November 2022

BCAJ February 2022

Financial Hara-Kiri Through Freebies?

Dr. CA Mayur B. Nayak, Editor

An English adage says, “there is no such thing as a free lunch”. It means when we get something free either someone else is paying for it or we shall pay for it in some or the other manner, or our children or grandchildren end up paying for the same. We often end up paying much more than what we get for free. Getting something for nothing is possible only in charity, but in the commercial world, it is just a gimmick. For example, free filing of a tax return may lure some taxpayers, but in the bargain, they share details of their income, investments, savings pattern, and so on. Data is considered as new oil or a gold mine, which can be used or exploited in many ways. These days, an entity’s valuation depends upon its customer database, rather than profitability. Marketing companies use free gifts to collect vital information about customers through various surveys. Pharma companies offer freebies to push their sales. Tax Havens offer tax- free regimes to attract investments. Thus, the use of freebies is not new, but when it is used to further political agenda it may lead to economic disaster.

These days many political parties in India are resorting to the so-called “Revadi Culture”. The political parties offer many freebies to lure voters to vote for them. There is competition amongst political parties to offer freebies without any planning or calculation of resources to fulfil them if voted to power. These freebies are in the form of free electricity, free water, free public transport, waiver of pending utility bills or farm loan waivers, etc. These expenditures put a heavy burden on the national exchequer and states’ finances. According to SBI Research ECOWRAP dated 3rd October 2022, Andhra Pradesh and Punjab top the list of freebies announced in the F.Y. 2022-23 with a commitment of 2.1 and 2.7 per cent respectively of their Gross State Domestic Product (GSDP). Punjab and Andhra Pradesh committed a whopping 45.4 and 30.3 per cent respectively of their own tax revenue to dole out freebies during the F.Y. 2022-23. Other states which spent a significant part of their own tax revenue on freebies are Jharkhand, Madhya Pradesh and West Bengal. If the contingent liabilities for the guarantees issued by the states are added to the cost of freebies, then it amounts to around 10 per cent of GSDP for all the states combined, which is quite alarming. Several bureaucrats met the Prime Minister in April 2022 and raised concerns over pronouncements for freebies made by state governments like Punjab, Delhi, Telangana, Andhra Pradesh, and West Bengal, which are unsustainable and may lead to dire economic consequences. The SBI Research Document on Freebies has recommended fixing a band of 1 per cent of the GSDP or the state’s own tax collections or state revenue expenditure for the welfare schemes of the states.

People supporting freebies compare them with social welfare schemes. However, there is a difference between the two. Freebies are offered across the board, without discriminating between those who can afford to pay and who cannot, whereas social welfare schemes are usually targeted at the weaker and poorer sections of society. For example, free power to everyone is a freebie, whereas free ration to poor people due to the pandemic is a welfare measure.

Unfortunately, there is no legal prohibition on political parties promising or offering freebies. In fact, in 2003 the division bench of the Supreme Court (SC) in the case of S. Subramaniam Balaji vs. State of Tamil Nadu held that the distribution of largesse (freebies) in the form of free distribution of colour TVs and laptops was related to the directive principles of state policy and warranted no interference by the court. However, in August 2022, while hearing a Public Interest Litigation (PIL) filed against irrational promises to issue freebies by various political parties in their election manifestos, the SC proposed to form a three-member bench to reconsider this decision.

During the hearing on the PIL, the Apex Court observed that “Freebies may create a situation wherein the State Government cannot provide basic amenities due to lack of funds and the State is pushed towards imminent bankruptcy. In the same breath, we should remember that such freebies are extended utilising taxpayers’ money only for increasing the popularity of the party and electoral prospects”.

In October 2022, the Election Commission of India wrote to political parties for providing authentic information to the voters to assess the financial viability of their election promises and sought their views on the issue. However, various opposition parties have opposed this move vehemently.

More than legal issues, freebies raise financial, ethical, and social concerns. They encourage laziness and dependency. Once people are habituated to freebies, it is difficult to withdraw these benefits as they consider them as their entitlements. Reservation policy is a classic example in this case. It was introduced as a temporary measure, but it is not only persisting today, but expanding. No Government can dare to withdraw the same. Freebies and liberal welfare schemes are not sustainable in the long run. They are the cause of economic disasters in many countries like Venezuela, Greece, and Sri Lanka. The worst is that they change the character of people so much that they won’t be ready to accept the austerity measures even in the face of imminent danger of a country’s bankruptcy.

Freebies also create social and gender divides in society with those getting the benefits and those not. Freebies lead to inefficiencies with misallocation of scarce resources, and disincentivise taxpayers as their hard- earned money paid in taxes is wasted for political mileage.

Those in favour of freebies would like to leave the choice of accepting poll promises to the wisdom of voters. This is a dangerous proposition in a country like India, where almost one-fourth of the population is illiterate. Even for the literate class, such freebies induce greed in them. Rather than giving freebies, people should be empowered to earn more so that they can buy things/services they need and live a life of dignity and self-respect.

While parties in favour of freebies consider it their constitutional right to make such promises, they should be made to pay the cost from their party funds rather than from taxpayers’ money.

The other possible solutions could be, transparency in Electoral Bonds to provide level playing fields to all political parties, a stringent law restricting the value of freebies with an objective parameter and a complete ban to offer them as poll promises. In any case, freebies should be allowed strictly for a limited period only.

It is high time that the distribution of freebies by any political party is regulated, to save states from the financial hara-kiri caused by them. In any case, it is too important a fiscal issue to leave it to the wisdom of political parties!

Keywords Search
HTML View Search
Current Issue