Are freebies a Gateway to Financial Disaster?
Source: indianexpress
For Prelims: Freebies, Fiscal deficit, Revenue deficit
For Mains: Burden on Fiscal deficit due to freebies, Fiscal dilemma
Highlights of the Article:
Fiscal dilemma
Balance of Payments (BoP)
Non-Performing Assets (NPA)
Directive Principles of State Policy
Context:
Political parties, regardless of their ideological orientation, frequently employ the strategy of offering free or significantly subsidised products and services as a means to sway voters. The statement made by Prime Minister Narendra Modi urging a stop to the prevalent ‘revdi’ culture, has brought the enduring practice of political populism into question.
UPSC EXAM NOTES ANALYSIS
1. Freebies
- The term ‘freebie’ in the dictionary refers to an item or service that is offered or delivered without any cost. In a bulletin published in June 2022, the Reserve Bank of India (RBI) issued a definition for the term ‘freebies’ as a form of public welfare programme that is offered without any cost
- The Reserve Bank of India (RBI) asserts that freebies can be differentiated from public or merit goods, such as education and healthcare, as well as other state expenditures that yield broader and enduring advantages
- Nevertheless, discerning between welfare goods, often referred to as ‘merit’ goods, and freebies or ‘non-merit’ products poses a significant challenge.
- Scholars have underscored the significance of merit goods, such as free or subsidised food, education, shelter, and healthcare, in expediting human development and subsequently fostering national economic progress.
2. Fiscal Sustainability
- Expenditures are being focused on various forms of subsidies. Consequently, what implications does this have for the fiscal sustainability of states that are already burdened with debt
- Another concern that arises is the distortion of expenditure priority. Furthermore, the matter of intergenerational equity contributes to heightened social disparities as a result of the misallocation of expenditure priorities away from items that promote economic growth
- One aspect to consider is the diversion of resources from environmental and sustainable development, such as the allocation of free electricity or a specific quantity of free power, water, and other consumable products
- This diversion hinders the progress towards renewable energy and overall environmental sustainability.
- Furthermore, there is a distortion in the allocation of agricultural priority. This phenomenon has implications for agricultural practises that do not rely heavily on the intensive utilisation of water and fertilisers.
- Furthermore, the detrimental impact it has on the future of the industrial industry. This prompts the inquiry as to whether it is now appropriate to contemplate the implementation of remedial measures such as subnational bankruptcy
3. Non Performing Assets
- There is a potential link between freebies and non-performing assets (NPAs). When banks and financial institutions offer freebies, such as low-interest loans or waived processing fees, they may be more likely to lend to borrowers who are not creditworthy. This can lead to an increase in NPAs, as borrowers who are unable to repay their loans may default.
- Andhra Pradesh disclosed freebies for the fiscal year 2023 that would utilise approximately 30.3% of its tax revenue. Similarly, Madhya Pradesh’s allocation for freebies was nearly 28.8%, Punjab’s was around 45.4%, and West Bengal’s amounted to 23.8% of their respective tax revenues (RBI Bulletin, June 2022).
- In the preceding five-year period, financial institutions have recorded loan write-offs amounting to ₹10 lakh crore, with public sector banks accounting for a substantial portion of non-performing asset (NPA) write-offs, often ranging from 60% to 80%
4. Directive Principles of State Policy (DPSP)
The Directive Principles of State Policy, enshrined in Part IV of the Indian Constitution reflect that India is a welfare state
Article 38 in the Constitution says that: The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life; and the State shall, in particular, strive to minimize the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only among individuals but also amongst groups of people residing in different areas or engaged in different vocations. Establishment of a welfare state is a conscious policy which entails the outflow of public resources for improving the quality of life for all citizens, including those who are unable to avail themselves of the bare necessities of life
5.Advantages of freebies
Freebies, or free goods and services, can have a number of benefits for society as a whole. Here are some of the most common benefits of freebies in society:
- Increased access to essential goods and services: Freebies can help to increase access to essential goods and services for people who cannot afford them. For example, the government may provide free healthcare or education to its citizens. This can help to improve the quality of life for everyone in society.
- Reduced poverty and inequality: Freebies can help to reduce poverty and inequality by providing people with the resources they need to live a better life. For example, the government may provide free food or housing to its citizens. This can help to lift people out of poverty and create a more equitable society.
- Promoted economic development: Freebies can help to promote economic development by stimulating demand for goods and services. For example, the government may provide tax breaks or subsidies to businesses. This can help businesses to grow and create jobs.
- Improved public health: Freebies can help to improve public health by providing people with access to preventive care. For example, the government may provide free vaccinations or screenings. This can help to reduce the incidence of disease and improve the overall health of the population.
- Encouraged innovation: Freebies can encourage innovation by providing businesses with the resources they need to develop new products and services. For example, the government may provide grants or loans to businesses. This can help businesses to grow and create new jobs.
6. Conclusion
It's important to note that while freebies offer many benefits, they should be used strategically and thoughtfully. They can be costly to produce and distribute, so it's crucial to ensure that the benefits you gain outweigh the expenses. Additionally, freebies should provide genuine value to recipients to create a positive impression and achieve the desired outcomes.
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Practice Questions
1.Discuss the social and ethical dimensions of the Non-Performing Assets (NPAs) issue. How can responsible lending and borrowing practices contribute to reducing the NPA burden and promoting financial inclusion?
2.Critically analyze the effectiveness of the Insolvency and Bankruptcy Code (IBC) in resolving Non-Performing Assets (NPAs) in India. Highlight the challenges and potential improvements needed for a more efficient resolution process
3.Critically analyze the role of freebies and subsidies in poverty alleviation and social welfare programs in India. Assess their effectiveness in achieving their intended objectives and propose strategies for more targeted and efficient implementation
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