The Assembly Elections for five states of Mizoram, Rajasthan, Chattisgarh, Rajasthan and Telengana are due later this year, followed by the 2024 Lok Sabha Elections next year. And let’s examine the role of Freebies impacting the finances of states.
In the recent elections held in Himachal Pradesh, the Congress party made several promises, including the restoration of the Old Pension Scheme, providing free electricity up to 300 units monthly to all households, and offering financial assistance of ₹1,500 per month to women between the ages of 18 and 60. However, recent reports in the media have indicated that the state government is facing financial difficulties and is unable to pay the salaries of around 15,000 government employees. This includes 11,000 employees of the Himachal Road Transport Corporation (HRTC). The salary payments have been delayed by two weeks due to the state’s mounting debt, which amounts to nearly Rs 76,000 crore. The affected employees also include those working in the forest corporation, medical colleges, and the irrigation department.
The financial challenges extend beyond Himachal Pradesh, as the neighboring state of Punjab, which is governed by the Aam Aadmi Party (AAP), faces an even more precarious situation. Despite announcing the implementation of the Old Pension Scheme (OPS) for over 1.75 lakh employees seven months ago, the party has yet to fulfill this promise. The state of Punjab carries a debt of Rs. 3.12 lakh crore, and the cost of the election freebies promised by AAP amounts to Rs. 20,000 crore. As a means to fund this deficit, the government led by Bhagwant Mann has increased the value-added tax (VAT) on petrol and diesel. The state had the highest GDP death equivalent in the entire nation in the financial year 2021–2022 at 53%.
In the recently concluded Karnataka Assembly elections, the Congress party emerged victorious with a significant majority, largely due to the allure of promised freebies. These included the ‘five guarantees’ in Karnataka, such as providing Rs 2,000 per month to the female head of a family, offering a monthly allowance to educated unemployed individuals, distributing 10 kg of free rice to every member of below poverty line (BPL) families, granting 200 units of free electricity to each household, and facilitating free bus travel for women. The estimated cost of these freebies on the state exchequer amounts to around Rs. 62,000 crore. To finance the promises of 200 units of free electricity, the Siddaramaiah government found it necessary to raise electricity tariffs for consumers exceeding 200 units. However, this price hike has faced opposition from trade and industry bodies within the state. Notably, the Peenya Industrial Area (PIA), considered one of Asia’s largest manufacturing hubs, has decided to suspend operations for two days in protest against the tariff increase.
The Aam Aadmi Party (AAP) came to power in Delhi in 2015, promising a range of freebies, including free water, free power, and subsidized healthcare, among others. However, since then, the Delhi government has not been successful in constructing new schools, colleges, hospitals, flyovers, or other infrastructure projects. Consequently, the condition of the poor in the city can be easily imagined. Furthermore, the maintenance of roads, water supply, and sewage systems has also been neglected, leading to various issues and concerns.
A few days ago, Congress General Secretary Priyanka Gandhi launched the party’s election campaign for the Madhya Pradesh Assembly elections with five pledges modeled after those made in previous victories in Himachal Pradesh and Karnataka. Additionally, political parties will continue to make freebie promises in upcoming elections without any accountability of impact of election promises and the financial burden they impose on the state.
The Supreme Court of India last year issued notice to Political parties to disclose the source of funds for the promises made in their election manifestos. The order aims to bring greater accountability and transparency to the electoral process by ensuring that political parties disclose the sources of their funds. It suggests that political parties should reveal the financial origins of the resources used to fulfill the promises made in their election manifestos. This disclosure would enable voters to make informed decisions about the credibility and feasibility of the promises put forward by political parties during election campaigns.
Furthermore, the Finance Ministry has projected a Fiscal Deficit of 5.9% of GDP for the fiscal year 2023-24, which is lower than the revised fiscal deficit of 6.4% in the previous year, 2022-23. This indicates that the Central Government, led by Narendra Modi, is focusing on fiscal prudence. In contrast, opposition parties are implementing freebies in their respective states without adequately considering the impact on state finances. Consequently, they are resorting to additional taxes and price hikes on essential services, burdening the citizens of their states. The debt of Tamil Nadu, Uttar Pradesh, Maharashtra, and West Bengal is almost Rs. 6 lakh crores, which is comparable to the whole debt of Sri Lanka, which went bankrupt and resulted in a shortage of necessities, a failure to pay its debts to other countries, disorder, riots, and regime change.
A robust tax base and an efficient taxation system are crucial for funding freebies and community welfare schemes. These schemes, aimed at providing benefits and support to the citizens, require financial resources to be sustained effectively. By having a broad tax base, where a larger number of individuals and entities contribute to the tax revenue, the government can generate the necessary funds to implement and maintain these welfare programs. The Finance Ministry recently disclosed that the number of individuals who filed income tax returns in the fiscal year 2020-21 was 6.8 crore. This implies that merely 4.8% of the total population filed IT returns during that period. Out of these individuals, only 1.69 crore actually paid taxes, as 65% of the taxpayers earned less than Rs. 5 lakh. Consequently, only around 1.2% of the population is currently contributing to income tax payments.
In light of the evidence supplied, it appears that political parties promising freebies without carefully weighing the impact on the resources of the state exchequer might be considered as an attempt to take advantage of legitimate taxpayers. This is due to the fact that the taxpayers who are already paying their taxes frequently bear the financial burden of sponsoring these freebies.This technique might be seen as an exploitation of the legitimate taxpayers who are already paying their taxes to the government. In addition to undermining the concepts of justice and equity, it also increases the financial burden on taxpayers. Political parties should carefully analyze the financial implications of their pledges and work toward responsible administration that does not unjustly burden the public in order to achieve a reasonable and balanced approach. In summary, it is imperative for political parties to exercise fiscal prudence to prevent a situation like the one in 1991, where the nation had to resort to mortgaging its gold reserves abroad. By practicing fiscal prudence, political parties can make informed decisions regarding expenditure, taxation, and resource allocation, taking into account the long-term impact on the nation’s financial health.