The Supreme Court of India on August 3, 2022 recommended setting up of an expert committee consisting of representatives of beneficiaries, Central and State Governments, Finance Commission, NITI Aayog and Reserve Bank of India to study the issue of ‘free gifts’. The apex court said that the law banning freebies is not proper. But at the same time there is a need to strike a balance between welfare measures and the loss to the exchequer.
What is freebies i.e. Rewari culture?
Any ‘public policy intervention’ that does not support medium to long term production and productivity can be termed as freebies.
This includes free electricity, free water, free public transport, waiver of pending utility bills and farm loan waivers. These free products and services potentially undermine the credit culture, distort prices through cross-subsidies for private investment, and disruptive work at current wage rates leading to a decline in labor force participation.
Now the question is what is the difference between freebies and welfare works?
To understand this we have to first understand about welfare. Welfare refers to the expenditure made on welfare schemes which brings economic benefits to the excluded group of the society. Such as public distribution system, employment guarantee schemes, assistance to the states for education and health.
Now let us try to understand the arithmetic of expenditure that India spends on its welfare schemes and how many changes have taken place in it in recent years?
(1) Decline in spending on the social sector- Studies on state finances by the Reserve Bank of India have shown that since 2014, there has been a decline in social sector spending at the state level even after more resources have been allocated to the states.
(2) Health and Education- Allocation by the states for health and education sectors is declining.
(3) Reserve Bank of India report – At least five states are witnessing fiscal pressure.
(4) Less spending on welfare schemes – Very little is spent on welfare schemes in India. This is very low compared to other developing countries. A few years ago, public spending on health and education in India was 4.7%, while in sub-Saharan Africa it was 7%.
(5) World Inequality Report 2022- This report states that by 2021 the top 1% of the people in India had 22% of the total national income, and the top 10% of the people had 57% of the total national income.
Apart from this, if we talk about government revenue measures, then it is necessary to discuss the differential burden…
(1) Indirect Taxes- The central government relies more on indirect taxes than on direct taxes. While direct taxes such as corporate tax were reduced from 30% to 18%, indirect taxes increased manifold between 2014-21.
(2) Taxes on fuel and food- Poor people spend a major part of their income on these items. The increased expenditure on these puts a financial burden on the poor which results in high inflation and consequently inequalities in the society and low growth rate.
(3) Reduction in Corporate Tax- The Government of India has reduced the rate of this tax from 30% to 18%. Due to this, the central government has suffered a revenue loss of ₹ 1.84 lakh crore for 2019-20 and 2020-21.
Since India is also a federal nation. Therefore it is also important to understand its fiscal federalism. The Constitution of India adopts ‘cooperative federalism’ where the union and the states cooperate in making laws and making policies in their respective areas. Also, in a fiscal federal structure, States or territories are expected to have autonomy. Social welfare measures (free gifts) may vary from state to state or region to region. For example, it could be free drinking water in the desert areas of Rajasthan and educational/marriage support and a free bus pass to help empower the girl child in North India. Some measures can be taken to deal with the problem of freebies like more spending on welfare schemes, public expenditure efficiency, better distribution of resources etc.