- 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 Prime Minister’s recent comment on “freebies” handed out by governments has reignited the debate on the economic rationale for granting subsidies.
- 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.
Subsidies:
According to the Agreement on Subsidies and Countervailing Measures (ASCM) of WTO:
- A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services.
- Revenue Foregone under the Central Tax System(RFCTS)(Budget 2006-07): The Union Budget has provided data on direct subsidies and transfer under RFCTS, changed to “Statement of Revenue Impact of Tax Incentives under the Central Tax System(Union Budget 2015-16 onwards)
What is included in subsidy:
- Income and Price support: Subsidy can also be any form of income or price support granted by the government.
- Taxes and charges: It includes not only direct transfer payments by the governments but also taxes and charges that are not collected.
Policy and measures:
- Tax policy: It includes a range of measures that include:
- Special tax rates
- Exemptions
- Deductions
- Rebates
- Deferrals
- Credits
- Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good.
- Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers.
- Income-tax Act: It includes “tax preferences” to promote savings by individuals and for enhancing exports, creation of infrastructure facilities and scientific research and development by corporates.
- Customs duty: These concessions are intended to promote exports.
Comptroller and Auditor General of India (CAG) report in 2016:
- Revenue foregone in 2010-11 was 21% of direct tax revenue and had decreased to 15% in 2014-15.
- However, a subsequent report showed that the share had climbed again to reach 22% of tax revenue in 2019-20.
Underinvestment:
- Public expenditure on health: It has struggled to cross 5% of GDP, which is significantly lower than those in other major economies.
- Public expenditure on education: In education, the Kothari Commission’s target set in 1966, that public investment should be increased to “6 percent of the national income.
- However, in 2021-22, the budgetary allocation for education spending, by the Union government and the states combined, was far less at 1 percent.
- Expenditure on agriculture: Low share of the country’s investment in agriculture.
- Its share was 10% in recent years; it has almost halved.
Subsidies:
Subsidies provided in India:
Agricultural subsidy (also called an agricultural incentive):
- It is a government incentive paid to agribusinesses, agricultural organizations and farms to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities.
- Farm subsidies form about 2 percent of India’s GDP.
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 and Free mid-day meals (now extended to free breakfast) have encouraged socially backward parents to send their wards to school.
- 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%.
- Less Fiscal Space: There is a need to be very efficient and select subsidies on goods and services as there is limited overall financial support.
- Generating More Income: Governments, both state and centre need to pay adequate attention to further strengthening their fiscal revenue.
- Politicized Finance Commission: The sole institution for fiscal devolution after abolition of the Planning Commission.
- This only increases the dependence of States on the Union when it comes 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 step will 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
- How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers?(UPSC 2017)
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