What the article is about:
- The article talks about distortionary effects of freebies on economy.
Relevance:
- Paper 1: Essay
- GS2: Government policies and intervention
Analysis:
- In the light of recent PIL Against ‘irrational freebies’ SC is considering setting up an expert panel to examine the issue of freebies announced by the political parties during elections.
What constitutes freebies?:
- Fredrich Hayek argued “State must guarantee a basic social minimum of food, shelter and clothing, sufficient to preserve health and the capacity to work.
Whose responsibility is to finance the freebies? :
- The PIL petitioner argued that during election, politicians must also provide a comprehensive financing plan for the freebies for the voters and taxpayers.
Short term Impacts of freebies:
- From an economic perspective, a subsidy to one sector of the economy creates a distortion and an implicit tax on the other sectors.
- As a result resources move from the non-subsidised sector to subsidised sector.
Long term impacts of freebies:
- Case study: Take the case of Punjab . Till early 2000s, Punjab’s per capita GDP was one of the highest among the large states in India.
- Punjab heavily subsidised the agricultural sector- besides severe ecological implications, the subsidy left little fiscal room to provide incentives to other sectors like Industries and services.
- This triggered a major relocation of firms (and jobs) from Punjab to other states that offered a more conducive growth environment.
- As a result, post 2001, Punjab’s per capita GDP began to lag behind other states.
- The unemployment rate in Punjab was also higher than the national average.
Conclusion:
- Punjab illustrates that not only these freebies are fiscally feasible in short run but also creates distortion in long term, which will make them unsustainable over time.
- For every other freebie, whether in the form of subsidies or exemptions, in addition to the immediate financial burde, the state must consider the hidden distortionary effects of these freebies on the overall economy that would lower growth and productivity and jobs and hence reduce individual capacity.
