Freebies are denuding the budgets of many states. This practice must go before states’ coffers run dry
Delivering his Independence Day address, Delhi Chief Minister Arvind Kejriwal promised 200 units of electricity a month for ‘free’ to the entire 1.4 billion people of India saying this will cost Rs 150,000 crore per annum. He went on to add ‘When Modi – government can waive Rs 150,000 crore worth of loans given to four top industrialists of the country, why can’t it provide free electricity to the people which would cost it the same amount?
In Delhi, Kejriwal is already giving free electricity to all households (HHs) consuming 200 units a month and a flat subsidy of Rs 800 to HHs consuming 200 – 400 units a month. In Punjab too, the Aam Aadmi Party (AAP) government is giving free power to each HH consuming up to 600 units per month. Having tasted the success of this brand of politics at the state level, it is no surprise that he is promising a supply of free electricity pan – India. This is bizarre. Let us look at the flaws in Kejriwal’s approach.
First, the indicated cost of his offer is a gross understatement. Taking a HH to include five persons on average and a population of 1400 million, the number of HHs comes to 280 million. Further, take the cost of supplying a unit of electricity (purchase price plus wheeling and distribution cost) to be around Rs 5, the cost of supplying 200 units a month is Rs 1000 per HH. For 280 million HHs, this would be Rs 28,000 crore or Rs 336,000 crore annually. The estimate given by Kejriwal is less than half of this number. How has he arrived at Rs 150,000 crore? It appears he could have used a lower cost of Rs 3 per unit being the tariff applicable to HH whose consumption is less than 200 units. But, that is a subsidized rate that is paid for by charging more from HHs in higher consumption brackets. It is illogical to use it for calculating the subsidy impact of Kejriwal’s proposal. That apart, even with Rs 3 per unit, the impact comes to Rs 201,600 crore. An attempt to suppress the figure is visible.
Second, by citing the waive-off (alleged) of Rs 150,000 crore loans of businessmen, he gives an impression that providing free power to all 1.4 billion people won’t dent the exchequer as the money saved by avoiding waiver would pay for it. The argument is untenable as the banks haven’t waived the loans.
When there is a delay in recovering a loan beyond a certain time limit, banks are required to ‘write-off’ – a jargon for making full provision for it in the balance sheet. This is a technical requirement as per prudential norms prescribed by the Reserve Bank of India (RBI). This is necessary to keep the bank’s balance sheet (BS) clean. It can’t be bandied as a loan waiver as the bank continues to make efforts to recover the loan from the defaulting borrower.
As and when the loan is recovered, the amount is written back into the BS. The savings assumed by Kejriwal (read: Rs 150,000 crore) which he wants to set off against the liability resulting from his proposal for free electricity simply don’t exist. Third, as per the extant practice, states don’t give subsidies directly to consumers. Instead, they ask power distribution companies (discoms) not to bill the consumers or bill for the amount (albeit subsidized) as directed by the former. The understanding is that the state will make timely reimbursement to the discoms for the subsidy amount. But, most states don’t reimburse or do it partially. Even when they do, this is after considerable delay.
It is unlikely that the states will change their ways when it comes to implementing Kejriwal’s pan – India proposal. Imagine if subsidy dues of mammoth amounts of over Rs 300,000 crore annually get stuck even for a few months. This can push discoms into serious financial trouble posing a great risk to an uninterrupted supply of power. The CM who tom-toms about ‘no power cuts in Delhi’ should be aware of the fall-out of his idea.
Fourth, when a State intends to provide an essential good or service free or at a subsidized price, the target beneficiary necessarily has to be a poor person. She has to be one who with her meagre income, can’t afford to pay for the good/service. But, Kejriwal talks of giving free power to all 1400 million persons. Under his plan, everyone including those with higher income, millionaires, billionaires in fact, even the ‘richest’ person in India is eligible. It makes a mockery of the cardinal principles of a welfare scheme.
It isn’t as if the CM is not aware of the folly of his proposition. Indeed, he is or else, he would not have come up last year with a rejig of the free power scheme in Delhi. Citing that several HHs had informed him that they didn’t want subsidy, he asked all Delhiites to give their choice in writing. Did he intend not to give subsidies to the better off? Certainly not. Who will say, ‘I don’t want a subsidy’?
The outcome of the exercise was that the majority of all HHs who were earlier enjoying free power continue to get it even now. Given his track record, it is not surprising that while talking about free electricity pan – India, Kejriwal doesn’t differentiate between the poor and the rich. And, he as well as other political parties (sans Modi) do it because it is a saleable proposition.
Apart from Delhi, we have already seen this in Punjab and Karnataka. In a recent public rally, Kejriwal promised 300 units of electricity free in Chhattisgarh and Madhya Pradesh. He is going to reiterate this pledge in Rajasthan where elections are due towards the end of this year. The ball won’t stop here; it will extend to many other areas; free education, free health, free LPG etc.
Freebies are already denuding the budgets of the concerned states. For instance, in Karnataka, the five guarantees promised by GOP make a hole of Rs 65,000 crore annually. The states’ Dy CM says ‘the government has no money left for development’. In Delhi, a surplus budget is a mirage as several of its agencies are in the red (Delhi Jal Board has a mammoth debt of Rs 70,000 crore). The finances of Punjab and Himachal Pradesh too are in dire straits.
Now, if Delhi CMs’ misadventure starts playing out on a national scale, this will plunge the whole of India into ‘mammoth’ and ‘unsustainable’ debt. With a big slice of earnings used for freebies and servicing the debt, little will be left for financing development work. Besides, people will grapple with high-interest rates and high inflation. Above all, this will kill the urge to work thereby converting India’s demographic dividend into a demographic disaster.
The scourge of freebies needs to be curbed before it is too late. Last year, the Supreme Court (SC) asked political parties to come up with a law that prohibits freebies. Left to themselves, they won’t. They would instead let the matter rest in cold storage. What then is the way forward? The SC should pass an order prohibiting freebies that they will find difficult to nullify.
(The writer is a policy analyst)
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