Freebies good, tax subsidies bad 

On April 4, 2022, top bureaucrats are reported to have briefed Prime Minister Narendra Modi that some states could become cash-strapped like Sri Lanka or Greece due to the freebies they have announced. The bureaucrats are reported to have said that announcements made by Punjab, Delhi, Telangana, Andhra Pradesh, and West Bengal are unsustainable. It is not only Sri Lanka or Greece; 147 governments have defaulted on debts since 1960.

Actually, bureaucrats failed to distinguish between the debt problems of states and that of Sri Lanka and Greece, which failed to import goods and repay external debt due to lack of foreign exchange -a case of a sovereign debt default.  But neither states have to pay any external debt in foreign exchange nor can fall into a debt trap like Sri Lanka or Greece.

If states can go in the Sri Lankan way by an increase in debt, why it did not happen when states had higher debt-GSDP ratios than what is today.  The Centre can also rescue states by providing loans or aid or financial assistance as it is providing revenue deficit grants as per the recommendation of Finance Commission. However, the Centre may face a similar crisis as it had faced in the 1990s. It does not mean states should spend recklessly. But spending for the poor is never reckless as it is propagated.

Sri Lankan crisis is not only due to debt problems but embracing IMF dictated reforms and tax cuts to the benefit of the rich and corporate. If higher debt-GDP ratio is responsible for such a crisis, then countries with higher debt-GDP must have been embroiled in such a crisis. When the debt-to-GDP ratio in Sri Lanka is 119%, it is nearly 134% in the US, 155.80% in Italy, 266% in Japan, 97.7%, in Europe, and 103.7% in the UK, 115.70% in France, and 90% in India.

It is not that Sri Lankan debt-GDP ratio has increased only, IMF’s January 2021 Fiscal Monitor Update revealed that global public debt has risen to 98% of GDP (higher by 14% from, October 2019), primarily due to additional spending, forgone revenue, and liquidity support. The US debt has increased by more than 800% from 1989 to 2021.

Most importantly, the global trade and payments are done in a few currencies with the US dollar accounting alone (40.51%), followed by Euro (36.6%), pound and sterling (5.85%). India, Pakistan, Sri Lanka, and Nepal don’t enjoy such privileges at all. Had Sri Lanka had a chance to pay the debt in its own currency or allowed currency swapping with the dollar, it could have averted the crisis

The Centre can provide some guidelines for maintaining fiscal discipline but it cannot direct states on how to spend money. After such irrational statements of bureaucrats, many newspapers, and journals have mentioned that states with the highest debt-GSDP ratio in 2021-22 are Punjab (53.3%), Rajasthan (39.8%), and West Bengal (38.8%), Kerala (38.3%) and Andhra Pradesh (37.6%).

This figure is not only wrong but also deliberately inflated to belittle non-BJP ruled states. In 2021-22, outstanding liabilities as proportionate of GSDP were for Punjab 46.4%, Rajasthan 38.2%, Kerala 37.39%, Andhra Pradesh 36.5%, West Bengal 35.5%, Telangana 24.84%.  Other BJP or its coalition ruled states Himachal Pradesh 40.26%, Bihar 32.3%, Madhya Pradesh 28.5%, Uttar Pradesh 28.1%, Karnataka 26.9%, Haryana 25.92% have also higher ratio.

The liabilities of State Governments consist of (i) Public Debt; (ii) Ways and Means Advances and Overdrafts from the RBI or any other banks; (iii) Public Accounts; and (iv) Contingency Fund, automatically public debt of states will be much lower. Note that public debt does not include other liabilities of states such as liabilities on public accounts, which have ranged between 6.7%-7.7% of GDP from 2011-to 2021.

What is disquieting is that during Modi’s regime, states’ debt increased. Between 2011-12 and 2014-15, the outstanding public debt of states was reduced from 17.2% of GDP in 2011-12 to 16.6% of GDP in 2014- 15. But it increased to 25.1% in 2021-22. Similarly, outstanding Liabilities of State governments and UTs have increased from 22% in 2014-15 to 31.2% of GDP in 2021-22, though within the prescribed limit. The 15th Finance Commission expects the debt-GDP ratio to peak at 33.35% in 2022-23, and gradually decline thereafter to reach 32.5% by 2025-26.

The takeover of debt of state-owned power distribution companies under the UDAY scheme by states was one of the principal reasons for the rise in states’ debt levels in 2015-16 and 2016-17. The draconian demonetisation, flawed GST triggering slowdown and the COVID-19 pandemic induced recession needing increased borrowings to fund the expenditure has affected states’ finances. This shows that during the Modi regime, state finances have worsened.

Outstanding liabilities of states do not include a few other liabilities that are contingent in nature, which states may have to honour in certain cases. State governments guarantee the borrowings of State Public Sector Enterprises (SPSEs) from financial institutions.

The guarantee given by the states together is around 3% of their aggregate GSDP. It means in order to deliberately denigrate some non-BJP states, following misinformation is being spread. Even the figure shown included not debt but liabilities including guarantees.

RBI (in 2019) observed that the debt level of a state is considered sustainable if interest payment is less than 10% of its revenue receipts. BJP-ruled state of Haryana is estimated to spend the highest proportion of revenue on interest payments in 2021-22 at 23%.

Own tax-GSDP ratio is a measure of a state’s potential to generate taxes from its economy on its own. A higher ratio indicates a better ability to harvest taxes from the economic activities in the state. States’ own tax revenue in 2021-22 is estimated to be 6.7% of their GSDP. Most non-BJP ruled states like Andhra Pradesh (10%), Kerala (8.2%), Maharashtra, UP (8.1%), Jammu Kashmir (8.1%), Rajasthan (7.5%), Telangana (8.0%), and Odisha (6.4%) will have such ratio.

For 2021-22, the fiscal deficit (that shows how much the government is going to borrow in a year) limit permitted for states is 4% of GSDP. States will be allowed additional borrowing worth 0.5% of GSDP upon completing power sector reforms. The fiscal deficit of states on aggregate is estimated to be 3.7% of their GSDP in 2021-22.

Around 19 states have estimated their fiscal deficit to be below the 4% level. States with a relatively high fiscal deficit in 2021-22 include Chhattisgarh, Madhya Pradesh, and Himachal Pradesh. As per the RBI report, the fiscal deficit that shows the amount of borrowing is highest in Manipur (9.2%), followed by Goa 6.06%), Tripura (5.7%), Tamil Nadu (4.8%), Uttar Pradesh (4.7%), Punjab (4.6%), and Madhya Pradesh (4.6%),

Hence, citing names of only non-BJP ruled states only exposes the hypocrisy of civil servants who want to please the Prime Minister. However, after such statements, protagonists of neoliberalism have criticized freebies in such a way that all ills of state finances are only due to freebies. Even, NK Singh chairman of the Fifteenth Finance Commission, writes freebies are a passport to fiscal disaster. They could prove expensive for the economy, life quality, and social cohesion in the long run. This is quite wrong.

Freebies mean something is given free of charge. It is not only freebies but anything given at a subsidised rate including any populist scheme opposed by market fundamentalists. It is not only a few non-BJP ruled states, but almost all state governments including the Centre are giving freebies to voters to strengthen their vote banks. Only the degree varies. But citing the name of only non-BJP ruled states exposes the hypocrisy of bureaucrats.

When any non-BJP ruled state government gives freebies, the Centre is worried not because of any fiscal profligacy, but because it does not want any non-BJP state government to gain any popularity in this way. So, it is adopting hostile federalism, squeezing the fiscal capacity of states.

However, the freebies have a positive impact. A new study by International Monetary Fund has praised the Pradhan Mantri Garib Kalyan Anna Yojana for keeping extreme poverty levels in check during the pandemic. What is reprehensible is that the Centre trimmed the expenditures necessary to raise the standard of living of people and raised revenue by taxing fuel to spend on this scheme, which affected the poor more brutishly later.

When government policies are favouring the rich and corporates, a larger section of society is alienated from the mainstream and deprived of getting the benefits of growth and wealth creation. They need to be given some benefits through subsidies, freebies, and various schemes.  Further, freebies enhance the discretionary incomes of beneficiaries and thus enhance economic activities, and spur demand, investment and growth.

Opponents of freebies argue that there is no such thing as a freebie in economics because ultimately somebody has to bear the cost of the supposedly free giveaways. The concept is popularly known as “There’s No Such Thing as a Free Lunch”, which is the name of a book by Nobel Prize-winning economist Milton Friedman, who showed that everything has to be paid for by taxes if not today or tomorrow, then the day after. But government can raise resources by taxing the rich for said purpose.

However, nobody objects when free lunch is given to the rich through tax cuts, tax exemptions or tax subsidies.  Those who are opposing freebies, never raise questions when our country loses huge resources due to tax evasion, tax cut like corporate tax reduction, abolition of wealth tax, tax foregone, growing NPAs, and banking frauds. They do not say how states get less from the divisible pool because the country has one of the lowest tax-GDP ratios in the world. They don’t say when common people suffer due to unfettered privatization of the public sector, essential services, and monetization of assets.

When the Centre fails to rax the rich, states’ finances are worsened as the latter’s share in the divisible pool declines.  States are incurring debt, not owing to expenditure on freebies but because their scopes for raising taxes have been squeezed especially after GST implementation. The state cannot raise taxes like the Centre, though have to spend more.

The administration is rigged in favour of the rich and ordinary citizens have been left to foot the bill for government spending through indirect taxes.  Hence, freebies, subsidies or populist schemes should not be stopped but the rich and corporates should be made to finance such schemes so as to make growth inclusive and reduce inequality.

The Centre is espousing hostile federalism and squeezing the fiscal capacity of states so as to browbeat states. The Centre’s cess and surcharge revenue, which is not shared with states, is estimated to be Rs 4.5 lakh crore in 2020-21.  Due to cesses and surcharges, states’ share in the divisible pool is around 29% in 2020-21, lower than the 41% recommended by the 15th Finance Commission. Overall fund transfer from the Centre to states has declined too.

However, the states are in a far better position compared to the Centre as far as debt is concerned. The N K Singh Committee on FRBM in 2017 had suggested a ceiling for general government debt (both Centre and states) of 60% of GDP by 2022-23. And within this overall limit, a ceiling of 40% was adopted by the Centre, and 20% by the states. There was relaxation in view of the impact of the Corona Pandemic induced recession.  But the Central debt which was 48.6 % in 2019-20 has increased to around 62% of GDP in 2021-22.

The bitter truth is that when any non-BJP ruled state government gives freebies, the Centre is worried not because of any fiscal profligacy, but because it does not want any non-BJP state government to gain any popularity.

Actually, the so-called Gujarat Model/Modi Model/ double engine model (BJP ruling both at Centre and states) was damaged by the astounding success of the Kerala Model in the last few years and is now further eclipsed by Kejriwal’s Delhi Model.  In past, BJP ‘s annihilation in the Delhi Assembly election and recently in Punjab has perturbed BJP leaders and corporate/ business behemoths who have disdain for any expenditure or schemes made for the poor.

They are further perplexed and perturbed as Aam Admi Party (AAP) is gaining popularity in Gujarat and is successfully able to provide freebies, subsidies, and concessions to the poor, women even maintaining high growth and fiscal rectitude in Delhi. Corporates and the rich do not want such freebies or subsidies to the poor not because there may not have enough resources at disposal of the government to give tax concessions to them.

They are more perplexed and perturbed as Aam Admi Party (AAP) is gaining popularity in Gujarat and is successfully able to provide freebies, subsidies, and concessions to the poor even maintaining fiscal rectitude. Had it not been so, bureaucrats would not have cited the name of Delhi despite having the best performers in fiscal indicators and Kerala being the best in Human Development.

In 2021-22, for Delhi, as per the revised estimates, the fiscal deficit is expected to be 1.58%, lower than the limit of 4.5% of GSDP. Delhi’s per capita income grew 16.81% year-on-year to Rs 4, 01,982 in fiscal 2021-22 as against Rs 3,44,136 during 2020-21. The per capita income of Delhi is reportedly three times higher than the per capita income of India in 2021-22.

CAG’s financial audit for 2013-18 concluded that Delhi has no debt sustainability issues as its GSDP grew faster than its public debt. The GSDP increased by about 50% in the last six years. The debt to GSDP ratio had declined substantially to 5.18% in 2021-22 as compared to 8.61% in 2011-12.  The fiscal deficit is estimated to be at 1.58 % of GSDP in 2021-22. The ratio of interest payment to revenue receipts also declined to 6.86% in 2020-21 from the high ratio of 13.03% in 2011-12, indicating that the debt was under control.

Similarly, say Human Development Index (HDI), the latest Public Affairs Index-2021 showing governance, Niti Aayog’s Health Index report for 2019-2020, literacy rate, the SDG India Index 2020–21, Kerala tops the list. Similarly, India’s first-ever Niti Aayog’s first Multidimensional Poverty Index (MPI), Kerala (0.71%) has registered the lowest poverty across India. Kerala is one of the least corrupt states, where only 10% of people admitted to paying a bribe to get their work done.

Most of the corporates, the rich and powerful people have derision for the poor and they don’t want the poor should lead a decent and meaningful life. They think that poor people should remain always poor and struggle to eke out basic existence and do only manual, physical work with lesser wages so that they can lead a cosy life.

However, life is always more important than anything else. What is the meaning of fiscal discipline, if people suffer or perish? The standard of living of people should be raised to such a level and health, education including other essential services should be made affordable in such a way that there will be no need for freebies. Let the government ensure this first.