Supreme Court's Displeasure Over Freebies
The Supreme Court has raised concerns about the increasing culture of distributing freebies in Indian states, emphasizing the need for a collective response from both the Union and state governments.
Economic Implications
- The court noted that uncontrolled distribution of largesse can weaken the nation's economic foundations.
- Many states are running a revenue deficit, borrowing to fund subsidies or distributing cash through various schemes.
- Such schemes are often announced before elections, raising questions about their timing and intent.
Finance Commission's Analysis
- The 16th Finance Commission discussed the implications of these subsidies at length.
- An analysis of 21 states showed that their subsidies and transfers are budgeted at ₹9.73 trillion for 2025-26, up from ₹3.86 trillion in 2018-19.
- The outlay on subsidies increased to 2.7% of the combined GSDP of these states in 2023-24, from 2.2% in 2018-19.
- Unconditional cash transfers are budgeted at nearly ₹2 trillion this year, making up 20% of the states' subsidy and transfer schemes.
- Power subsidy is the largest component at 27%, with a bill of ₹2.60 trillion for 2023-24.
Central Government Subsidies
- The Central Government also provides various subsidies, with allocations increasing during the pandemic but moderating thereafter, budgeted at 1.76% of GDP this financial year.
- The majority of the subsidies go towards food and fertilisers.
Need for Fiscal Discipline
- Once a subsidy or cash-transfer scheme is implemented, it often remains in effect permanently.
- With public debt elevated at about 80% of GDP, there is an urgent need for a national debate on subsidies.
- In a competitive political environment, incumbents tend to increase subsidies and cash transfers.
- Hard fiscal rules and mechanisms are necessary to maintain sustainable government finances.
Policy Recommendations
- Define merit and non-merit subsidies clearly.
- Set clear limits on state expenditure on subsidies and cash transfers, especially for states with revenue deficits and higher debt burdens.
- Build a consensus on the proportion of government spending that should finance subsidies and cash transfers.
- Recognize that higher government spending on subsidies limits fiscal capacity and can crowd out private investment, impacting long-term growth prospects.
