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The hidden costs of 'free' in fiscal policy

While freebies might provide immediate relief or popularity for current leaders, they undermine the ability to fund programmes that build capabilities and provide long-term societal benefits

Expansionary fiscal policy that emphasises on "freebies" can pose substantial risks to macroeconomic stability over the long term. Such policies typically involve significant government spending on free or heavily subsidised goods and services to the public, which can lead to higher budget deficits and an increase in national debt. Over time, this fiscal approach can generate inflationary pressures as the economy overheats from boosted consumer demand without a corresponding increase in productive capacity. Moreover, these short-term benefits often come at the expense of more sustainable social policies. By allocating a large portion of public funds to immediate, non-productive subsidies, governments may need more resources to invest in critical areas such as education, healthcare, and infrastructure. These sectors are essential for empowering individuals and enhancing long-term economic productivity and social welfare. Consequently, while freebies might provide immediate relief or popularity for current leaders, they undermine the ability to fund programmes that build capabilities and provide long-term societal benefits.

In the current general elections in India, the phenomenon of opposition parties offering freebies in election manifestos has been notable. These promises often include benefits such as subsidies, financial aid, and other incentives intended to attract voters. However, there are concerns regarding the need for a detailed fiscal analysis accompanying these promises. More rigorous financial planning is needed, which raises questions about the viability and sustainability of these offers.

The impact of such freebies can be complex. On the one hand, they can play a significant role in parties' electoral strategies, aiming to meet the electorate's immediate needs or desires. On the other hand, without a clear assessment of the fiscal implications, these promises could lead to economic imbalances or increased strain on the public exchequer if implemented.

Research indicates that the indiscriminate provision of free goods and services can significantly strain government budgets, potentially necessitating increases in taxation or leading to elevated levels of national debt. For example, studies suggest that untargeted subsidy programs can lead to fiscal imbalances that detract from more critical welfare spending. Furthermore, the availability of free resources might encourage overconsumption or misuse, exemplified by the findings of Gneezy and Rustichini (2000), who reported that the provision of free services often leads to a devaluation of the resource in the eyes of consumers, thereby reducing overall efficiency.

On a socio-economic level, providing extensive freebies can impact work incentives and engender a culture of dependency. According to Moffitt (2002), generous welfare benefits can create disincentives for employment, particularly when the marginal benefit of working is outweighed by the welfare benefits received. This situation can perpetuate a cycle of dependency and economic stagnation. Politically, there is also the risk of such programs being manipulated for electoral gain rather than societal benefit, a concern highlighted by Case (2001), who found that short-term welfare expansions often correlate with upcoming elections.

The focus of governments and political parties on empowerment rather than merely doling out cash incentives is critical for fostering sustainable development and self-sufficiency among citizens. Empowerment strategies, such as education, vocational training, and capacity building, address the root causes of poverty and dependency by equipping individuals with the skills and knowledge necessary to improve their socio-economic conditions. According to a study by the World Bank, empowerment initiatives that enhance individual capabilities lead to more substantial and long-lasting economic outcomes than short-term financial aid (Narayan, 2002). These approaches encourage active economic participation and reduce reliance on government support, promoting a more resilient and productive society.

Further, empirical evidence suggests that cash incentives, while providing immediate relief, may not significantly alter the long-term economic behaviours of recipients. A meta-analysis of cash transfer programs in Africa showed that while these programs boost consumption in the short term, their long-term impact on economic self-sufficiency is minimal (Baird et al., 2011). This indicates that cash transfers might only lead to enduring economic improvements with accompanying measures to enhance human capital. Conversely, empowerment-focused policies such as microfinance initiatives and educational support have improved long-term economic prospects by fostering entrepreneurial activities and increasing employment opportunities (Khandker, 2005).

Moreover, focusing on empowerment aligns with sustainable development goals and ensures that development gains are equitable and inclusive. Research has demonstrated that empowerment programs, particularly those aimed at women and marginalized communities, lead to broader social benefits, including improved health outcomes and increased political participation (Malhotra, Schuler, & Boender, 2002).

Since 2014, India has embraced a "New Welfarism" approach, marking a significant shift from traditional welfare models to one focused on directly providing essential goods and services. This transformative strategy deeply integrates welfare into the broader economic and social development fabric. By ensuring everyone has bank accounts, cooking gas, toilets, electricity, housing, water, and direct cash transfers, emphasising empowering women and supporting marginalized communities, India aims to make the dividends of its economic growth accessible to all. This approach meets immediate needs and creates a more inclusive economic environment, ensuring equitable sharing of development benefits and narrowing the socio-economic divide.

The government has implemented a variety of social welfare schemes that meet basic needs and provide tools for self-improvement and economic integration. For instance, the Pradhan Mantri Jan Arogya Yojana (PM-JAY) offers health insurance to over 500 million beneficiaries, covering secondary and tertiary care hospitalization, which helps reduce the financial vulnerability of poor families due to health issues.

The effectiveness of India's New Welfarism can largely be attributed to the innovative integration of technological and administrative innovations, revolutionizing the delivery of welfare services. The Aadhaar identification system, pivotal to this new approach, enhances welfare programs' efficiency, transparency, and accountability by ensuring that subsidies and benefits reach their intended recipients. This system minimises bureaucratic obstacles and leakages and optimizes resource allocation, leading to substantial government savings and more efficient disbursements. Together with initiatives like the Jan Dhan Yojana, Aadhaar supports Direct Benefit Transfers (DBT), which cut out intermediaries and significantly reduce corruption.

Furthermore, the long-term impacts of New Welfarism in India are profound, with initiatives like the Jal Jeevan Mission and the Swachh Bharat Mission addressing immediate needs while contributing to sustainable development and improving quality of life. These initiatives, aimed at providing piped drinking water and improving sanitation, have significantly improved public health and children’s cognitive outcomes. Through its holistic approach, New Welfarism addresses root causes of poverty and undernutrition, laying a foundation for a healthier, more educated, and economically productive population. This model, emphasising technology, community engagement, and sustainable development, has the potential to reshape India's welfare and development landscape, promoting a more equitable and prosperous future for all its citizens.

Therefore, voters are presented with two distinct options during elections. One option is a model that seeks to promote the long-term empowerment of the electorate. This model aims to invest in sustainable development initiatives that enhance citizens' capabilities and opportunities, focusing on education, health, infrastructure, and economic growth. Doing so ensures that the benefits of development are deep-rooted and enduring, aiming to uplift the overall quality of life for future generations. Conversely, the other model primarily concentrates on the immediate distribution of freebies, such as cash transfers, subsidies, and other short-term aids. While this approach may provide voters with quick relief and instant gratification, it often lacks a long-term vision.

Aditya Sinha (X:@adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister of India. Views personal.