Impact of Freebees on inflation in India

By Anup Dave - Consultant

?

The Freebees are a normal phenomenon. The mechanisms may differ across globe though. There is usually free healthcare, social insurance pension and subsidies on essential goods. Freebie culture is not new to the Indian society but the extent to which it is spreading its reach is really disturbing and it is not good for? the fiscal health of the country . Most of us do not understand the impact it has on growth. A major part of the income of our country ( 1-2% of GDP) goes to the distribution of freebees which can otherwise be used to develop our country. If this fact is ignored the implications will be humongous in the coming future.

We are not in any conflict with freebees but strongly believe that these can impact economic growth due to inflationary pressure. Also, if we understand the national level fiscal issues, we will agree that there is a need to assess freebees and find an alternative model.? ?

In India freebees have changed the electioneering . The complexion and proportion of freebees tend to decide winning elections. With the increasing rift and race between the political parties in pursuit of winning the elections, the rationale behind promising freebies is taking a big toll on the Indian economy .The Just seen the last year Karnataka and now Nov 2023 election and its results. Some elections were not won based on development and governance. They won based on freebees. A large part of this is due to lack of awareness and poor financial literacy system where people are hard-pressed ?all the time and succumb to ?temporary gains without understanding the cost of such actions. They are ready to ignore corruption by politicians. The cost of one vote is perhaps around 2000 Rs per month per person for 65-70% of the population. People tend to ignore the fact that if that much amount a politician or party must spend, certainly they will recover several times of that for future. It is very difficult for people of India to accept that freebie indeed is misunderstood and conveniently misunderstood, since someone has to bear the cost of providing it, the benefits availed by one section will be the increased cost borne by any other section of the society.

In any case the idea of this article is not about electioneering. It is about the real impact on people. We are trying to assess what are the visible and latent effects of freebees.

?

Inflation in India for last 5 years:-

?

?Subject matter experts are conducting research on this culture and found that this policy in the long run is economically unsustainable. With the inflation rate at 6% average in last 5 years, the impact of the freebies in long run will further increase the cost of other goods and hence will drag the common people into the spiral of high payments and debt burden for the state government. Of course, with decisive actions by RBI the inflation has fallen in the last few months.

But we doubt if it has stabilized at current levels for medium term.. It is expected to go up again as the share of subsidies and freebies as a percentage of GDP is alarmingly high for almost all the states and is going to increase further with recent announcements. The farm loan waivers is deteriorating the fiscal health of the states. As per the?National Bank for Agriculture And Rural Development?(NABARD) report on Farm Loan Waivers, the schemes cost approximately Rs,10,000 crores and Rs.34,020 crore in Punjab and Maharashtra respectively. It was also found that inflation spiked after the implementation of the scheme and on the other hand market borrowing was on a constant rise. States including Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal, and Kerala have committed to spend 5-19% of their revenue receipts on such schemes. In terms of percentage of state own tax revenue, this is as much as 53% for some of the states.

?The fiscal condition of the states has already deteriorated owing to natural calamities. Further, an average fiscal deficit (as % of GSDP) is 4% for FY22-23.?States including Telangana, Rajasthan, Madhya Pradesh and a few more have already reported more than 4% deficit thus moving towards the red line.

The?Comptroller and Auditor General of India(CAG)?reports?of states like Gujarat, Telangana and West Bengal indicated the whopping numbers corresponding to the fiscal indicators.?Telangana’s Total Outstanding Liabilities have more than doubled (104.57 percent) from 2016-17 to 2020-21 while in the case of Gujarat the outstanding public debt grew at a CAGR of 11.49%. As per the budgetary data available for various states through their recent budget speeches, it is concluded that the expenditure on education and health declined for almost all the states while their interest payments and liabilities rose indicating the shift of budget allocation from the sectors of prime importance towards these non-merit goods.

Inflationary pressure build-up mechanism.

As famous Economist Keynes said - Inflation is an excess of aggregate demand over the aggregate supply. Every inflationary situation can be looked at from either of two points of view: (1) from? point of view? that inflation is an excess of aggregate demand for goods and services over aggregate supply, (2) the other point of view, it is an excess of money supply over the aggregate demand for money. Increase in quantity of money can influence the economic system through liquidity preference, the interest rate, the inducement to invest, the multiplier, and national income. An increase in the total quantity of money increases the supply of idle balance.

One of the reasons for excess money supply is freebees. When money is distributed under schemes like Additional price for paddy to farmers than what market is willing to pay, Money to farmers, MANREGA, LADALI BAHAN, MAHTARI YOJANA the demand for non-essential goods also increases as a result the price goes up and that also induces pressure on price of essential goods, and they tend? to go up. Freebees in the form of free grain will tend to reduce stock and will lead to an increase in price. Freebees also cause wastage as consumption may be less and during storage it will get spoiled.

The need of the hour is to rationalize the freebee disbursement and rather create short term employment in avenues like police, social monitoring of Swachh Bharat, disaster management and military for example. Subsidy for creation of skill development centers in each constituency will lead to more employability. This should be coupled with drive for saving of certain percentage of receipts from such schemes will lead to stabilization of demand.

Time is ripe to analyze state wise freebees both in the form of subsidies, distribution of goods and direct payment Map it against the GDP and earnings of each state. RBI has done an estimate for select states shown as under.

?This is an indicator that approximately 1% to 2% of GDP of each state goes in freebees. Considering 2% of GDP the freebees come to 80 billion USD per year. This is same as GSDP of one state Punjab (82 billion USD). In terms of Indian Rupees, it is 664,000 Crores Rs. The above chart shows a large part of tax collection goes out in freebees and is worrisome. The correct assessment may reveal a much graver situation. Here we are doing a very broad assessment to sensitize readers as to what is magnitude of the problem.

Freebees are adversely affecting skilling of manpower. On the one hand we always talk of inflation and unemployment, on the other hand freebees are given. It is quite dichotomic. We wonder where this country is heading to. We strongly believe there is jobs availability in private sector, but youth is mentally conditioned to consider themselves employed if they get government jobs. The general notion is the amount of work one has to do in a government job is far less in comparison to a private job. As a result, freebees are a way of compensating people in lieu of government job to keep people sentiment in check.

To summarize we can see the freebees given by various states is a concern and there is a strong need remodel freebees to encourage people to develop skill, work efficiently and work consistently. The private sector offers employment opportunities, but youth is keen on government jobs as the perception is that it is safe and does not require hard work to earn. There is a need to reform labour laws to make the work environment conducive and the perception of safety in private employment is improved if not completely matched.