The inevitable outcome is fiscal disaster and irreparable damage to long term development, growth and welfare plans.
Sometimes, people find dark humour even when the news is terrible. It happened recently in Himachal Pradesh when there was a massive controversy over a so-called “toilet tax”. It seems urban households in the state will have to pay a fixed sum of money as charges for every toilet they have and use. As it usually happens, the Congress government in Himachal Pradesh denied the news as misleading and most media platforms moved on to other controversies and events, particularly the Assembly elections. There is no clarity if people who have and use toilets under the “Swachh Bharat” scheme will also have to pay the toilet tax. Beyond the theatrics and the dark humour, the episode once again highlights the perils of distributing freebies as confetti in a parade. The inevitable outcome is fiscal disaster and irreparable damage to long term development, growth and welfare plans. During a tight and closely contested election campaign in Himachal Pradesh in late 2022, the Congress promised that it will bring back the Old Pension Scheme if it is elected to power. Under the OPS, the employee enjoys a lifetime of pension post retirement without contributing a single penny during service. With the number of pensioners rising consistently and with retired folks living longer lives, the pension burden had become unsustainable across India and had been replaced by a new pension scheme where the employee too contributes to a pension corpus along with the government.
The Congress promise lured enough voters in Himachal and it won the elections. It implemented the OPS. And now the state government is virtually bankrupt. In an unprecedented move the government delayed the payment of salaries to employees by more than a week as there literally was no money left with the state exchequer. Pension payments were delayed even further. The government is trying hard to borrow more and more money. But that will eventually lead to a cul de sac as it is reaching a stage where it will need to borrow money to pay interest on old and pending loans. What about money needed for roads, urban infrastructure, irrigation, government schools, primary health care centres and hospitals? Forget it.
Himachal Pradesh being a comparatively small state, the disaster is not yet an issue that is drawing national attention. But a much larger state Karnataka too is hurtling towards fiscal disaster thanks to indiscriminate freebies. By the time Assembly elections came around in April 2023, the anti-incumbency against the ruling BJP government was incredibly high. The Congress was set to win the elections. But besotted by the “Khatakhat” culture and vision being propounded by Rahul Gandhi, the party promised five sets of freebies to voters in Karnataka. It won the elections handsomely and went about implementing the freebie promises. They ranged from direct cash transfers to women to unemployment doles to free bus rides for women. The total annual cost of the five “welfare” schemes is projected to be Rs 60,000 crores by next year. In the 2024-25 Budget submitted by the Karnataka government, the total expenditure is Rs 350,000 odd crores out of which Rs 52,000 crores is for the five new freebies. Quite naturally, money doesn’t grow on trees so the Congress government is borrowing more than Rs 1 lakh crores this year to mainly finance the freebies. In coming years, the interest burden of the state will keep sweeping as borrowings are increased to finance freebies. The tragedy is that the freebies are “crowding out” much needed investments in physical and social infrastructure that are of immense importance to the poor in the long run. The mathematics is very simple. The unavoidable and committed expenditure of the Karnataka government is Rs 80,000 crores for salaries, Rs 32,000 crores for pensions and Rs 40,000 crores for interest payments (rough figures). Add more than Rs 53,000 crores for the new freebies. That makes it more than Rs 2 lakh crores.
Inevitably, there will be not much money left for education, healthcare, irrigation, infrastructure and development projects. But that’s not the end of the story. Staring at bankruptcy, the Karnataka government has started raising prices of almost everything it can. State taxes on both diesel and petrol have been increased substantially. That will hurt the poor more. Prices of milk have been raised. That will hurt the poor. Bus fares for non freebies beneficiaries have been jacked up significantly. So women will enjoy free bus rides and poor men will hurt even more in monetary terms. This will have a cascading effect year after year as salary, pension, interest and freebie expenditures keep going up relentlessly. The end of the road is fiscal disaster. It is not as if only Congress governments are distributing freebies like there is no tomorrow. Realising that not offering freebies could lead to electoral losses, even the BJP has jumped on to the bandwagon.
Perhaps the most glaring example of how freebies can ruin a state in the long run is Punjab that has been ruled by the Congress, the Akali Dal-BJP alliance and the Aam Aadmi Party over the last 25 years or so. The maximum procurement of food grains at MSP is from Punjab. It also has a unique model where farmers can consumer as much electricity as they want without paying anything. This perverse structure of incentives has led to strange developments. For one, the state electricity board is bankrupt. Besides, since there is MSP for water guzzling crops, farmers in Punjab have focused mainly on those crops. Since electricity is free, water can be pumped from reservoirs at no cost. The result: the water table in Punjab is now so alarmingly low that there is near unanimity among agriculture scientists that Punjab could become a desert state in a few decades. With the focus on agriculture, Punjab has ignored the industrial and services sectors. No wonder, while the per capita income of Punjab is less than Rs 2 lakh, that of neighbouring Haryana is about Rs 325,000.
More freebies anyone?
Yashwant Deshmukh is Founder & Editor in Chief of CVoter Foundation and Sutanu Guru is Executive Director.