Amid flickers of economic freedom, demand for state dependence (specially when designing policies for the poor) remains high in India. Through the years, Central and state governments have both enabled and been overburdened by this dependence. While the burden is a result of gaps in state capacity, the enabling is often rooted in the politics of public policy.
This year started with state polls for India, and with the polls came an unsurprising surge in freebies. These often take the form of cash transfers and subsidies. Ahead of Punjab polls, Delhi’s incumbent Aam Aadmi Party made the news for promising direct cash transfers and electricity subsidies worth INR 25,000 crore, 15% of the state’s budget. This, however, is neither a new trend nor unique to any political party. Tamil Nadu, often credited with the initiation of freebie politics, is expected to owe INR 5,70,189.29 crore in debt by the end of March, 2022. Punjab and Uttar Pradesh, on the other hand, have the highest debt to GSDP ratios at 39.9% and 38.1% respectively.
Schemes promised by political contenders ahead of polls tend to have a populist appeal and rely heavily on the government (of the day). The braver bills, ones most likely to turn into subjects of contention, come soon after parties are voted to power. At the Centre, a glaring example of this was the Farm Laws. Farm Laws were passed in September 2020, a little over a year after 2019 general elections; a safe distance from 2024 general elections. Interestingly enough, these were rolled back ahead of UP and Punjab state polls. The contentious Citizenship (Amendment) Act, 2019 was passed in December of the year, 6 months after the general elections.
Where is the problem?
Irrespective of their personal incentives, political contenders often make promises that claim to benefit poor households. In theory, who would refute the merit of a direct transfer of INR 1000 to the women heads of poor households?
In a 1990 paper, Indian diplomat B.K. Nehru wrote, “The word socialism literally is meant to convey only that society should be so organised that the interests of the members of that society as a whole should take precedence over the interests of a part of that society whenever there is a conflict between sectional interests and social interests that conflict must invariably be resolved in favour of the latter. With this objective nobody can possibly differ.” This attractiveness of socialism in theory mirrors the attractiveness of populist promises. Therefore, a similar dilemma of theory vs implementation may be faced by a critical thinker when analysing populist promises.
An important question to ask then would be – are all subsidies and cash transfers a bad idea? No. While all subsidies and cash transfers create state dependence, in low and middle income nations, subsidisation can boost consumption of merit goods, and through it, growth.
In their paper Subsidies, merit goods and fiscal space – II, Mundle and Sikdar highlight the positive correlation between per-capita education subsidy and literacy rate (statistically significant at 1% level). The paper also highlights the inverse and positive correlation between per-capita subsidy for consumption of services (or the per-capita consumption of subsidised health services) and infant mortality rates (statistically significant at 1%). Please note, this subsidisation is important because the lack of subsidisation of healthcare services and primary education would lead to underconsumption of these services (primarily, by the poor) in the economy.
However, subsidisation of non-merit goods tends to be economically unsound. Hiked subsidisation of electricity, an emergent trend ahead of state polls, raises significant financial concerns. The AAP promise of free electricity to nearly 70 lakh households in Punjab would mean an additional expense of INR 9000 crore. In 2020-21, Punjab’s electricity subsidisation cost was nearly INR 18,000 crore. Electricity is not a merit good. It is not likely to be consumed less (than desired levels) in the absence of subsidisation. In fact, electricity subsidisation can cause overconsumption, resulting in severe environmental costs.
Is greater economic freedom the answer?
The main concern of this essay is the impact of populism on the beneficiaries. Beneficiaries who depend greatly on subsidisation and cash transfers for sustenance are vulnerable to uncertainties that come with change in politics of the day. The contentious Farm Laws present an interesting case study.
Irrespective of whether or not the proposed Farm Laws aimed at the eventual withdrawal of MSP, the uproar was a result of the dependence. It is unsurprising that the section of farmers that depended greatly on subsidisation of crops like wheat and paddy did not allow for a change in status quo. And while in the case of Farm Laws the interest groups (or beneficiaries) were both well-organised and well-backed to shake even the Central government, this may not always hold true.
When citizens’ upward economic mobility depends on the longevity of the government in power, their livelihoods remain vulnerable to political fluctuations. Therefore, creating greater economic opportunities that facilitate greater economic freedom for the poor is crucial for sustainably improving the lives of citizens. There is significant anecdotal and statistical evidence on how free markets improve lives.
When the government adopts liberal policies that enhance ease of doing business, there is an increase in available economic opportunities. For instance, a textile market with greater ease of doing business in Bangladesh has led to the creation of more economic opportunities for women. It created demand for women’s labour. Women’s economic participation in turn has improved their socio-political bargaining power. In her book The Power to Choose, Naila Kabeer provides anecdotal evidence for the same. She outlines the failure of governments and nonprofits in improving female labour force participation, through planned programs, in Bangladesh. However, what did lead to women’s participation was the availability of jobs in an “export oriented garment industry” of the 1980s. It is also important to note, financial independence and out-of-home work often increase women’s public sphere and intra-household bargaining powers. Such change requires the State to take on a facilitative and not paternalistic role.
This article is part of a series titled, Making Markets Work for the Poor. The next article will be published in April, 2022.
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.