Poorly-Directed Freebies Likely To Have Adverse Impact On Economy, Like Sri Lanka: Experts

Recently, the Supreme Court said freebies at the cost of taxpayers' money may push the country towards imminent bankruptcy

Poorly-directed freebies may wreak  havoc with state finances and have adverse consequences on the economy as in the case of Sri Lanka, experts say, while noting it is important to define a freebie and how it is different from welfare expenditure.

Recently, the Supreme Court said freebies at the cost of taxpayers' money may push the country towards imminent bankruptcy.

Economic think tank ICRIER Chairman Pramod Bhasin said, "Most freebies (unless at a time of huge urgency such as Covid) which are often poorly directed are a fiscal mistake with significant adverse consequences. And these exist in most states and under most forms of governments." Bhasin noted that "political compulsions" cause most politicians to announce freebies as their way of capturing votes.

"If there was a way to limiting these within each state and also centrally that would be a welcome move—but that is also for the elected representative to decide," he said, adding that there is a need to define a freebie and how it is different from welfare expenditure.

Echoing similar views, Institute for Studies in Industrial Development (ISID) Director Nagesh Kumar said the state governments need to be responsible in terms of fiscal management unless they wish to get into an unsustainable situation.

"Basically, freebies given by state governments can wreak havoc with state finances. As demonstrated in Sri Lanka's case, fiscal profligacy always leads to disaster,"Kumar said.     

Vice Chancellor of BR Ambedkar School of Economics (BASE)N R Bhanumurthy said any policy intervention that do not ensure net addition to production and productivity in the medium term to long term may be treated as a 'freebie'.

" ...it is important to define what is a freebie and how it is different from welfare expenditures. Such policies (freebies), if introduced, could only accentuate the already worsening public debt situation in many states and create perverse incentives as well as intergenerational friction," Bhanumurthy said.

On India's current macroeconomic situation, Bhasin said amid a fear of recession all over the globe, India seems relatively far better placed, calmer and far more stable. "Of course, India faces its own share of downside risks. With spiralling energy prices and the forecast of lower GDP growth at 6.1 per cent (for 2023 as per IMF), we will of course see an impact," he said, adding that relative to the rest of the world, India is in a much better position to weather this storm.             

According to Bhasin, there has been an outflow of investments from India as well, but against that the Indian rupee has depreciated only moderately compared to other G20 countries, sometimes by half the amount versus Europe and the UK.

Noting that India's foreign exchange reserves are more than adequate in terms of sound macroeconomic perspective, he said, "In fact India has done remarkably well to manage through these times at a time when we would be considered very vulnerable to global shocks." Bhanumurthy opined that India is absolutely in a better position than many of the advanced economies and has zero probability of getting into recession.

"Our outlook suggests that India should continue to be one of the fastest growing large economies with growth between 6.5 to 7 per cent  in the current year," he said, adding that in terms of downside risks, clearly there are no domestic factors. He said it is only the external factors that could pose some downside pressures on the Indian economy.

"However, the domestic fundamentals are strong enough to cope with such external risks," Bhanumurthy opined.

According to Kumar, with its robust macro fundamentals, acceleration of industrial growth (IIP) in the past few months, and prospects of a good or normal monsoon, the Indian economy is expected to grow at 7-7.5 per cent in 2022-23, which will make it the fastest growing major economy in the world.

"Key risks to the growth outlook are posed by possible volatility of oil prices against the backdrop of the Ukraine-Russia war, and further worsening of the pandemic requiring lockdowns," he said.

Kumar said another headwind for India is arising from the hardening interest rates in the US as the Fed is unwinding the easy money policy rather aggressively. "Yet I do not think that a repeat of the 2013-14 type of situation (taper-tantrum) is likely, given the sizeable forex reserves of around $570 billion," he added.