Accounting for subsidies

The government can streamline the distribution of freebies with the aid of a fiscal council. Prime Minister Narendra Modi’s comment on “revdi culture,” or freebies, set off a debate that attracted a lot of attention. In fact, the Supreme Court is currently hearing arguments related to this dispute. Freebies are now more important than ever in a nation where millions of people were just one epidemic away from being forced back into poverty.

Freebies are a type of non-merit subsidy. Government transfers of money, whether implicit or explicit, are known as subsidies and are used to artificially lower prices.One could argue that offering free things gives the government more power to do three things: first, provide welfare as a welfare state should by subsidising merit goods like health and education; second, assist households in overcoming poverty (especially during economically difficult times marked by a lack of job opportunities, low incomes, high inflation, etc.) by subsidising public goods like food, electricity, etc.; and third, win over voters (through outright populist spending).

When deciding whether a certain freebie qualifies as a merit or non-merit subsidy, the lines between the aforementioned goals start to blur. Are corporate tax cuts, for instance, non-merit handouts or a strategy to encourage investment? Is allowing women in the nation’s capital to take the bus for free a non-merit subsidy or a means of increasing their mobility and labour force participation? In a similar vein, are free laptops provided to students in Tamil Nadu not a means of closing the educational digital divide? Freebies cannot be defined in a finite context, and the definition varies among geographic and economic contexts, according to the reasons now advanced. Going forward, any freebie-induced debt burden could have a negative impact on state finances if, first, it hasn’t been properly accounted for through open budgeting processes (including off-budget borrowings in debt calculations), and, second, it threatens fiscal sustainability, i.e., limits the state’s ability to service its debt-related obligations without making an unfeasible fiscal adjustment.