Doles for polls don't work, spending efficiently does'

Rather than doling out money, focus should be on spending it efficientlyBy N R Bhanumurthy, vice-chancellor, Dr BR Ambedkar School of Economics University.It is true that Covid-19 and the subsequent slowdown in the economy has resulted in substantial job losses, pushed people below the poverty line, and affected the overall welfare of large sections of society. Following this, governments (both Union and states) as well as the RBI have taken several measures to mitigate such effects including expansion of the food security scheme for two full years, cash transfer schemes for farmers, expansion of jobs scheme, among many other direct interventions.While the economy has seen a sharp recovery (mostly due to base effect) in FY21, there are a few indicators such as unemployment data and survival rate of MSMEs which suggest that the adverse impact of Covid-19 is deeper and wider and a broader recovery could take longer. Hence, there were demands for more fiscal support and transfers for social welfare programs. Against this expectation, the Centre in its latest Budget for FY22 has renewed its focus on government capital expenditure. However, it was criticised for reduction in the growth of social sector expenditures and for not imposing more taxes on the rich. medium nocaption89648745 medium nocaption89646362Those who do so assume that with some transfers and efficient wealth redistribution, one can achieve welfare optimisation but such assumptions are impractical. A case in point are some southern states which have been rolling out freebies in keeping with poll promises and ended up with unsustainable fiscal conditions and near bankruptcy. Such excesses have resulted in limiting the state from borrowing even for capital expenditure purposes. Indeed, banks have rejected its plea to go for overdraft facility to finance Centrally Sponsored Schemes (CSS) meant for the poor and social sector. This has ultimately ended with the state not being able to utilise the 60% central share in implementing CSS. Instead, one needs to focus on improving public expenditure efficiency, which, at present, is not part of the public policy discourse. The whole discourse right now is on outlays and not on outputs/outcomes. Understanding outcomes is crucial to ensuring that government intervention does not result in low level of equilibrium. One good example is the distribution of LPG subsidy through direct benefit transfer (DBT) which led to a decline in the subsidy bill. A similar outcome is expected regarding fertilizer subsidies as well. We have also seen that better managed social sector schemes (mostly in rural development) end up with unspent balances while poorly implemented schemes exhaust their budget allocation. This may suggest large leakages in poorly governed schemes, resulting in weak welfare outcomes.At the state level, these concerns are much greater. Most states have more than 1,000 social sector schemes each without any sunset clauses, thus limiting the resources for important welfare schemes like health and education. With a weak implementation mechanism, the result is fatter governments with least multiplier impacts on the economy as well as on social outcomes. Rationalisation of all these schemes becomes very important and needs to be undertaken at the earliest.But ‘freebies’ also raise concerns on the revenue side as well. Pricing of public utilities well below the marginal cost ends up with distorted outcomes. This is more prone at the state level and in sectors such as power, transport, and irrigation where the user charges are almost nil (like free power schemes) or kept constant for a long time due to political pressures. medium nocaption89646341More from the other side: Poll freebies may be good politics, but are they bad economics? NoThis is also called implicit (or non-merit) subsidies and some estimates suggest that the extent of these non-merit subsidies could be higher than merit subsidies. And this could have repercussions on other public sector expenditure that may have helped in generating durable employment and positive multiplier impacts. Some state governments have succeeded in reducing non-merit subsidies and, at the same time, benefited politically. In other words, in many cases reducing non-merit subsidies (or freebies) also turned out to be good politics and not just good economics since such measures have ensured quality of public services and resulted in government savings. India has experienced the politics of freebies for a long time and the outcome of those policies is very evident, sub-optimal, inefficient, and unsustainable. Since the introduction of DBT, there are signs of improvement in public expenditure efficiency, and that could result in strengthening public finances at the Centre and providing more fiscal space for the crucial social infrastructure sector. And this may need to be adopted by the states urgently. It is high time the discourse on improving public expenditure efficiency should take centrestage while discussing the role of fiscal policy in India.Views are personal