Freebies vs. Loan Write-offs: Examining India's Fiscal Morality and Public Funds

Srimathi Venkatachari

There is a pattern in our public life that no amount of televised indignation can conceal. The poorer the beneficiary, the louder the sermon.

A mixer-grinder scheme is announced in Tamil Nadu, and one can almost hear the moral alarm bells from Delhi to Coimbatore. Freebie culture, we are warned. Fiscal collapse. Irresponsible populism. In Feb, Madras high court, while quashing proceedings over a remark that govts might “even give a wife to everyone” treated it as rhetorical criticism of freebie culture rather than misogyny.

But when public sector banks write off Rs 1.29 lakh crore over the years in bad loans, an amount large enough to fund several welfare budgets, the vocabulary softens. It becomes a conversation about “prudential norms” and “capital adequacy”.

The republic, it appears, has strong views about kitchen appliances. It is curiously relaxed about capital erosion.

Let us, before emotion outruns reason, look at the law.

A write-off is not a midnight amnesty. Under the regulatory framework of the Reserve Bank of India, banks must classify non-performing assets, make provisions, and eventually remove certain irrecoverable loans from their balance sheets. This is an accounting exercise. It does not dissolve the debt.

The Indian Contract Act, 1872, remains stubbornly alive. A contractual obligation survives unless discharged by novation, remission, or lawful settlement. Recovery can proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or through the machinery of the Insolvency and Bankruptcy Code, 2016. So, a write-off is not a waiver. But we do ourselves a disservice if we stop there.

Public sector banks are not private clubs. When their balance sheets falter, recapitalisation draws from public funds. The taxpayer becomes the silent guarantor. This is not ideological commentary; it is fiscal arithmetic.

Article 265 reminds us that taxation must be by authority of law. Implicit in that is something almost embarrassingly simple: public money must be administered with transparency. Supreme Court has said as much. In CBSE vs Aditya Bandopadhyay and later in Reserve Bank of India vs Jayantilal N Mistry, SC made it clear that regulators are custodians of public interest. Confidentiality is not a decorative shield to be raised whenever scrutiny becomes inconvenient.

Yet when corporate exposures curdle into NPAs and are eventually written off, disclosure tends to grow shy. “Commercial confidence,” we are told. It is a useful phrase. It ends conversations.

Now travel back to Tamil Nadu’s welfare landscape. The state that has, for decades, treated redistribution not as embarrassment but as policy. The Public Distribution System is not ornamental. Free bus travel for women is not a rumour. Direct transfers under the Kalaignar Magalir Urimai Thogai Scheme are announced in the budget speech. They are debated in the assembly. They are audited. They are defended before voters. One may disagree with the scale. One may argue about sustainability. But constitutionally speaking, the footing is not fragile.

Articles 38 and 39(b) speak of reducing inequality and distributing material resources to subserve the common good. Article 15(3) permits special provisions for women. In S Subramaniam Balaji vs State of Tamil Nadu, Supreme Court declined to criminalise electoral generosity. Policy, it observed, lies within legislative competence unless it violates the Constitution or statute.

What is striking is not that welfare exists. It is that it provokes disproportionate moral anxiety. Each time assistance is extended to low-income households, we are warned about dependency. The poor must not grow accustomed to support. Incentives must be preserved. These concerns are not illegitimate. But they are curiously one-directional.
When large borrowers repeatedly restructure, negotiate, and re-enter markets, the word “dependency” rarely surfaces. When banks absorb significant losses, recapitalise, and continue business, the conversation is about systemic stability, not moral frailty.

Article 14 guarantees equality before the law. In E P Royappa vs State of Tamil Nadu, arbitrariness was equated with inequality. If fiscal discipline is to be our civic mantra, it must be applied without social calibration. Accountability cannot be vigorous when directed at the ration card holder and discreet when directed at the boardroom. To be clear, insolvency law serves an economic purpose. The IBC was enacted because indefinite restructuring paralysed credit markets. Banks cannot carry dead assets forever. Resolution mechanisms are necessary in any functioning economy. But necessity does not demand reverence. And technical language does not eliminate public consequence. A welfare scheme’s cost is visible. Its beneficiaries are named. Its political risks are immediate. A large write-off is often aggregated in annual disclosures. The recovery process is procedural, distant, and difficult for the ordinary citizen to track. Both affect public finance. Only one produces studio debates. This is not an argument against insolvency law. It is an argument against selective indignation.

If Rs 5,000 to a poor household requires a moral inquest, Rs 5,000 crore in distressed exposure deserves at least equal curiosity. If we insist on lecturing the vulnerable about incentives, we might also inquire into credit appraisal, monitoring failures, and the consequences of repeated corporate default. The Constitution does not grade citizens by net worth. It does not prescribe austerity for the poor and accommodation for the powerful. It asks for equality, transparency, and reasoned administration.

The taxpayer funds welfare. The taxpayer recapitalises banks. The taxpayer absorbs systemic losses. In other words, the taxpayer underwrites both the mixer and the million. It would be refreshing, even revolutionary, if our outrage reflected that symmetry. Until then, we will continue to treat subsidised bus passes as existential threats while discussing massive financial erosion in tones usually reserved for weather updates. If fiscal virtue is the sermon of the day, it should be preached with equal enthusiasm in the boardroom and the ration queue. In the corridors of Madras high court, one occasionally hears an old line: the law may be blind, but it is not supposed to squint selectively. Our fiscal morality, at present, does exactly that.

(The writer is an advocate in Madras HC)