Context: There is growing trend of freebie culture in India. In this context let us analyze whether such electoral promises are sustainable or not.
Resources to fund the electoral promises
Much of the borrowing that funds these freebies happens off budget.
The typical modus operandi for States has been to borrow on the books of their public enterprises, in some cases by pledging future revenues of the State as guarantee.
Effectively, the burden of debt is on the State exchequer.
A certain amount of spending on transfer payments to provide safety nets to the most vulnerable segments of the population is not only desirable but even necessary.
The problem arises when such transfer payments become the main plank of discretionary expenditure, the spending is financed by debt, and the debt is concealed to circumvent the FRBM targets.
There is no comprehensive information in the public domain to assess the size of this off-budget debt, but anecdotal evidence suggests that it is comparable in size to the debt admitted in the Budget books.
Failed Checks
Unfortunately, all of them have become ineffective.
Opposition
In theory, the first line of defence has to be the legislature, in particular the Opposition, whose responsibility it is to keep the Government in line.
But given the perils of our democracy, the Opposition does not dare speak up for fear of forfeiting vote banks that are at the end of these freebies.
CAG
In practice, it has lost its teeth, our bureaucracy has mastered the fine art of turning audit paras into ‘files’ which run their course and die a quiet death.
The market
In practice this fails since the market perceives all State borrowing as implicitly guaranteed by the Centre, but there is no such guarantee in reality.
Consequences
The more States spend on transfer payments, the less they have for spending on physical infrastructure such as power and roads, and on social infrastructure such as education and health, which can potentially improve growth and generate jobs.
Makes beneficiaries lazy, thus leading to unemployment problems and affecting the social harmony of the society
The amount States borrow collectively every year is comparable in size to the Centre’s borrowing which implies that their fiscal stance has as much impact on ourmacroeconomic stability as does that of the Centre.
Thus instituting more effective checks that can make wayward States fall in line is compelling.
Way forward
Amendment of FRBM Act
Under the current FRBM provisions, governments are mandated to disclose their contingent liabilities, but that disclosure is restricted to liabilities for which they have extended an explicit guarantee
The provision should be expanded to cover all liabilities whose servicing obligation falls on the Budget, or could potentially fall on the Budget, regardless of any guarantee
Strict Monitoring by the centre
Under the Constitution, States are required to take the Centre’s permission when they borrow.
The Centre should not hesitate to impose conditionalities on wayward States when it accords such permission.
Use of Financial Emergency Provision
Constitution of India allows the President to declare financial emergency in any State if s/he is satisfied that financial stability is threatened.
It is therefore important to ensure that the prospect of a financial emergency in case of gross and continuing fiscal irresponsibility is not just an abstract threat but a realistic one.
