The Union government has opened yet another battlefront with the state governments. The states are supposed to be steeped in “revdi culture” and distributing too many freebies risking financial stability. The Supreme Court of India has taken cognisance of the issue and is setting up a commission. A roaring debate is going on in the media. But, to my surprise, everyone seems to have ignored that the existing FRBM Act already sets stringent fiscal limits on the freebies that a government can distribute.
Freebies, however, one may define them, are a part of the revenue expenditure. A key provision of the FRBM Act is that the revenue deficit must be eliminated, which means no borrowed money can be used for revenue expenditure, including freebies. On average, expenditure on salaries, pensions, and interest constitutes 50–55% of the total revenue expenditure of the states. After other committed expenditures on social and economic development, the residual available for freebies would be very limited unless governments flout the condition of zero revenue deficit.
The key question is this: who has been performing in a fiscally responsible manner—the states or the Union? In 2000–01, the combined revenue deficit of the Union and states had reached a dangerous level of 6.45% of GDP, the Union’s deficit being 3.91% and the states’ being 2.54%. After the FRBM acts, the deficit ratio tended to come down, and in 2010–11, the combined deficit was 3.20%, which was entirely the Union government’s contribution. In 2010–11, the Union government’s revenue deficit was 3.24%, while the state governments had a revenue surplus of -0.4%.
Since then, the average revenue deficit of the states has been negligible until Covid-19 at 0.05%, while that of the Union government hovered around 3.15%. The lesson that can be drawn from these simple figures is that the states, on the whole, have been fiscally responsible while the Union government has behaved imprudently. This asymmetry between the Union and the states is even sharper for the fiscal deficit. Therefore, the prime minister should do more introspection on his government’s performance rather than exhorting the states about the danger of excessive freebies.
How can the Union government justify its corporate and other tax concessions to the rich while running a continuous revenue deficit? Every year, the direct taxes totalling more than a lakh rupees are forgone as disclosed in the annexures to the annual budget. Besides, in 2019, the Union government reduced the corporate tax from 30% to 22% on the eve of the prime minister’s visit to the US, just to create a hurrah in the stock market and, perhaps, under the impression that such a gesture would please the tax-cut philosophy of Trump and Co.
The current GST rates on consumer durables are 30–50% lower than the burden of taxes subsumed under GST. Such instances of freebies by the Union government to the rich can be multiplied. Interestingly, the Tamil Nadu government’s submission to the Supreme Court, among other points, had raised the issue of loan waivers to corporates. They pointed out that in the first three years of the Modi government, `75,000 crores of non-performing debts of the Adani group had been written off. Since the NDA government assumed office, more than `10 lakh crores of total non-performing assets of banks, mostly of the corporates, have been written off. The asset restructuring companies have so far been able to recover less than `2 lakh crores of bad debts. Is this not a corporate freebie, or do only loan waivers of farmers qualify to be freebies? And what about the Production Linked Incentive Scheme (PLI) for large-scale electronics manufacturing, which is under consideration to be extended to other manufacturing sectors?
The high revenue deficit implies that a significant portion of the borrowed funds is being used by the Union government to finance revenue expenditure that does not create any assets. Therefore, it is the Union government that is burdening the future generations, the very sin that the Union finance minister warned the states. While the states have complied with the FRBM norm of 3% fiscal deficit, the Central government tended to have a ratio ranging between 4–5%, despite heavy window dressing.
India is one of the countries with the worst inequality in the distribution of income and wealth. The share of the richest 1% in national wealth has increased from 16.1% in 1990 to 42.5% in 2020. In contrast, the share of the poorest 50% declined from 8.8% to 2.8% during the same period. In terms of income distribution, too, inequality has been widening. While the share of the richest 1% increased from 10.4% in 1990 to 21.7% in 2020, the share of the bottom 50% declined from 22% to 14.7%.
In the background of acceleration of inequality, the obsession that the prime minister is exhibiting with freebies is perverse. The discourse of some pundits on appropriate and efficient support systems for the poor—also in the context of the freebie debate—would qualify to be in the same perversity brand.
Even the Supreme Court, sympathetic to restricting freebies, while hearing a petition by BJP leader and advocate Ashwini Upadhyay seeking to prevent political parties from promising freebies to the electorate before elections, was forced to ask:
“Can universal healthcare, access to drinking water, and access to consumer electronics be treated as freebies?” The BJP leader had also characterised MGNREGA to be a freebie. All of these point to the inherent difficulties in arriving at an operational definition of a freebie. It is a political choice that cannot be bound by rule-based governance.
What provoked the prime minister’s ‘revdi culture’ speech seems to be the Aam Aadmi Party upstaging the BJP in poll promises in the forthcoming Gujarat elections. It is no more a secret how the BJP massively used Mudra Loans and Centrally Sponsored Schemes to canvas votes in UP. If the BJP feels that the AAP’s freebies are going to thwart development, take it to the people and make it a poll issue. And the Supreme Court should not abrogate to itself the functions of the legislature or the political choice of the electorate.
More important and vital issues corrupting the election process in India—like the electoral bonds—require more urgent attention than freebies. The entire episode is bizarre.
Dr T M Thomas Isaac
Former finance minister of Kerala