Prime Minister’s “revdi” remark: We must distinguish between good subsidies and bad ones
Many in India have for some time bemoaned the culture of political populism and “handouts”. The issue has hit the headlines following the Prime Minister’s recent speech calling for an end to this gratuitous culture of “revdi” (freebies). Limiting gifts can now be a political priority. But gifts mean different things to different people. Unraveling this mixed bag is important for policy-making.
The gifts usually evoke images of free televisions distributed by the late J Jayalalithaa, free cycles distributed by Nitish Kumar or laptops distributed by Akhilesh Yadav. Although these are the most visible and discussed gifts, they are fiscally insignificant compared to the much larger subsidies on food, fertilizer and oil. Although they have been reduced in recent years, these “visible” subsidies in public budgets remain a major source of budgetary pressures. Then there is a range of “invisible” subsidies, notably in state government budgets, not always recognized as such, but which are also very important.
Technically, a subsidy is the unrecovered cost of any service (or good) provided by the government. The deficit between revenues and expenditures of a department for the provision of a service is the unrecovered cost of providing that service, i.e. a subsidy, even if it is not recognized as such in the budget. Examples include the unrecovered cost of public education, health care, irrigation, electricity, water supply and sanitation. It will be immediately apparent that not all subsidies are equally undesirable. A final category of gifts are pure cash grants for poor households. These are discussed below.
Returning to subsidies, the total volume includes all visible subsidies plus all implicit invisible subsidies to the provision of social and economic services. In an exercise undertaken in 2020, the late Satadru Sikdar and I found that the volume of subsidies as a proportion of GDP decreased with rising per capita incomes, but very gradually (“Merit goods and the fiscal space for reviving growth”, Economic & Political Weekly, February 1, 2020). The total volume of subsidies fell from 13% of GDP in 1987-88 to just over 10% in 2015-16, almost 30 years later. It is unlikely that this proportion has changed much today given the slow pace of change. State governments provide the bulk of these grants, primarily for social services like education and health. The central government accounts for less than 30 percent of total subsidies, provided mainly for economic services, including food.
In the mixed bag of subsidies, some are less justified than others. From the total volume, we separated out a very small number of “merit grants” that could be justified in the public interest. All governments have provided food subsidy to poor households by bipartisan consensus for decades. It was increased by the current government as a relief during the Covid-19 crisis. Then there are basic education and health services that have important benefits for society beyond the benefit accruing to the immediate recipient of the service, what economists call “externalities”. Finally, we have separated expenditure on water supply and sanitation, again where the benefit to society is much greater than that accruing to the immediate recipient of the service – for example, the prevention of infectious diseases. These four “merit” grants represent only one-third of the total grants. Thus, two-thirds of total subsidies, or about 6 percent of GDP, are unwarranted freebies that should be eliminated.
As explained in the article quoted above, if central and state governments could go beyond their usual budgets and take bold steps to phase out these unwarranted freebies, as well as much of the tax exemptions and concessions , which represent around 5% of GDP, this would free up enormous fiscal space. This would allow a massive reduction in the combined budget deficit of the Center and the states, while increasing the necessary expenditures on education, health and infrastructure. The myth of tight fiscal space simply reflects the lack of appetite for deep fiscal reforms that could radically change the structure of central government and state finances.
Finally, I address the issue of income assistance schemes. There is a growing demand in many advanced countries, which already have large social security schemes, to provide a minimum “universal basic income” for all. These demands are backed by global business leaders like Mark Zuckerberg as well as prominent economists and think tanks across the ideological spectrum. In this context, providing a small safety net to the poor in countries like India, which have no social security system, is the least a benevolent government can do. Especially when the government forgoes much larger sums of revenue in the form of tax breaks for the wealthy and the banks cancel vast sums of non-performing loans also given to the wealthy. MGNREGA is India’s largest and longest running income support program for the unemployed in rural areas. But it is often not considered as such because it involves payment against the performance of work. There are also purely monetary subsidy programs such as the central government’s PM-Kisan and some programs currently being piloted by a few state governments.
The usual complaint against such programs is that they artificially raise rural wages, reduce the incentive to look for work, and the poor blow those freebees on booze and the like. Since MGNREGA and similar programs in the states pay much less than the minimum wage, they obviously cannot raise rural wages beyond the legal minimum wage anyway. As for the somewhat condescending criticism that such support will deter the poor from looking for work or gorging on alcohol, there are now dozens of randomized controlled trials (RCTs) around the world, conducted by the Nobel laureates Abhijit Banerjee, Esther Duflo and Michael Kramer. , which refute these beliefs. I should specifically mention the RCT run by the famous women’s voluntary organization SEWA in Madhya Pradesh. It showed that the very small cash support provided in the villages where the intervention was carried out was spent mainly on seeking better education for children, repairing huts and supplementing the very meager diets of these households. poor.
The author is president of the Center for Development Studies