Welfare spends vs fiscal sense

The promise of freebies points to India’s broken political economy rather than bad political intent

Congress president Mallikarjun Kharge’s advice to his party about making only deliverable promises has triggered yet another slugfest on what is popularly termed freebies. While the BJP and the Congress have been hypocritical — everybody uses such schemes — in accusing each other, the issue, as these pages have repeatedly pointed out, is more systemic and symptomatic of India’s broken political economy than bad political intent.

Congress president Mallikarjun Kharge’s advice to his party about making only deliverable promises has triggered yet another slugfest on what is popularly termed freebies(REUTERS)

The impressive growth in the post-reform period has created a lot of wealth and upward mobility for a section of Indians. But a large majority is still living a life of extreme precarity. Unless they reap the rewards of growth, this cohort will keep expecting fiscal palliatives in return for political support. All political parties have realised this fact and now compete with each other for freebies.

This democratic pressure, as is often the case in political economy, has given birth to a bigger irony where scarce fiscal resources are being diverted from investments that could be beneficial to the poor in the long term to boost short-term consumption, which does nothing to solve the larger systemic problem of inequality. Short-termism in welfare spending is not the only perverse effect of this trend. Successive Union governments, in their urge to garner votes, have been taking on spending commitments in areas that they shouldn’t have entered if the constitutional division of spending areas for the Centre and states were being followed. This has also led to a squeeze on resources for strategic sectors such as defence. The 15th Finance Commission report has rightly sounded a note of caution on this issue.

Can this issue have a meaningful resolution? The only way to start a process of rectification is to take the route of an overhaul of India’s fiscal federalism framework, that engages rather than runs away from political economy. States, in the post-GST regime, have very little fiscal autonomy. This policy squeeze has come at a time when the BJP has discovered a new model of using centrally funded schemes to generate political tailwinds. This has increased the insecurity of Opposition parties, adding fuel to the fire of seeking political insurance from populism. Since India’s fiscal framework protects states and local bodies against bankruptcy, there is no long-term disincentive against such irresponsible populism.

A genuine bipartisanship in existing welfare spending in return for imbibing fiscal prudence both in letter and spirit is the only way forward to avoid this race to the bottom.