Political analysts seem to agree that the recent Karnataka State elections in May 2023 were won decisively based on the “four guarantees” by the winning party. These promise a monthly handout of Rs.2,000 to every housewife, another Rs.2,000 per month to unemployed graduates, free electricity to the extent of 200 units every month and free bus transport to women throughout the State. These “guarantees”, if implemented in right earnest, are expected to cost the State exchequer around Rs.62,000 cr. p.a., as per reliable estimates. It is important to put this number in context. In FY 2022-23, the State was budgeted to have a total receipt (excluding borrowings) of Rs.1,89,977 cr. and was budgeted to spend Rs.2,51,541 cr., resulting in a fiscal deficit of Rs.61,564 cr. or 3.26% of the State GDP. Out of the total budgeted expenditure, Rs.94,699 cr. was accounted for by interest payments, salaries and pensions, which are committed in nature. This is around half the total receipts and if the four guarantees are also to be implemented in right earnest, there would be hardly any funds available for development projects and other outlays. Of course, more revenues can be garnered by the State by increasing taxes and levies under their control like state excise, registration and stamp duties, vehicle taxes, land revenue and electricity duties but this would certainly have consequences in terms of the cost of doing business. If this additional cost is passed on to consumers, it can lead to moderating demand for goods and services, as also affect the very viability of several industries that compete with others in lower-taxed States and internationally. This in turn can lead to job losses and the loop comes full circle with possible reduced economic activity and consequent revenue losses, though to some extent, it may be compensated by increased spending on certain types of consumption by the ones receiving doles. Karnataka, till now, was being seen as one of the better States when it comes to fiscal management and had set itself a target to keep the fiscal deficit at less than 3% and borrowing to less than 25% of the State GDP. If the election promises are met in full, the fiscal deficit would be well in excess of 5% unless state level taxes are increased substantially. Experience has shown that once given, such freebies are difficult to withdraw and the State’s fiscal position, as also its ability to invest in better education, health, roads etc. will be severely compromised.
Enthused by the Karnataka victory, political parties are busy formulating plans that are likely to promise even more freebies in the forthcoming State and federal elections over the next twelve months. Even at the level at which the Karnataka electorate were promised freebies, an all-India roll out will cost a mind boggling 20 times or more which would be in excess of half the total tax revenue of the Central Government. If this were to happen, India’s ability to invest in public and social infrastructure, defence, health, education, science, security etc., which has indeed fuelled the growth story over the last couple of decades, will fade away almost completely. The medium-term implications of such political victories at a huge and unsustainable cost to the economy have been witnessed on several occasions in the past, involving countries in South America, as also in our immediate neighbourhood, with Sri Lanka and Pakistan, being very recent examples. This is certainly not the route that India should follow because most of us have memories of the abject state of our economy just before the Narasimha Rao government embarked upon economic reforms in 1991.
Some economists have argued the case for Universal Basic Income (UBI) where every citizen, regardless of his/her circumstances, is paid by the State a legally stipulated financial grant to cover
basic needs which serves to secure the independence of every citizen. A UN paper of July 2020 argues that an effective UBI programme has the potential to reduce the likelihood of social unrest, mass migration, and the rise of extremism that thrives on social disappointment in several countries. It is against this background, the paper argues, that there is a need to seriously consider implementing a well-designed UBI programme that complements any existing need-based social programmes while preventing double-dipping of benefits. Moreover, UBI can be linked to other welfare measures such as vaccinating all children, ensuring they attend school etc. that do not undermine the main purpose of eliminating poverty but also allow low-income citizens to take calculated risks to gradually lift themselves out of poverty. A very important aspect of the programme design is to ensure that UBI is just adequate for a modest minimum sustenance so that the incentives to work, save and invest remain intact. UBI may sound utopian but, in some form or other, was indeed administered by most progressive countries at the time the world was affected by Covid earlier in this decade.
Given the level of poverty, under-employment and unemployment in India, as a caring society, there is certainly a need to provide a well-targeted social benefit programme but certainly not a Universal Basic Income because the bulk of the population can fend for itself. The Central government has several programmes that deliver these minimum social benefits, in terms of food, shelter, health and Direct Benefit Transfer to the needy. These schemes are supplemented by some State Governments that offer additional benefits, that cover an even wider section of society but in some cases are not well targeted. Indiscriminate increase in such benefits, as in the Karnataka case, in addition to being utterly unaffordable are beginning to disincentivise job seekers. This has serious consequences to a fast growing economy that is increasingly generating new jobs at every level and needs both skilled and unskilled manpower.
Though most right-thinking citizens are concerned about irresponsible politicians making grand promises which would finally have to be paid for by increased taxes, in this era of competitive populism, it appears unlikely that the same political parties will agree to enact a law to limit such grand promises any time soon. Citizen groups have, as a last resort, though inappropriately, approached the judiciary to solve this issue. One of the frequently heard arguments in support of indiscriminate doles promised by politicians is that the banking system keeps writing off large debts given to industrialists and if, as a society, we can afford such write-offs, there is no case for us to limit the promises of doles. This is an odious comparison because lending is inherently risky and despite the best regulations, loan loss is an essential feature of banking everywhere, though the quantum varies depending on the state of the economy and its cyclicality. This is, of course, apart from the loan losses almost deliberately caused by behest-lending prompted by political considerations which used to be somewhat frequent in India but has come down substantially with stricter regulation and oversight, as also the increasing share of the private sector in Banking. There is no doubt that society cannot accept such criminality and the ongoing legal action in several such cases to punish the perpetrators offers a ray of hope in reforming the system.
Banks are in the business of taking on financial risks by lending in order to generate profits and in the process, help meet the credit needs of the economy. Providing adequate credit to consumers, agriculture, businesses and industry to grow and create new capacities helps meet the demand for goods and services and facilitate accelerated growth and job creation. It is axiomatic that not every
new venture will succeed and hence in some cases, Banks may not be able to recover their loans in full, causing some losses. The regulator keeps a hawk’s eye on the Banking system and ensures, through various policy actions, that Banks are able to finance the needs of the economy without incurring unduly high credit losses. Data on loan losses in India, except in cases of behest-lending, suggests that the Indian banking system is not an outlier on this score, compared to international banks. It is thus clear that comparing normal Bank loan losses with indiscriminate distribution of freebies is not only mischievous but indeed perverse. Containing the unbridled and ill-directed expansion in freebies has nothing to do with bank loan losses and needs urgent societal attention.
This article is authored by U.R. Bhat, Co-Founder at Alphaniti (www.alphaniti.com). Views expressed are personal.
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