- Prelims: Current events of national importance(freebies, welfare schemes etc)
- Mains GS Paper II & III: Social empowerment, schemes for vulnerable sections, development and management of social sectors/services.
ARTICLE HIGHLIGHTS
- The Supreme Court of India on August 3, 2022, recommended constituting an expert committee comprising representatives of the beneficiaries, Union and State governments, the Finance Commission, NITI Aayog and the Reserve Bank of India to study the issue of ‘freebies’.
- The court noted that a legislation banning freebies is not advisable, but at the same time called for a balance between welfare measures and loss to the public exchequer.
INSIGHTS ON THE ISSUE
Context
Freebies:
- Any public policy intervention that doesn’t support medium-term to long-term production and productivity may be termed as a freebie.
- Free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies
- They potentially undermine credit culture, distort prices through cross-subsidisation eroding incentives for private investment, and disincentive work at the current wage rate leading to a drop in labour force participation
Welfare:
- Expenditure on which brings economic benefits, such as the public distribution system, employment guarantee schemes, states’ support for education and health.
Is India spending too much on welfare or freebies?
- Declining spending on social sector: Studies, especially by the Reserve Bank of India (Study on State Finances), have shown that from 2014 onwards, the social sector expenditure at the State level has been declining even after States were given more resources.
- Health and education: The allocation to the health and education sectors by the States is declining.
- The Reserve Bank of India report: two months ago brought to light the fiscal situation of the States.
- At least five States are going to see fiscal pressure.
- Low spending on welfare schemes: Welfare spending in India is woefully low.
- It is low in comparison to other developing countries – some years ago, public spending on health and education was 4.7% in India, compared to 7% in sub-Saharan Africa.
Trickle down economics:
- Reagan tax cuts, or Reaganomics: In the Reagan tax cuts, or Reaganomics, associated with ‘Trickle down economics’ there was a maximum cut given to higher income earners and corporations in the expectation that any benefit provided at the top would trickle down to the poor in the form of job creation, higher output, and infrastructure development.
- While ‘trickle down’ yielded some positive results, it also widened inequality, diminished inclusive growth.
- Trickle down schemes in India: In India, neo-liberal schemes of the post-1990s such as:
- Special Economic Zones (SEZs)
- Software Technology Parks of India (STPI)
- BioTechnology Parks (BTP), (where there were incentives in the form of tax holidays, subsidized power, and waiver of stamp duty)
- The cut in the corporate tax from 30% to 18%.
- World Inequality Report 2022: However, the World Inequality Report 2022 says that the top 1% of India held 22% of the total national income as of 2021, and the top 10% owned 57% of the income.
- ‘Wealth Inequality, Class and Caste in India, 1961-2012: In another instance, a research paper, ‘Wealth Inequality, Class and Caste in India, 1961-2012’, states that India’s upper caste households earned nearly 47% more than the national average annual household income, thus making India one of the most economically and socially stratified countries in the world.
- Corporate boards and MSMEs: Further, 93% of the top corporate board members and 61.8% of micro, small and medium enterprises (MSME) are owned by upper castes (MSME data March 31, 2022).
Differential tax burden:
- Indirect taxes: The Union government seems to rely more on indirect taxes than direct taxes.
- While direct taxes such as corporate taxes were slashed from 30% to 18%, indirect taxes have gone up manifold between 2014-21.
- Taxes on fuel and food (rice, milk, cereal): On which the poor spend a major portion of their income, imposing a financial burden on the poor, in turn leading to high inflation and resulting in inequality and lower growth.
- Corporate tax reduction(30% to 18%): It has resulted in a revenue loss of ₹1.84 lakh crore to the Union government for 2019-20 and 2020-21.
- There is an expected loss of ₹1 lakh crore in 2021-22, surpassing the cost of some of the major freebies put together (free colour TV — ₹750 crore; free bus pass for women — ₹1,250 crore; mid-day meals for children — ₹1,823 crore).
A fiscal federal setup:
- Cooperative federalism: India adopts ‘cooperative federalism’ where the Union and State cooperate to legislate and frame policies in their respective domain.
- Moreover, in a fiscal federal set up, States or the regions are expected to have autonomy.
- Social welfare measures (freebies) may differ from State to State or region to region:
- For example, in the desert regions of Rajasthan it could be free drinking water
- In Kerala, it could be fiscal incentives to encourage corporates/entrepreneurs to boost industrial growth
- In N., educational/marriage assistance and a free bus pass to help girl empowerment.
Solution:
- Spend more on welfare schemes: There is a need to spend more resources on welfare schemes
- There’s a need to keep track of allocations to the social sector.
- Public expenditure efficiency: At the same time, it is high time we started talking about public expenditure efficiency in this country.
- Better resources: We need to have a good tax framework, where you have much better resources for more social sector expenditure while also ensuring medium-term debt sustainability.
How to raise taxes and engage in greater redistribution:
- Indirect taxes(Goods and Services Tax): The government is also actually looking at how to remove multiple tax exemptions because of the perverse incentives.
- Non-tax revenues: there is a significant growth at the Central government level, there is a substantial decline at the State government level over a period of time.
- Finance Commissions keep providing incentives, States need to take advantage of that.
- Wealth tax: Levy a one-time 4% wealth tax on the wealthy, we can get revenues worth 1% of GDP.
- Property tax: Similarly, we are raising 2% of GDP through property tax, whereas the developing country average is 0.6% of GDP and in OECD countries it is 2% of GDP.
- So again, there is great scope to raise revenues.
Supreme Court Judgments:
- K. Garg vs Union of India (1981)and BALCO employees Union vs Union of India (2002): The Court held that laws relating to economic policies should be viewed with greater latitude and deference, and that the wisdom of economic policies is not subject to judicial review.
- Subramaniam Balaji vs State of Tamilnadu (2013): while dismissing the challenge to the much discussed free gifts schemes (colour television, mixer grinder, laptops) of the T.N. government, the Court observed that the distribution of gifts relates to implementation of directive principles of state policy.
Supreme Court’s suggestion to balance welfare spending and the loss that such spending may cause to the public exchequer:
- Balance welfare spending and our fiscal concerns: The court has mentioned the need to balance welfare spending and our fiscal concerns.
- Social sector expenditure: The implicit subsidies can be reduced so that we have more resources for welfare or social sector expenditure.
Way Forward
- Long term impact: There is a need to identify the policies that have a long-term impact.
- At the same time, there is a need to identify the beneficiary sets.
- Case of Tamil Nadu: States such as Tamil Nadu address this inequality through social welfare measures (derided as freebies).
- For example, the TamilNadu government’s free bus pass for women has not only saved families fuel cost but has also encouraged more women to join the workforce, in turn leading to economically stable families and women’s empowerment.
- Free mid-day meals (now extended to free breakfast) have encouraged socially backward parents to send their wards to school at least for the meals, resulting in keeping the evil of child labour under control and, more importantly, imparting education.
- These measures have resulted in a higher graduate enrolment ratio for T.N. (at 52%) which is double the national average at 27% and also higher than that of the United States at 41%.
- Politicized Finance Commission: The abolition of the Planning Commission in 2014 led to the politicized Finance Commission to become the sole institution for fiscal devolution.
- This only increased the dependence of States on the Union when it came to fiscal matters.
- Thus, the committee recommended by the Supreme Court will further accelerate the existing mistrust States have with the Union.
- India as union of states under article 1: By recommending a central committee, the Supreme Court seems to have considered India to be a single administrative unit facing the same set of issues without due consideration of socio-economic diversity.
- This step would not only be counter productive to the economic freedom of the States but also to the ‘Idea of India’ as a ‘Union of States’ — as highlighted in Article 1 of the Constitution of India.
QUESTION FOR PRACTICE
- Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and private entity.(UPSC 2020)
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