The Myth and the Reality of Freebies

Words hold promise as well as danger. Politicians and journalists load them with nuances and insinuations, hints and suggestions, fresh possibilities and value judgments. This has happened to the words tossed around in the latest debate raging in the country. Populism. Freebies. Economic terms that we thought we knew like Subsidy and Debt. And now there is revadi too.

We are told these are all BAD things. Very soon, experts and Their Lordships will be bending their minds to the task of fitting definitions to these words. Let us help them with some ideas.

To begin with, there is the Freebie. It's not a word used by economists, but we understand the idea. A Freebie is what you get without payment. It's the extra bit attached to a product sold in the supermarket as an incentive to sweeten the deal and induce you to reach for the item on display.

Surely, the honourable judges and their experts are aware that nothing that comes from the budget is a Freebie. Money spent on every government service is first collected from persons living in the country. All goods bought or sold contain some component on which tax has been paid during production, distribution or sale. Even the poorest person, whether she knows it or not, has forked out the tax from which the government funds the services included in the budget.

Income tax payers may look down their noses at others and complain that the burden of paying for the government rests on their shoulders. But, this is just a convenient myth that the middle class uses to sneer at fellow citizens. Income tax accounts for only one-third of the combined revenues of the State and Central governments. Budget resources are mostly raised from consumption taxes, which no one can escape. Ergo, budgets by definition don't fund Freebies, since their revenues come from taxes paid by all residents.

The real Freebies in politics are the "gifts' ' dispensed at the time of elections. To give them their true name, these are Bribes or inducements to buy votes. Money spent on such Freebies does not pass through the government budget. It comes from the slush funds of the campaign committees of political parties.

In India, bribes-for-votes are not accounted for under the head of the campaign expenses reported to the Election Commission, for which there are prescribed limits, because buying votes is illegal. Freebies are offered to voters in the form of cash, biryani, blankets and a thousand other inducements like mobiles, scooters and the like and they are paid on or before Election Day or redeemed when voting is over if there is proof that a vote has been cast (an inked forefinger and an Election Card).

This one time purchase of votes is made with black money, soiled money moving through unaccounted channels. And much of it is funded by the notorious electoral bonds. Everyone knows about such Bribes/Freebies and no one, not even the Election Commission, does anything about them. During my brief foray into electioneering in 2018, the walls of most buildings in the constituency were plastered with posters telling voters where to collect their blankets and biryani.

Their Honourable Lordships could, therefore, start the enquiry into Freebies by clubbing the present PIL with the electoral bonds case that has already reached them several months back and attend to both issues together. They may not need any expert committee either to guide them.

We must now clear the air of the red herrings that are described as Freebies. Government budgets have no Freebies; they have Subsidies and Public Goods. Any special financial dispensation that benefits only one group is a Subsidy. It can come from either side of the budget-from revenue as well as expenditure. When we complain of subsidies, we cannot conveniently forget the relaxations and exemptions from taxation offered only to selected categories of citizens.

The standard deduction enjoyed by salaried employees (and not by farmers and businesspersons) is as much a favour as free rations given to families below the poverty line. Concessions offered to industrialists are on par with free power given to farmers or scholarships for children from deprived sections of the population. Benefits enjoyed by select taxpayer groups are called tax expenditures.

The budget of the Central government has an addendum listing out revenues foregone by such deductions, but the information offered in this document is getting scantier year after year. Their Lordships might perhaps insist that the government should provide honest and detailed data in future budgets.

Some traditional outflows from the expenditure budget are also universally recognized as Subsidies. Means-based payments like social security, free rations and gas cylinders, unemployment insurance or old age pensions are subsidies. Scholarships for poor children from deprived sections, free power to farmers alone, free bus travel for senior citizens or women are also subsidies. But free power and water up to a specified metered consumption limit are not subsidies.

The word Subsidy is expected today to leave a bad taste in our mouths. In economics, however, it is a neutral term; there is nothing good or bad about it. An auditor will be satisfied if expenditure is booked from the budget approved by the Cabinet of the ruling party, which has been voted by the people's representatives in Parliament, for they are authorized to do so on behalf of their voters. There is no reason to believe that only those who benefit from a subsidy support it.

We may all wish to see a more egalitarian society by spending our tax money on scholarships for the deprived. Not merely because we are philanthropists, socialists or welfare economists, but also because we believe that an egalitarian society is innovative and productive, that helping the poor will increase the country's per capita income and GDP and give a fillip to economic growth. And that such policies will raise the country's image in international fora.

A democracy like India already has very clear methods for finalising budget allocations and voting them into law. The elected representatives, the people's agents sitting in Parliament have the last word and they are answerable for their actions whenever elections come around. Voters can and do throw MLAs out of office if they have betrayed their trust in any manner and this includes the grant of unwarranted subsidies. Populism is merely a synonym for democracy.

In a democratic government, the majority must have the final say on the items on which the government should be spending public money. As long as India remains a poor country, the decision will be overwhelmingly in the hands of the poor. And if we want to live in a democracy, we must accept this reality.

In the current debate, subsidies are also being confused with public goods. Goods and services which have externalities are supplied by government and not provided by each citizen for herself.

Taxpayers (who are also voters) implicitly choose their preferred kinds and levels of public goods when they opt for the manifesto of a political party. Public goods come from the budget but, unlike subsidies, they are available to everybody and not limited to a special group. Free water and power provided to all citizens up to a metered fixed limit is a public good, not a subsidy.

In liberal democracies worldwide good quality education and basic health services are funded by the government. Citizens in these countries constantly debate about what they want to include in the list of public goods.

Tony Blair's Labour government wished to provide free access to university education to every young person as France already does. The UK today is considering whether internet services should be available free as Singapore and China are planning to do.

Another bad word in the current lexicon seems to be Debt. In economics, debt is a temporary bridge between income and expenditure. Governments can and should borrow if loan money is being invested in capital which will generate future income to service the debt (pay interest on the loan and repay it eventually). And capital is not just physical infrastructure like roads and power plants but also human capital like educated and healthy citizens who will earn higher incomes through greater productivity and innovation.

The present diatribe against the debt burden of States is misplaced for another reason too. The Reserve Bank has highlighted the debt traps of some States but where does the blame lie? A criminal must have the power to commit the crime. Our State governments, however, have little say in raising debt. Most of it comes from the Central government's "assistance", which is in the form of loans. As long as they are indebted to the Centre, they cannot borrow without its permission.

If borrowing is a crime, the Central government is the principal agent, because it funds States through loans and approves their borrowing programs. Which means that the debt problem can be remedied only by the Central government, not by individual States. By complaining about State debt, the Centre is merely passing the buck to hapless victims.

This is why, when the Court (with its experts) looks at freebies and revadis, it will find that it only has one role and duty-stop the flow of tainted money for buying votes on Election Day. Which again means that it will have to dispose of the electoral bonds matter as quickly as possible. Your Honours, the ball is in your Court!