5 ways to resolve the unfinished agenda of freebies

Now that five state elections are scheduled for November 2023, state governments' 'revdi' (freebies) and 'revdi culture', their rising debt and off-budget expenditures are back in focus. On October 6, 2023, the Supreme Court issued fresh notices to the chief ministers of Rajasthan and Madhya Pradesh over their announcement of election freebies. The Centre has already warned that "financially irresponsible policies and populism may give political results in the short term but will extract a great social and economic price in the long term" and that "those who suffer those consequences the most are often the poorest and the most vulnerable".

These are legitimate issues about fiscal management (freebies, off-budget borrowing and debt) and hence, must be debated and fixed.

But the chances are that this round of debate would end up, like the one in 2019 and 2022 – seasonal, political, partisan and inconclusive. On the previous two occasions, the debate began immediately after the BJP lost elections in important states – which were fought on competitive promises of welfare and populist schemes – and ahead of the next round of elections. Once the next round of elections was over, the issues were forgotten. This time too it seems no different.

Recall January 2019 when the farm loan waivers announced by Congress-ruled states (Rajasthan, Madhya Pradesh and Chhattisgarh) were described as "lollipops" and "political stunts". The BJP had lost the election in all those three states, the 2019 general election was looming and then Congress president Rahul Gandhi was proposing a minimum income guarantee scheme 'NYAY' – to transfer ₹6,000 per month (₹72,000 a year) to 50 million poor families. The two questions raised then were: Will India's fiscal condition allow this and how the beneficiaries would be selected. This was after six BJP-ruled states had announced farm loan waivers – Uttar Pradesh (2017), Maharashtra (2017), J&K (2017), Chhattisgarh (2015), Rajasthan (2018), Madhya Pradesh (2018) – and two more BJP-ruled states, Assam (2018) had declared 25% farm loan waiver and Gujarat had waived off power bills of farmers (2018).

The debate ended with the Centre declaring ₹6,000 per year to farmers in the 'vote-on-account' budget on February 1, 2019.

In 2022, the RBI made the beginning, in its June 2022 bulletin. It sparked off the debate by warning of a Sri Lanka-like fiscal crisis by cautioning against fiscal profligacy of state governments but was silent on the Centre's fiscal performance. It corrected itself seven months later in January 2023 and commended state governments for their fiscal prudence. This came five months after the finance ministry think tank National Institute of Public Finance and Policy (NIPFP) had already contradicted the RBI's June 2022 findings. The RBI had done a rushed job – which was unwarranted, given the long history of states outperforming the Centre in every single fiscal parameter in the entire 2011-12 GDP period.

But by then, 'revdi' and 'revdi culture' had been introduced in public debate in July 2022. The Supreme Court conducted daily hearings in August 2022 – to which the Election Commission of India (ECI) and Finance Commission (FC) were dragged in.

The debate remained inconclusive. The court referred the matter to a three-judge bench to take it forward – which is yet to be constituted. The ECI asked political parties to disclose the cost of freebies they announce – which is not feasible because none has defined what is a freebie and which are 'rational' or 'irrational' (used by the court), 'merit' or 'non-merit' (used by the RBI), 'populist' or otherwise (used by the FC), 'unwarranted' or 'wasteful' (used by others). Budget documents and Economic Surveys use different terms altogether – 'subsidies' for the poor and 'stimulus', 'tax incentive' or 'revenue foregone' for the rich (HNIs) and businesses and trusts.

The existence of these terms underlines the fact that freebies per se are a necessity in India because it is home to the maximum poor (228.9 million) and maximum hungry (224.3 million) in the world. Nonetheless, good fiscal management calls for eternal vigilance.

For a closure to the debate, the following five measures are necessary.

What is a freebie?

First, 'freebie' needs to be defined – for both the Centre and states.

The Centre runs many welfare schemes that can be called freebies: Subsidised LPG cylinders to poor families in which a ₹200 cut was announced recently; "free" PDS to 67% households (₹2.87 lakh crore given for this in FY23 (RE); fertiliser subsidy to industry (₹22.5 lakh crore given in FY23 (RE); the PLIs and DLIs to industry (allocated ₹2.82 lakh crore); ₹1.45 lakh crore corporate tax cut in 2019; annual average NPA write-off of ₹1.62 lakh crore during FY15-FY23 (total of ₹14.56 lakh crore); annual cash transfers of ₹6,000 to farmers (₹60,000 crore given in FY23) etc.

So is the case for states: 200 units of free electricity and 20 KL of free water by the NCT of Delhi, free bus travel for women by Delhi and Karnataka governments, 10 kg free rice for BPL families by Karnataka government etc.

Second, limits to freebies. The limit could be a percentage of revenue or fiscal deficit of states/Centre.

How much freebies states give is known – the RBI said (June 2022)[18] said it was 0.1% to 2.7% of respective GSDPs in FY23 (BE), with only two of nine states it tracked recorded over 2%. The RBI (January 2023) also found 19 of 31 states/UTs were revenue surplus in FY23 (BE). Their total revenue deficit was 0.3% of the GDP and fiscal deficit 3.4% of the GDP in FY23 (BE).

No such exercise has been undertaken by the RBI for the Centre. In FY23 (RE), the Centre's revenue deficit was 4.1% and fiscal deficit 6.4% of the GDP – far higher than those of states.

Off-budget accounting and disclosures

Third, accounting standards and disclosure norms for off-budget borrowings.

Off-budget borrowings are not easy to detect; the very nomenclature makes that clear. Only the CAG can do the job because it has the power to seek documents and ask questions and clarifications from governments. But even then, it isn't quite possible to monitor off-budget borrowings – which will become clear soon.

Recall the Centre's budget for FY22. It showed, for FY21 (RE) fertiliser subsidy was ₹1.34 lakh crore – 1.9 times the budgeted ₹71,309 crore and food subsidy was ₹4.2 lakh crore – 3.5 times the budgeted ₹1.2 lakh crore. This couldn't have been possible without hidden off-budget borrowings (totalling ₹3.69 lakh crore) – even if it was a pandemic fiscal. There is little logic to support 1.9 times rise in fertiliser subsidy in a pandemic year; food subsidy would have gone up by a maximum of 2 times, given the additional "free" ration, but not by 3.5 times.

Few know that this extraordinary spending (RE) happened despite the introduction of "statement of extra budgetary resources (EBRs)" – or "statement 27" in the "expenditure profile" – in FY20.

This statement is supposed to disclose all off-budget borrowings. The "statement 27" of FY24 (BE) shows, between FY17-FY22 (six fiscals), off-budget borrowings amounted to a mere ₹1.39 lakh crore – a lot less than ₹3.69 crore of extra subsidy outgo in FY21 (RE) alone! How did that happen?

The "statement 27" for FY24 (BE) also shows "nil" off-budget borrowings in FY23 (BE and RE) and FY24 (BE). Watch out for the next "statement 27" to see, for example, how the additional spending of over ₹3,110 crore for the G20 summit in New Delhi is accounted for. The budget allocation for the G20 summit was a mere ₹90 crore – against which the actual spending is over ₹4,100 crore.

Here is more evidence of bad off-budget disclosures.

Delhi-based think tank, Centre for Social and Economic Progress (CSEP), published a study on off-budget borrowings in June 2023, "An Analysis of Off-Budget Borrowings by Indian Governments and their Legal Context". For this study, the CSEP relied on CAG audit reports because it said budget documents didn’t give proper accounts (due to "non-standard accounting").

About the Centre's disclosures, it said: "The CAG audits from 2020-2022 of the union government point out the inadequacies of Statement 27, which include deficiency in the format, and incomplete and non-disclosure of certain entities' debt." About states, it said, their disclosures are (i) "highly understated" and suffer from additional deficiencies like (ii) for states like Madhya Pradesh, Uttarakhand and Gujarat "no data is available at all" and (iii) for many other states, data is "not consistently available for the last few years".

Sharp rise in Centre's debts

Fourth, a 'fiscal council' to redefine standards and monitor fiscal management. This is essential as the CAG is not good enough a watchdog.

Several older Finance Commission reports had recommended a 'fiscal council' for better fiscal management; the 15th one sought a "high-powered inter-governmental group". Such a mechanism is essential. Besides, the Inter-state Council (ISC) and National Development Council (NDC) – both are non-functional after 2015 – also need to be revived to get a better handle on fiscal management.

Fifth, empowering 'fiscal council' to set new standards on fiscal deficit and debt.

The logic is simple: (i) higher debts are needed to boost growth, particularly when private investment is muted for long and also (ii) because the IMF, which put the limits that the FRBM Act of 2003 adopted, has argued for upward revision in both fiscal deficit and debt limits in view of the changed financial realities in both in the pre-pandemic low interest rate regime and the post-pandemic needs for higher fiscal supports to people and businesses which went through hardships.

Incidentally, states outperform the Centre in government capex too.

During the past 12 fiscals of FY12-FY23, the share of government capex for the Centre and state are in the ratio of 36:64 – exactly the reverse of their tax collections – 62:38. Which means, the Centre collects more tax but spends comparatively less on capex than states.

'Fiscal council' needs to keep in mind that the Centre has (i) more tax rights like monopoly over direct taxes (on individual income and corporate profits), while states gave up several indirect tax rights by adopting the GST. It collects more revenues through tools unavailable to states, like (ii) cess and surcharges (risen in recent years) and (iii) disinvestments and privatisations (risen in recent years) – which are not shared with states – and (iv) dividend and surplus transfers from the RBI and CPSUs (risen too). It was, in fact, the demand for additional ₹2-3 lakh crore transfers from the RBI ahead of the 2019 general elections that caused a clash between the two – former RBI Deputy Governor Viral Acharya disclosed recently. Besides, (v) devolution of Finance Commission award to states is falling in recent years.

To sum up, the 'revdi' debate must lead to new standards and better monitoring of fiscal management by both the Centre and states, equity and 'cooperative federalism' between them.