The growing political culture of providing freebies to garner political gains raises the question whether India should contemplate adopting the concept of sub-national bankruptcies, said NK Singh, chairman of the Fifteenth Finance Commission. Singh made these remarks in his chief guest’s address at the annual day of Delhi School of Economics, of which he is also an alumnus.
“The strength of the Centre lies in the strength of the states. Therefore, the macroeconomic stability of the Union is contingent on the macroeconomic stability of both the Centre and states”, Singh said, drawing attention to the perils of “replicating the culture of competitive freebie politics”.
Singh’s remarks come in the backdrop of senior bureaucrats expressing their apprehensions to Prime Minister Narendra Modi about the growing culture of promising various kinds of freebies during state elections earlier this month.
While states such as Rajasthan and Chhattisgarh have announced a restoration of the Old Pension Scheme, the newly elected Aam Aadmi Party (AAP) government in Punjab has announced various freebies including 300 units of free electricity. Before announcing these concessions, Punjab chief minister Bhagwant Mann met PM Modi and demanded a special package of ₹50,000 crore for Punjab.
“These are illustrations because governments across the political spectrum are now being increasingly attracted to this new slogan of freebie politics,” Singh said while referring to Punjab and Rajasthan.
The growing tendency of states to make demands on the Centre for extra funds is undermining our fiscal federalism framework, he argued. “In a classic example of a state which has become profligate and is unable to pay its bills, they immediately rush to the Centre. There is no recourse mechanism outside the Finance Commission. There may only be options for recourse mechanisms in times of emergency such as pandemics and natural disasters like earthquakes,” he said, adding that “We must consider separate constitutional provisions in addition to Article 282 in cases of sub-national bankruptcy.”
Article 282 of the Constitution says: “The Union or a State may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the State, as the case may be, may make laws”.
“In this sense, we must not forget constitutional amendments made earlier which enabled the voice of the market to filter to the states for markets to differentiate between well managed states and less well managed states as long as there is a sovereign guarantee,” Singh added.
The threat to state’s fiscal situation due to the growing culture of freebies has become more pronounced after the roll-out of Goods and Services Tax (GST), as states have very little freedom in raising their own revenues, Singh said.
He gave six more reasons why the freebie culture hurts India’s fiscal federalism framework: it undermines the basic framework of macroeconomic stability, distorts expenditure priorities, creates the issue of inter-generational equality, pushes governments to move away from environmentally sustainable practices (especially in agriculture); and has a debilitating effect on manufacturing.
To be sure, Singh made a case for differentiating between freebies and what he described as the concept of “merit goods and public goods” such as the public distribution system, employment guarantee schemes and outlays for education and health “on which unexceptionally, expenditure outlays has overall benefits”.
Recognising the delicate interplay between politics and economics Singh underlined the fact that “what matters is political economy and not economics per se” and “one is the flipside of the other”.
Singh’s latest arguments for revisiting constitutional provisions to safeguard the fiscal federalism framework come in the backdrop of his argument for revisiting the Seventh Schedule in the constitution. “The Seventh Schedule decided to classify between the three categories… what would be in the exclusive category of the Union, exclusive domain of the states, and what would be in the concurrent list…Over a period of time, you have really transgressed from one end to the other. Most of the centrally sponsored schemes are subjects which are classic subjects in the domain of the states, such as employment, food, education…So the Seventh Schedule requires a revisit. So does the entry under Article 282 of the Constitution which has been used and misused for having all the centrally sponsored schemes”, he had said in an interview to HT on February 5, 2021.
Singh was felicitated by Delhi University vice chancellor Yogesh Singh with a shawl and a momento before his lecture.