Poll-nomics of ‘guarantees’: Short-lived happiness, long-term damages

Quite a few questions emerge here: What is the economic logic of providing guaranteed programmes? Is there any quid pro quo between declaring the Free schemes and seeking votes? Is it correct to do so on an ethical platform? Will that impact the overall fiscal discipline? What are the positive effects on the economy of the recipients? What about discontinuing or sustaining these policies for a long time? Are there any alternatives to reach the same results with substitute options? Not keeping these promises will mean what?

First, looking into the hard economic logic of these “guarantees” in the theory of public expenditure, there are eleven enshrined principles in the theory for maximising social welfare. The underlying principle states that “the aim of public expenditure is to maximize the social benefit, yet it does not exonerate government from exercising utmost economy in its expenditure”.

Related: Rahul Gandhi’s five guarantees

Source of additional revenue

Further, efficiently use public expenditures for the population’s welfare. Therefore, provide for concessions in expenditure on education, food, pension, and insurance, treating certain essential commodities as welfare augmenting. These come under the basic duties of the State.

This, however, should operate in the overall fiscal discipline of the State and not burgeon the deficits and increase the borrowings. It is essential, therefore, for the promising party to declare in the manifesto itself the proposed methods of finding additional revenue to meet such expenditures and, on that basis, declare such benefits. Neither the State governments nor the Union Government has ever made any efforts to state upfront the sources of this additional revenue needed. That jeopardises the fiscal discipline at both levels and results in borrowing, pushing both levels of the government towards the debt trap.

The State of State Finances 2022-23 report indicated that outstanding liabilities of states increased from 26.7 percent of GSDP at the end of 2019-20 to 31.1 percent at the end of 2020-21. At the end of 2022-23, outstanding liabilities of state governments estimated 29.5 percent of GDP. For 21 states, outstanding liabilities are higher than 30 percent of GSDP. Here, the outstanding liabilities refer to the debt that states have accumulated from past borrowings.

The FRBM Act specifies the limits of liabilities as a percent of GSDP, and quite a few states have crossed that. The state governments look to the Union Government for rescue and sometimes blame the devolution based on some untenable simplistic logic.

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Guarantees similar to electoral bonds

The apex court, in its judgement on Writ Petition (C) No. 880 of 2017, said that the election bonds used the term ‘quid pro quo’ almost 28 times, hinting at the link between the purchase of bonds and favours, either ante or post shown to the contributors. The schemes providing certain sops free from the same viewpoints amount to committing the voters to a future gain, as in the case of ‘contributors to electoral bonds’, which expected some future gains.

Certainly, the schemes did not come from any demand from the population for such benefits but suo moto declared by the political parties under their manifesto. Possibly, the party functionaries might have had wide-ranging consultations, but people love the word ‘free’, and therefore, it is easy to play on their vulnerability. These schemes enhance at least the static welfare situation, but is it that the population has asked for such backhanders, or are these pushed onto them?

The guidelines for the election manifesto, the apex court in the case no Civil Appeal No 5130 of 2013, by Subramaniam Balaji, stated on page 8 at para 77, say that “Although the law is obvious that the promises in the election manifesto cannot be strictly construed as ‘corrupt practice’ under Section 123 of RP Act, the reality cannot be ruled out that distribution of freebies on any kind, undoubtedly, influences all people. It shakes the root of free and fair elections to a large degree”.

Further, in the same case, it is stated that “the Election Commission through its counsel also conveyed the same feeling both in the affidavit and in the argument that the promise of such freebies at government cost disturbs the level playing field and vitiates the electoral process and thereby expressed willingness to implement any directions or decision of this Court in this regard”. However, on purely technical grounds, the manifestos are published before the code of conduct comes into operation and the case is decided. However, the ethical grounds for such practices remain under a dark cloud.

Related: Guarantee expenditure a bumpy ride

New fiscal liabilities

The overall fiscal impact of such schemes can be huge. The promise of giving ₹1 lakh grant to females in each household, given that 3.44 crore people are living in poverty as per recent estimates and taking 48.4 percent of them as females, the total expenditure will be ₹1.65 lakh crores per year at one go.

Further, as promised, ₹72,000 per person to the 20 percent poorest comes to about ₹1 lakh crore. India’s total liabilities stood at ₹183.67 lakh crore last year. Besides, the Kisan Sanman Nidhi, laptops, gas prices, free electricity, housing promises, etc., will require additional expenditures. Keeping other expenditures unchanged means a yearly addition to the liabilities besides the liabilities created by the State governments.

Of course, these policies will have positive effects, including increased purchasing power in the hands of the poor, thereby increasing demand in the essential commodities sector. However, it is imperative to handle demand push inflation, which may severely impact the poor. The increased demand may pressure production, bringing in new growth sources.

Albeit these arguments are distant possibilities, these policies can bring at least short-lived happiness but may have a long-term incapacitating effect. More importantly, the pressure exerted on revenue may require pushing the direct tax and GST rates ahead. To sustain these over time, the economy will confront a debt trap of the 1990-01 type, and inflation will reach double digits and unmanageable deficits.

The alternative policies need to follow the economic policies proposed by PV Narasimha Rao and Manmohan Singh combine, focusing on market centralism and incentivising the production sector through infrastructure and attracting capital in the economy. The indirect approach towards welfare followed in the post-1990 economic policy and continued by successive governments will certainly but surely yield the desired results. Any hurried direct benefits approach based on free pacifiers may cause long-term economic damage, making it difficult for any government to carry it forward.