Fiscal hara-kiri! SBI report asks Supreme Court to put cap on freebies spending

The State Bank of India’s research report, Ecowrap, has said that India must free itself of freebies culture. Drawing the difference between freebies and welfare scheme, the report stated that there is a thin difference between freebies and entitlements. Calling freebies fiscal hara-kiri, the report also said that the Supreme Court must put a cap on spending on freebies.

“We expect SC panel should fix a band say 1 per cent GSDP or 1 per cent of state own tax collections or 1 per cent to state revenue expenditure for these welfare schemes of the states. With this, the desired welfare schemes can be implemented in a proper way,” stated the report.

The report said that it is difficult to define freebies and welfare schemes but drew a line nevertheless. “Freebies do not differentiate between those who can afford to pay and those who can’t, thus alleviating the crucial distinction between who should be and those who shouldn’t be the beneficiaries. Entitlement or welfare on the other hand, is a bonafide benefit for those who can’t afford. A clear example being free power for everyone is freebies, while free food grain for the 80-crore population during the pandemic is an entitlement!” said the report.

It underscored freebies’ large fiscal costs and stated that it causes inefficiencies by distorting prices and misallocating resources. It also acknowledged that some freebies might help the needy if properly managed with minimal leakages.

“However, during election campaigns, political parties promise many things like free electricity, free water, cheaper food grains, smartphones, laptops, bicycles & farm loan waiver etc, which seem like motivating voters through promises and fulfilling them with taxpayers' money,” it said.

The report pointed out that some states reverting to old pension schemes also appears to be for political purposes. “For example, 3 states, namely Chhattisgarh, Jharkhand and Rajasthan have already reverted to Old Pension Scheme or PAYG (pay as you go) scheme. Punjab is the latest one which is contemplating the shift. India had a PAYG scheme prior to 2004,” it said.

The contributions of the current generation of workers were used to pay pensions of current pensioners, under this scheme. “Hence a PAYG scheme involved a direct transfer of resources from the current generation of taxpayers to fund the pensioners. It seems that the states moving back to the old schemes want to save money currently and use the amount to give freebies to gain popularity,” it said, adding that it appears unfair that only a section of people would get this benefit.

“The pension liabilities of three states Chhattisgarh, Jharkhand and Rajasthan is estimated at Rs 3 lakh crore. When looked in relation to own tax revenue, pension liabilities of states is quite high for Jharkhand, Rajasthan and Chhattisgarh at 217 per cent, 190 per cent and 207 per cent respectively. While for states contemplating the change, it would be as high as 450 per cent of own tax revenue in case of HP, 138 per cent of own tax revenue in case of Gujarat and 242 per cent of own tax revenue for Punjab,” it said.

The election promises made recently range from 0.1-2.7 per cent of GSDP for different states and around 5-10 per cent of own tax revenue of the states.

It said that a solution must be found for this fiscal hara-kiri. It also criticised arguments likening haircut taken by banks through IBC to freebies. It said equating the two or even loan write-offs with freebies are flawed arguments, since promoters of these businesses cede control whether the default triggering is for genuine reasons or otherwise. “Additionally, such loan write offs are purely technical in nature and are added back to bank books once recovered,” stated the report.

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