Siddaramaiah promises free power: The danger with freebies for a state

Political parties have been quick to offer freebies without knowing about its consequences. The RBI has pointed out the dangers of freebies on many occasions and the Supreme Court is seized off a similar matter

Bengaluru, Jan 12: The election season is back again the news is yet again about freebies. While sounding the poll bugle for the Karnataka Assembly Elections 2023 scheduled to be held in April-May, Congress leader, Siddaramaiah said if voted to power the government will provide 200 units of free electricity every month for all Kannadigas.

Last year a Supreme Court comprising then Chief Justice of India, N V Ramana called for a debate saying that moving forward there needs to be a definition for freebie. He also asked if universal healthcare, access to drinking water, access to consumer electronics be treated as a freebie. The observations were made on a petition filed by Bharatiya Janata Part leader and advocate Ashwini Upadhyay. He in his petition had opposed the idea of promising freebies ahead of the elections.

How do freebies affect the economy:

Dr. Ashima Goyal, a member of the Reserve Bank of India's Monetary Policy Committee, freebies are never free. She said when political parties are offering freebies, they are essentially making a trade-off and this negatively impacts the production and resource allocation while imposing large indirect costs. She also gave the example of the Aam Aadmi Party led Punjab government where there was an alarm of the water table falling, thanks to the free electricity promised to all voters.

The PRS Legislative Research date in 2022-23 says fiscal deficit as a percentage of gross state domestic production of various states ranges from 2.81 per cent in Jharkhand to 4.6 per cent In Madhya Pradesh. A higher fiscal deficit would mean that the state government needs to borrow more in order to meet its expenses.

In the petition Upadhyay quoted the Handbook of Statistics of the Indian States for 2020-21 which was published by the RBI. "New sources of risk have emerged in the form of rising expenditure on non-merit freebies, expanding contingent liabilities and the ballooning overdue of DISCOMS," the RBI said.

In the wake of the Sri Lankan economic crisis, the RBI had put out a report tilled State Finances: A risk analysis. The article was written in the backdrop of the economic crisis in Sri Lanka.

The Punjab case:

While campaigning in Punjab the AAP had promised 300 units of free power per month to all households. This has been implemented and it is costing the state's exchequer Rs 1,200 crore every year. The AAP government had also waived off the unpaid bulls I the first six months which again cost the exchequer an additional 1,298 crore.

The RBI says that Punjab has the worst ratio and is the fiscally most stressed state with the debt-GSDP ratio for 2021-22 at 49.5 per cent. The state however says it expects that the percentage would drop to 48 by March this year.

The RBI points out that subsidies and freebies have climbed from 7.8 per cent in 2019-20 to 8.2 per cent in 2021-22. Jharkhand, Odisha, Kerala, Uttar Pradesh and Telangana have recorded the largest rise in the number of subsidies. In the case of states such as Punjab, Gujarat and Chhattisgarh, more than 10 per cent of the revenue are spent on subsidies.