The Impact of Freebies in Electoral Politics and Fiscal Responsibility

The growing trend of offering freebies in Indian elections, like free electricity and food grains, raises significant concerns about fiscal sustainability and long-term development. While such promises temporarily alleviate economic strain for low-income groups, they strain government finances, crowd out essential investments, and increase public debt. Misallocation of resources undermines critical sectors like healthcare, education, and infrastructure. Policymakers must prioritize long-term strategies for sustainable growth, job creation, and fiscal responsibility over short-term electoral gains to ensure India's economic stability and prosperity.

Recently, the phenomenon of the free gift to voters has emerged as one of the main concerns of Indian electoral politics. While aiming to achieve victory, political parties have already made outrageous promises of free goods and services (e.g., electricity, food grains, water, and even laptops free of charge). Although such promises may initially draw voters to a party, the ultimate economic impact of such policies is today a matter of fierce argument among economists and politicians.

From a historical perspective, the greater the number of attendees a party can muster on the back of such pledges, the greater the chances of electoral victory. However, this paradigm also favors short-term political expediency over long-term economic sustainability. Historically, the distribution of freebies has had mixed results. Although they may temporarily reduce the economic strain on low-income populations (for example, by distributing food grains or subsidized transport), this relief invariably leads to an inefficient use of resources. The indiscriminate nature of these distributions tends to favour wealthier individuals, while the most vulnerable segments of society, such as slum dwellers or those living on footpaths, are left out of these benefits. For example, electricity subsidies in Delhi trickle down to richer beneficiaries but are not passed on by landlords to poor tenants who rent the houses, either at all or only very incrementally.

The Economic Implications of Freebies

Economists and authorities have consistently disapproved of the practice of providing free wares, noting worries about fiscal soundness. Atop the opposition to freebies is the fact that they waste an enormous amount of resources. However, for example, although free food grains/electricity might help reduce short-term financial distress for families, these measures have the consequence of abstracting away important resources more effectively, through the development of infrastructure, social welfare, or other investments required in the long run.

Furthermore, according to much of the economic analysis, such subsidies not only contribute to a worse overall quality of life but also cause a money transfer to an individual from society, thereby causing a perverse subsidy. Resources that could be used to make healthcare, education, and infrastructure better are being squandered on short-term election themes. In a country like India, where the tax-to-GDP ratio is already lower than many other nations, fulfilling these promises becomes a severe burden on state and national finances.

In addition, the tax burden of freebies on government finances is significant. Estimates indicate that spending on freebies can vary from 0.1% to 2.7% of a state's Gross State Domestic Product (GSDP). Some states, such as Punjab or Delhi, for example, provide 300 or 200 units free of electricity per month, respectively, while they create burdensome debt into their overstretched finances. Such spending comes at the cost of fiscal sustainability, as these states are often forced to borrow heavily to finance these promises. Punjab's plea for ₹50,000 crore special package is a clear articulation of the fiscal difficulties infocrats unleashed by limitless freebies.

The Impact on Fiscal Sustainability

The COVID-19 pandemic only worsened the budget stress on state governments, already under pressure due to increasing subsidy pressures. The Reserve Bank of India (RBI) in its annual report warned that the increasing cost of non-merit freebies was putting a strain on the state finances. The ballooning overdue of state power distribution companies (discoms) is a significant example of how subsidies and freebies can lead to fiscal distress. The debt-to-GSDP ratio is another indicator of fiscal strain. Even in states, like Rajasthan, West Bengal, Punjab, and Kerala, revenue expenditure occupies more than 90% of state expenditure, and hardly any space is available for capital investments. Debt-to-GSDP ratios for certain states, especially in Punjab, are predicted to exceed 45% by 2026-2027. This increasing debt burden will just worsen their budgetary standings, making them susceptible to financial crises such as the one experienced in their neighboring countries, for example, Sri Lanka.

The recent economic crisis in Sri Lanka is a cautionary tale about the risks of fiscal irresponsibility and high levels of public debt. The country's unsustainable debt burden, partly driven by populist policies, ultimately led to a collapse of its economy. Although the crisis is not as deep in India there are concerns around the long-term fiscal and macroeconomic stability arising from the uncontrolled free buddy distribution pattern.

Deficits and Development Trade-offs

The practice of giving things away has established an unstable tension between good accounting and winning an election. Freebies may provide short-term (but only) political benefits but, in the long run, they inevitably hinder development. Government deficits rise because of fulfilling these promises, leading to higher debt levels that crowd out spending on essential services like healthcare, education, and infrastructure. For example, the provision of free electricity in Punjab and Delhi has contributed to ballooning state debt, which has implications for future development projects. Rather than putting money into infrastructure or employment creation programs, governments have to make distributions in favor of fulfilling these short-term campaign commitments.

Consequently, future generations' quality of life could be compromised because there isn't enough investment in the main pillars of society such as manufacturing and agriculture. The uncontrolled allocation of subsidies also leads to the misallocation of expenditure priorities. For instance, subsidies in the agricultural sector, which are aimed at providing short-term relief to farmers, often lead to environmentally unsustainable practices. For this reason, governments are, as a result, running off from long-term growth, which includes strengthening of labour-intensive industry, and creating the best employment opportunities. This is something governments should be focussing on.

Although it may be argued that the provision of basic goods and services, such as health care, education, and food security, is needed for social welfare, indiscriminate provision of free goods and services is desirable. These freebies put pressure on the government's finances, shift expenditure priorities, and ultimately block long-run growth. Policymakers are in a bind in balancing the provision of critical welfare services with fiscal responsibility. Rather than give short-term electoral courtesies in the form of freebies, political parties should target long-term policy directions for the development of the economy, job creation, and social welfare. Taxation, public debt management, and effective use of public resources require reforms to achieve fiscal sustainability and macroeconomic stability.

In the context of India's economy expanding, both central and state authorities need to pay attention to building a sustainable fiscal structure that can be leveraged for long-term development. Only through enlightened fiscal management can India fulfill its development aspirations and deliver a better quality of life to all its people as an immediate or future reality. Although freebies can attract short-term political popularity, their long-run economic consequences are seriously adverse to the country's fiscal well-being and progress. Governments must shift their focus from offering short-term benefits to investing in sustainable, long-term growth that benefits all segments of society.

Mohmmad Hesham Atik is a student pursuing a Psychology Hons. from Jamia Millia Islamia.

Edited By: Sana Faiz

Disclaimer: The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of The Jamia Review or its members.