Freebie Will Weaken The Fiscal Position

The nature and scope of promises made by political parties in electoral states is continuously increasing. These will have adverse effects on the treasury in future.

For example, analysis of promises made in Chhattisgarh shows that there is no significant difference in the attitude of both Congress and Bharatiya Janata Party (BJP).

Promises like giving cash to landless agricultural workers, making gas cylinders cheaper and providing free education have been made in the state. BJP has also promised to give monthly allowance to married women.

However, the biggest announcement was made by Prime Minister Narendra Modi on Saturday and said that the Central Government has extended the scheme of distribution of free food grains to 80 crore eligible people for five years.

An estimated amount of Rs 2 lakh crore is spent annually on this scheme.

The matter of concern is that this announcement has set the tone not only for the electoral states but also for the upcoming Lok Sabha elections.

The free food grain distribution was started during the pandemic and was being distributed under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).

After extending its duration several times, the government had decided to merge this scheme with the scheme of grain distribution under the National Food Security Act for one year.

It started in January 2023. This is the reason why the government had made rice and wheat free under the National Food Security Act instead of selling them at the rate of Rs 3 and Rs 2 per kg respectively.

The government should have discontinued the Pradhan Mantri Garib Kalyan Anna Yojana as this scheme was a temporary measure to provide relief during the pandemic and the situation in the economy had become normal.

It is noteworthy that before the pandemic, the debate was focused on how the government should increase the price of grains given under the National Food Security Act so that food subsidies can be reduced.

But by making it free, the government took exactly the opposite step. It was difficult to reverse this step.

At the time of the announcement in December 2022, media report claimed that “From a political point of view, it is difficult to imagine that the government will be able to end the free food grain scheme by the end of 2023 as the Lok Sabha elections will be just a few months away.’

Now an extension of five years will give almost permanent status to this scheme.

If we take a hint from the promises being made in the state elections, it does not seem that this trend will change in the Lok Sabha elections also. The expansion of the food grain distribution scheme also shows the same.

However, when it comes to policy and fiscal management, including permanent expenditure is politically difficult and will limit the government’s room for any change. This will prove to have long term economic impact.

In principle, there is no policy controversy that the government should help people from low income groups.

However, fiscal resources should be used in such a way that their impact can be maximized. This is especially important considering India’s stage of development as it needs to spend in many sectors to build capacity. This also includes the social sector.

At present, increasing expenditure on subsidies and freebie will weaken the fiscal position of the country.

This will happen at a time when government debt and the general government deficit are already very high.

The central government aims to keep the fiscal deficit at the level of 5.9 percent of GDP in the current financial year. It wants to further reduce it to 4.5 percent by 2025-26.

PIn such a situation, the fiscal deficit will remain high in the medium term and the increase in expenditure will further delay the process of fiscal consolidation. This will increase macroeconomic risks.

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