The Price of a Free Lunch: Elections Edition

By: Ananya Gaunekar; Edited by:Parisa Chatrath

In 2022, Prime Minister Narendra Modi criticized the freebie culture, referring to it as the ‘Revdi’ culture, highlighting that these moves make the taxpayer unhappy. Surprisingly, he made this statement while awarding free houses to the beneficiaries of the Prime Minister Awas Yojna scheme. Similarly, during an election rally in 2023, he criticized the Congress Party for giving out freebies in the form of direct cash transfers to women and the unemployed, deeming it detrimental to the economy. Yet, amidst these critical comments against Revdis, the BJP announced its own initiative of a monthly cash transfer of rupees 6000 per month to farmers in the state of Karnataka, categorising it as a ‘welfare scheme’.

This dichotomy between the words of a leader and the actions of their party can give rise to several questions, raised primarily by the taxpayers funding this distribution of resources. This article will attempt to answer some of the questions by delving deeper into the ‘Revdi’ culture and analysing to what extent they promote social welfare or undermine fiscal responsibility.  This will be done primarily in the context of elections, taking into account freebies and their effects on the economy as compared to those of welfare schemes.

What are freebies or Revdis?

Freebies refer to the handing out of goods and services to citizens free of cost, including things like free electricity, gas cylinders, and even direct cash transfers at regular intervals, or in simple terms, gifts. A Revdi is a popular traditional North Indian sweet, and recently, also a term that the Prime Minister has used to criticise the unsustainable handing out of freebies for votes, as if handing out sweets casually. These gifts may be targeted towards a particular section of society. On the other hand, welfare schemes are programs created to provide assistance to almost all sections of society after considering several factors such as income, family size, and so on. At first glance, these seem to be quite harmless, yet context allows us to understand the underlying nuances of these two terms and its effects on the economy. The context? Elections.

During elections, politicians are constantly competing with each other to offer the best freebies to the targeted public in order to attract votes. In an economically diverse country like India, where the rich and middle-income classes are apathetic to such short-lived schemes, the political parties turn to the poor, comprising approximately 129 million people (below poverty line), to gain votes. They promise certain sections of society a commodity or service that, in regular circumstances, may be out of reach for these people but, with the help of these freebies, become readily available to them.

One might think that these freebies are indeed benefiting the economy. And they do. Take for instance, the Midday Meal scheme. It was initially designed to encourage regular school attendance and address hunger and education by providing free school meals to students. However, its implementation first in Tamil Nadu and eventually nationwide has resulted in several positive outcomes.

As shown in the graphs above, the midday meal scheme caused a significant rise in secondary enrolment accompanied by a rise in literacy rate and a drop in mortality rate as it reduces malnourishment by providing healthy food in addition to education. Thus, it positively affected the section of society it was targeted at. However, the expenditure involved in running this scheme goes on increasing regularly, with little done to tackle operational issues like hygiene, corruption, and so on.

Nevertheless, these freebies could be categorised as merit freebies, those which have a positive effect on the beneficiaries. On the other hand, non-merit freebies comprise those schemes whose negative effect outweighs the positive. Take, for instance, the recent Delhi election campaign. Both the Aam Aadmi Party and the BJP have made election promises of monthly direct cash transfers to women of Rs. 2,100 and Rs. 2,500, respectively. While these transfers offer short-term financial relief for women, they could discourage workforce participation and divert funds away from job-creating schemes. Further, these cash transfers are funded by taxpayers’ money, and the provision of such schemes increases the burden on taxpayers. After all, even the poor pay taxes in the form of indirect taxes like GDP.

This brings us to the next point: What is the cost of a freebie?

Ironically, there is no such thing as a free lunch in economics. So, there must be some cost incurred in mobilising these freebies. As mentioned before, freebies being a part of revenue expenditure are funded via sources of public revenue, including taxes and borrowings. These comprise both direct and indirect taxes as well as public debt, all of which are funded by the common taxpayer. While taxes assume a quid pro quo position, a lack of effective execution or even, to some extent, its utilisation in the taxpayer’s area may dissuade compliance and increase burden. For instance, loan waivers or provisioning of free electricity may help its beneficiaries in the short term, but they take a heavy toll on the fiscal discipline of the government. Eventually, the governments, particularly the state governments, have to revise their fiscal deficit numbers owing to the rise in revenue expenditure and debt, which creates an unending cycle of borrowing and a rise in public revenue.

The most popular example of this is the financial state of the Punjab government, which is currently entangled in a debt trap.

Since 2016, Punjab’s debt has been moving between 43% and 48% of the Gross state domestic product. This has arisen primarily due to its underutilised resources and irrational distribution of freebies, which has caused it to fall into a trap where it has to keep borrowing loans to pay off existing loans. Other states have begun to follow the ‘Punjab Path’, with election promises constituting a significant portion of their GDP. Maharashtra leads this race with freebies making up around 2.2% of its GDP, according to the given graph.

Before the recent state elections, the BJP alliance government in Maharashtra made hefty election promises including but not limited to free LPG cylinders to BPL families, free electricity to the state’s farmers and Rs. 1,500 to women per month under the Ladki Bahin (favourite sister) scheme, spending around Rs. 46,000 crore on the same. With such large and continually increasing gaps between the revenue collected and the public expenditure incurred on the ‘revdis’, there arises a huge question on whether such election spending is really useful or not.

While certain freebies are quite useful for the overall benefit of the economy, it should be noted that they should primarily be targeted towards areas of development in the economy. Providing free cash to women, or free electricity to farmers may be beneficial in the short run, but problems may arise when eventually the government is unable to meet these promises due to budgetary issues. There is a greater need for schemes which make the beneficiaries self-sufficient, for instance, employment and low-interest credit schemes. While this may be less appealing than the provision of consumer durables and cash, in the long term, its usability keeps on decreasing. If a political party truly cares for its goals, it will focus on the long-term well-being of its people rather than engage in a battle of increasing party vote volume.