Executive Director, C Voter Foundation
Having thumped the BJP convincingly in the May 2023 assembly elections in Karnataka, Congress leaders were euphoric. And justifiably so. A stable, five years tenure for the Congress regime is more or less guaranteed. Yet, within months of forming the government, there seems to be widespread discontent and resentment in the ruling party, particularly among the newly elected MLAs. So serious was the problem that chief minister Siddaramaiah had to call a meeting of the disgruntled Congress MLAs and top leaders to do some damage control. Why are Congress MLAs so unhappy just months after winning a handsome electoral victory? The cat was let out of the bag by deputy chief minister D. K. Shivakumar who said the fulfilling the five election manifesto promises made to voters was eating up so much money that there is nothing left for other development work. MLAS need development funds to be spent in their constituencies to keep voters satisfied. If no such funds are available, it is crystal clear how votes will react. During the election campaign, the Congress promised five “freebies” to people of Karnataka: free bus rides to females in buses; Rs 2,000 a month to every female head of a family, free use of 200 units of electricity per month, 10 kgs food grains free to all BPL families and unemployment allowance for unemployed graduates. It is estimated that the total cost to be borne by the state government is well above Rs 40,000 crores a year and could touch Rs 50,000 crores a year when all beneficiaries cash in on the freebies.
The maths is simple. The total expenditure of the Karnataka government was more than Rs 2,51,000 crores in 2022-23. Out of this, about 95,000 crores was spent on salaries, pensions and interest payments. There is no question of any reduction in these expenses. Capital expenditure-that helps future growth-was estimated at about Rs 44,000 crores. The new Congress government presented a budget in July that shows a total expenditure of Rs 3,05,000 crores. Siddaramaiah has earmarked Rs 52,000 crores for the freebies. There is simply no way the numbers will add up unless the state borrows heavily and the budget deficit shoots up. This will wreck the finances of the state in the coming years. In the future, when salaries, pensions, freebies and substantially higher interest and loan repayments eat up most of the budget, there will be very little left to invest in education, healthcare, irrigation, roads and urban infrastructure. When these critical investments are neglected, it is the poor residents of Karnataka who will suffer the most. Freebies come with a heavy price tag attached to it. In Himachal Pradesh, the Congress won a arrow victory in assembly elections of December 2022 by promising to restore the old pension scheme. Economists are certain that this single freebie is driving Himachal towards bankruptcy. In Rajasthan, sitting chief minister Ashok Gehlot and in Madhya Pradesh Kamal Nath are making reckless promises of freebies to voters as elections due in December draw close.
There is a term that every student of economics is familiar with. It is called opportunity cost. The logic is simple: since resources are limited; spending on one thing that is “needed” means sacrificing another “need”. Take a hypothetical middle class family of Mrs and Mr. Patil who have a college going son Rohan and a daughter Riya who has entered class 12th. The family has Rs 1 lakh saved to spend on a “non-essential”. Rohan wants a new bike, Riya wants a new I phone and Mrs Patil badly wants to go on a family holiday. If Rohan gets his bike, Riya and Mrs Patil will bear the opportunity cost. Or Mr Patil can borrow Rs 2 lakh to satisfy all three “needs”. The family will then have to pay interest every month along with loan via an EMI. That much less disposable income will be left. If the Patil family goes on borrowing and spending recklessly, it will eventually go bankrupt. The story is the same with state and central governments.
I am not at all against freebies. A rapidly growing economy means tax revenues in India have gone up substantially. Some of it must be spent on the poor who do not benefit as much from high economic growth as the rich. It is the moral obligation of a society and a government to spend money on “welfare”. The real issue is: what kind of freebie and what kind of welfare. I am convinced that indiscriminate freebies harm the poor the most in the long run as critical investments get delayed or neglected. The best welfare or freebie is the one that eventually empowers the poor and the deserving. One of the best examples is Mudra loans given to small entrepreneurs. In the past, they had no access to formal bank credit as they couldn’t offer any collateral. In 8 years since launch, Mudra loans worth Rs 23.2 lakh crores have been disbursed and helped tens of millions of ordinary Indians start or expand a small business. The most admirable thing about it is that most borrowers have repaid the loans. The default rate for small businesses taking Mudra loans is far lower than loans taken by large corporate entities. The other example of a powerful freebie is the monthly stipend given to every girl child till she graduates. Many state governments are doing this. It is a freebie, but it is creating a generation of educated and skilled females who are equipped to get jobs or start their own businesses.
Even politicians agree that this makes sense. But then, it is easier to be reckless than sensible.