political dialogue built around freebies is fraught with pitfalls because it undermines to a large extent the root of free and fair elections.

Unsustainable pre-election promises undermine informed decision-making by voters. This calls for closing the gaps in the design, execution and accountability of the culture of gratuity. It’s not that no one before has warned of the consequences of populism. It’s a “race to the bottom” and “a quick passport to fiscal disaster.”

The results are visible to everyone. A recent study by the RBI stated: “We can identify a central subset of highly stressed states among the 10 states identified by the necessary condition, i.e. the debt/GSDP ratio. The most stressed states are Bihar, Kerala, Punjab, Rajasthan and West Bengal. The GDPP is the state’s GDP. States with the highest debt to GDP ratio in 2021-22 include Punjab at 53.3%, Rajasthan at 39.8%, West Bengal at 38.8%, Kerala at 38.3% and India. Andhra Pradesh at 32.4%, while the Fiscal Responsibility and Management (FRBM) Act recommended a debt to GDP ratio of 20% for state governments (40% for Central) by financial year 2022-23. This level of indebtedness is extremely concerning and is largely the result of spending and subsidies on populist programs coupled with weak revenue growth.

Most states, however, have a healthy picture of their finances, which is helped by the fact that much of the borrowing that funds these giveaways is off-budget, beyond FRBM tracking. States borrow from the books of their public enterprises by pledging future state revenues as collateral. Indeed, the weight of the debt weighs on the Public Treasury, although well concealed.

Punjab’s debt to GDP ratio is worst and getting worse. Instead of worrying that the ratio of government debt to GSDP has not fallen below 40% in the past six years, the Aam Aadmi Party (AAP) government instead announced that 51 million households would pay no electricity bills from September. This is in line with the AAP’s campaign promise of 600 units of free electricity per billing cycle beginning July 1, 2022.

A typical example is Latin America which provides key learning lessons on populist politics. Populism was active from the 1920s to the 1970s, when the working poor united behind icons such as Brazilian Getúlio Vargas and Argentinian Juan Perón due to their dissatisfaction with industrialization. Populist governments have used inflationary financing to deliver benefits to the poor. In the 1980s, uncontrolled government spending led to excessive budget deficits, unsustainable public debt and unsustainable inflation. Latin America’s “lost decade” followed.

Growth from 5.6% in the 1970s fell to 1.3% and stagnated for another decade. By the 1990s, inflation had reached 1,000% in countries like Brazil, and the poor were suffering exponentially. Major economies, including Mexico, Argentina and Brazil, languished and up to half of Latin Americans fell into poverty. This bodes well for India and its political actors to absorb the lessons of Latin America and how the first generation of tax reforms introduced in Latin America brought political stability in the early 2000s. same path as Latin America could mean a “lost decade” for India as well.

The problem with gifts is political; the solution is simple: all parties (in the Center and in the States) sit down together and make a list of things not to do, a negative list of things that none of them would do. As states go astray, it is the Center’s responsibility to work with states to advocate fiscal conservatism while ensuring that states retain their freedom in the spirit of federalism. This forces the Center to walk a tightrope and requires strong visionary leadership at the helm. There needs to be more emphasis and reliance on the legislation already in place to control budget spending, namely the FRBM law.

Constructive debate and discussion in parliament is difficult because the culture of freebies impacts every political party, either directly or indirectly. Therefore, judicial intervention is necessary to propose measures. The Election Commission of India may plan to effectively enforce the “Model Code of Conduct” for “Guidance of Political Parties and Candidates” to effectively regulate election manifestos to prevent manipulation of informed behavior of voters .

Since getting elected is not a license to kill, elected officials must not act arbitrarily. The system of monarchy and the practice of democracy have a clear distinction, in which in the latter system, the leader is responsible for all actions, while in office, including finance and its management. In India, many regional and even national leaders see themselves as the embodiment of God. The reckless way in which these leaders spend public money is simply unacceptable in an orderly society and there must be reasonable restraints placed on them as they systematically corrupt society by handing out freebies on quality governance, in order to safeguard the macro interest of society and the growth of the country.

(The author is a policy analyst)

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