Debate on freebies: no easy answers

The debate on freebies- handouts or subsidies of one kind or another by the central and state governments- is getting shriller by the day. Everybody thinks freebies should be curbed because they wreak havoc with the government's finances. The solution is not as obvious as many think.

One of the most common answers is: subsidise items that generate positive externalities such as health and education. Clamp down on those that do not, such as power.

Former RBI Governor D Subbarao points out in an article in ToI today that it's hard to measure the welfare effects of a given subsidy, so it's hard to determine what are 'merit' and 'merit' subsidies. He proposes that we abolish the classification. Let politicians agree on a cap on subsidies. An independent fiscal council must vouch for the integrity of budgetary numbers. 

Dr Subbarao is right on the measurement issues. MGR's now-famous Mid-Day Meal scheme for school children was decried by many as simply giving away food for free. We know now that school attendance went up sharply, with the ensuring benefits. Politicians, with their acute understanding of realities at the grassroots, may have a much better sense of the welfare effects of a given subsidy than economists. So, many freebie schemes may not be as perverse as economists think. Any sensible Railways minister will include a junction in his constituency in the Railways budget- he knows how a rail junction can transform the local economy.

I am not sure that Dr Subbarao's suggestion for a cap on freebies will work. It may well go the way of the limits on the FRBM caps. Politicians will find ways around limits.

It is important to recognise that jobs in industry or services go to the relatively privileged, that is, those who have access to education and the means to afford it. A big chunk of freebies goes to those who will not be able to access the jobs created by productive expenditure. 

So, how much to spend on freebies relative to productive expenditure is a question of equity. It is a question that can be answered only by the electorate. Expenditure on freebies will fall only the potential beneficiaries of these diminish relative to the potential beneficiaries of job-creating expenditure- the votes will no longer be as strongly in favour of freebies. Politicians understanding this better than economists, so they will go on spending on freebies until this condition is met.