In the just concluded elections in Delhi, the electorate has returned Arvind Kejriwal [AK] to the coveted position of Chief Minister with a thumping majority [Aam Aadmi Party (AAP) won 62 out of a total of 70 assembly seats even as its dominant rival BJP secured a mere 8; the third main contestant in the fray Congress got none]. Kejriwal claims that this is a vindication of the ‘development model’ pursued by him during the last 5 years since February 2015. He vows to pursue this in Delhi during the next 5 years and has crafted plans to leverage it for establishing the footprint of AAP in other states.
What precisely is the model? Will the states be able to cope up with resource requirements concomitant with its adoption? How will it impact their financial health?
On close scrutiny of all that AAP government has done during its present term, spate of reliefs announced during the last six months, and the ‘Guarantee Card’ [list of 10 promises] released at election time, two major strands come out quite clearly.
First, AK has brought about metaphorical change in the working of government schools – by augmenting infrastructure as well as quality of learning – to such an extent that parents who until hitherto were allergic to admitting their children to these schools are now coming in droves. Some are even shifting their wards from private schools that save them a lot of money without compromising on the quality of education. The private schools have also been restrained from hefty fee hike which was a normal in the past. He has also revolutionized health care in Delhi through the so called ‘Mohalla Clinics’ – an acronym for neighborhood medical services. A person suffering from customary ailments can get treatment from these clinics ‘free of cost’.
Second, Kejriwal has literally mesmerized Delhi voters by promising free/heavily subsidized electricity [uninterrupted 24×7] and free water besides several add-ons such as free bus ride for women, free Wi-Fi, full reimbursement of hospitalization expenses in case of accident on actual, free testing and diagnostic services [if the facility is not available in government hospitals, the tests can be done in private hospitals and the expenses thereof are reimbursed by the state government], free pilgrimage tour for elderly etc.
These mouth-watering sops yield savings of a few thousand rupees per month for every household. Strangely, most of these freebies are available to all households/persons across all income classes [even millionaires are eligible]. No wonder, the electorate has rewarded AK handsomely even though the contribution of work done in education and healthcare can’t be denied.
But, we can’t ignore the irreversible damage this policy does in terms of (i) abetment of corrupt practices and erosion in ethics of governance; (ii) undermining ‘equity’ and ‘fairness’ and (iii) debilitating effect on the financial health of the states.
As regards (i), at the outset, the Government of India’s standards of financial propriety clearly lays down inter alia that “no authority shall exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly, to its advantage; and the expenditure from public moneys should not be incurred for the benefit of a particular person or a section of the people unless a claim for the amount could be enforced in a court of law or the expenditure is in pursuance of a recognized policy or custom”.
The reckless spending of tax payer’s money on freebies is neither a recognized policy/custom nor it is sanctioned in a court of law. It is blatant financial irregularity that amounts to bribing voters using public money solely for gaining advantage in electoral politics. An individual candidate distributing cash or giving liquor bottles (using his own pocket money) to garner votes is treated as corrupt practice, rightly so whereas a party bribing voters that too using public money is allowed to happen with impunity [in fact, it gets de facto legitimacy]. Why this double standard when the intent in both cases is quid pro quo?
Coming to (ii), the manner of giving freebies by the AAP government is a serious affront to the equity and fairness. For instance, giving electricity free to any household having monthly consumption less than 200 units and 50% subsidy to those consuming up to 400 units irrespective of the income level is patently inequitable. There are tens of thousand families who fall in higher income strata and can afford to pay; yet their consumption being less than 400 units, they are the beneficiaries of the scheme.
Consider free bus ride. There are lakhs of women who fall in high income bracket and hence, can afford to pay [a large number of them own cars]. Yet, giving free ride to all including the high income earners is highly inequitable. Imagine the plight of a poor person who has to pay travelling in a bus simply because he happens to be a male even as a rich person gets a free ride as she happens to be a woman. One can discern such abhorrent implications of the freebies culture in a host of other areas such as free pilgrimage for elderly persons, reimbursement of expenses in cases of hospitalization.
It leads to other serious anomalies as well. The facilities and infrastructure being limited [the acute shortage of buses in Delhi or hospitals is well known], when services are made available free, it is inevitable that only those who are well connected and are able wield influence over the bureaucrats and political brass manage to have access even as those who are not so privileged are denied. So, you end up in a scenario whereby those who don’t need get access even as others who deserve don’t get.
Look at it from the perspective of tax payer. The ruling party uses money collected from the tax payers to distribute freebies. When, tax collected from the latter is used for giving subsidies to the poor, it passes muster as welfare oriented measure. But, when tax revenue is used to give freebies to rich persons also, this is bound to be strongly resented. This may even trigger non-compliance and eventually lead to reduced tax collection.
As regards (iii), the ‘freebies culture’ is bound to affect the health of state’s finances. AK’s argument that he has generated enough surplus to pay for doles is untenable. It is the responsibility of every government to increase revenue needed to meet expenses on development and welfare of the poor. This can’t be a valid argument for justifying indiscriminate spending on freebies which if allowed to proliferate will take no time in converting surplus in to deficit.
The largesse such as farm loan waivers, subsidized/free electricity given by states in the past have led to fiscal slippages. According to a review by Reserve Bank of India [RBI] on “State Finances: A Study of Budgets”, combined fiscal deficit [excess of total expenditure over total receipts] of all states rose from 1.93% of state gross domestic product [SGDP] in 2011-12 to 2.6% in 2014-15, 3.1% during 2015-16 and further to a high of 3.5% in 2016-17 – against 3% threshold required to be maintained under the Fiscal Responsibility and Budget Management [FRBM] Act for the relevant period.
Emboldened by the electoral success of AAP in Delhi, other states are also gearing up to join the freebies bandwagon. For most of the states already faced with mute revenue collection of their own and massive shortfall in transfer from the centre [including compensation under Goods and Services Tax (GST)], this will further exacerbate the fiscal slippage. The states might draw comfort from the leeway contemplated by the NK Singh committee on review of FRBM Act to allow breach of the fiscal deficit target in case of “far reaching structural reforms with unanticipated fiscal implications” on the lines already allowed to the union government.
But, this doesn’t take away from the fact that they will be heading towards unsustainable high debt in the medium to long-term with catastrophic consequences in terms of ballooning debt-servicing obligations, rating down grade, increase in interest rates and attendant backlash on economic growth and ability of the states to fund welfare schemes for the poor.
There is urgent need to put an end to freebies. The 15th Finance Commission may consider making suitable recommendation in this regard which should be made binding on all parties.