A spectre is haunting India — the spectre of free services in return for votes. Replicating the “Delhi Model”, the Punjab government is distributing 300 units of free electricity per month to everyone starting this month, despite falling revenues and widening deficit.
By keeping its poll promise, the Punjab government has shown that it faces no compunction in compromising the future of the youth of this country for immediate electoral benefits. At a time the Indian economy is gearing up for takeoff with cleaned-up banking system, and animal spirits, if the fireball of offering free goods spreads to other parts of the country, it may have long-lasting repercussions. Sensing the grave danger that this culture poses to the country, even the Supreme Court has termed it a “serious issue”.
To understand the scale of recklessness, one needn’t look any further than Punjab’s fiscal situation. The free electricity policy is supposed to cost Punjab around Rs 1,500 crore per year. In my opinion, this is likely to be an underestimate. A similar scheme in Delhi costs the exchequer Rs 3,200 crore a year. Punjab being a bigger state is likely to cost more. But even if one goes by the projected costs, this is about 7-8% of its 2021-22 revenue deficit estimates. Therefore, this policy is supposed to add an additional 8% of revenue deficit. In fact, Punjab is estimated to have the highest outstanding public debt as percentage of GDP in 2021-22.
And this is excluding the off-balance sheet borrowing of the state which is an entirely different headache. It remains unclear how the Punjab government is going to finance this expenditure if not through more borrowing or accounting gimmicks of some sort.
This unsustainable debt has obviously had its fallouts with delays in salary payments to government employees. The Punjab Roadways Transport Corporation has been on strikes multiple times over delays in salary, the most recent being in June as the government was unable to pay salaries to contractual employees in the month of May. In the scorching heat of May, the contractual employees were left hanging by the government.
Unless Punjab discovers oil reserves, chickens will come home to roost. And that day, armed with an unparalleled propaganda machinery, the Punjab government will blame some external forces for its failures. But that might take one year or five.
The broader point, however, is that even if Punjab’s economic health were not so bad, do its citizens — or for that matter citizens in any other part of the country — need 300 units of free electricity? To put things in perspective, an average household in Delhi — the inspiration behind the free electricity model — consumes 250-270 units of electricity per month. Is this the best use of public money? Could this money not be better spent to ensure access to basic necessities like healthcare and education?
Also, people who argue that this electricity subsidy is harmless in a revenue-surplus state like Delhi (which has also enjoyed a windfall gain through GST) need to think of the opportunity cost. Delhi has the luxury of not having to spend any money on its police force. If one takes the budget of Delhi Police into account, Delhi is unlikely to remain revenue-surplus. Therefore, its “revenue surplus” status is deceptive in the first place.
There are a few other states in India that pay for their police force and are revenue-surplus. And more importantly, just because it is revenue-surplus, should the state splurge the exchequer’s money on financing expenditures with no long-term benefits? For example, given the status of DTC, would it not make more sense to add those 5,000 buses that the Delhi government promised? Or why not spend it on ensuring food to the poor people who are being shooed due to shortage?
Fiscal recklessness can wreak havoc as we are learning from Sri Lanka and Pakistan. Both countries relied on spending heavily in good times, borrowing like there’s no tomorrow, and are now facing the music with Sri Lanka defaulting for the first time in its history, while Pakistan is on the brink of yet another default.
This is not the place to talk about the causes behind their fall. But, at its root, unsustainable level of debt is the primary reason. Such economic collapses are enormously costly on the poor. They are often hit the hardest when such crashes occur. For example, a 10% hike in petrol prices — and therefore a rise in other goods — does not pinch a rich person much, but it can lead to a poor family cutting their expenditure on important areas such as health or education of their children.
The most imminent danger with this model, however, is not limited to Punjab or Delhi. In a fiercely competitive democracy, with some or the other state going to elections every year, other political parties may also be tempted, or compelled, to follow this model for electoral success.
Whether they resist the temptation of electoral bribes — for there is no better word — remains to be seen. As things stand, we could easily see the competitive pressure resulting in a race to the bottom. To keep their reputation, parties may even deliver on the irresponsible promises they make during campaigns.
The result could be a forced substitution away from R&D expenditure, health, education, and defence expenditure. Whether we go the South Korea way to become a developed economy one day, or we perennially remain a “developing nation” could be determined by the choices we make right now. Success in the long run is always accompanied by short-term pain. Hopefully, the citizenry has the wherewithal to bear this pain.
Aditya Kuvalekar is a Lecturer in Economics at University of Essex, UK. The views expressed in this article are those of the author and do not represent the stand of this publication.
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