If States continue to dish out freebies to sway the electorate, India might see sub-national bankruptcy, Fifteenth Finance Commission chairperson NK Singh said on Tuesday, calling the political battle over such perks a “fast passport to fiscal disaster.”
Mr. Singh cited the highly indebted state of Punjab as an example of the necessity for credit ratings based on fiscal health. Punjab is anticipated to spend an estimated 17,000 crore to implement recently promised ‘freebies’ such as 300 units of free power per family.
Without mentioning Punjab by name, the Finance Commission chairman said “a typical example” is a state that has grown too spendthrift and is unable to pay its obligations, prompting it to seek help from the central government. He pointed out that, aside from devolution of revenues to the states as recommended by the Commission, the Centre can only assist states in times of crisis or tragedy.
The new mantra of freebies politics
“This new mantra of freebies politics is gradually attracting governments across the political spectrum. Mr. Singh stated in a lecture at the Delhi School of Economics’ annual day, “The bigger problem disturbing me for some time is if the politics and economics of giveaways drive us to now conceive of what we can loosely call sub-national bankruptcy.”
Mr. Singh described the Rajasthan government’s decision to revert to the old pension scheme for its employees as “regressive” and “risky,” claiming that it resulted in a small fraction of the population, or just 6% of the population, benefiting from as much as 56% of the state’s revenues that go toward pension and salary expenditure.
While subsidies are necessary for merit-based and public goods with greater benefits, such as the public distribution system, employment guarantee schemes, and increased support for the education and health sectors, Mr. Singh stressed the importance of distinguishing these from other perks that are part of the current political narrative.
“Freebies’ economics and politics are both severely wrong. It’s a downward spiral. Indeed, it is a rapid passport to fiscal disaster rather than a route to efficiency or success,” he said, emphasizing that ‘cheap’ freebies are costly to the economy, life quality, and social cohesion in the long term.
Excessive election bribes impair job development and growth, while also lowering the quality of India’s industry and jeopardizing the country’s environmental sustainability goals. “Free electricity, free water, and free fertilizers of various kinds all detract from environmental goals.” Mr. Singh suggested that in circumstances of sub-national insolvency, constitutional provisions such as Article 282 should be examined and that the race to the bottom indicates government deregulation of markets and business.
“This means that states will eventually strive to undercut each other on taxes, spending, and regulation.” Instead, we must pursue a race to efficiency through democratic and sanguine federalism laboratories, in which states use their sovereignty to harness inventive ideas and solutions to common issues that other states can learn from.”