Balancing Freebies and Welfare

• 10 Feb 2025

For Prelims: Subsidies, RBI, Health Insurance, Purchasing Power, Public Distribution System (PDS), Directive Principles of State Policy (DPSP), Fiscal Responsibility and Budget Management (FRBM) Act, 2003, Off-budget Borrowings. 

For Mains: Debate over freebies and welfare and their impact on the economy. 

Source: TH 

Why in News? 

There is a rising trend among the political parties to promise a barrage of freebies or subsidies to lure the electorate as seen in the Delhi Assembly elections 2025. 

• Electoral freebies (or "revdi culture") are debated—some see them as harmful to development, while others view them as essential for socio-economic progress. 
• The RBI defines ‘freebies’ as “a public welfare measure that is provided free of charge.” 

How Freebies Help in Socio-economic Progress? 

• Women Empowerment: Cash transfers to women boost financial independence, decision-making, and reduce dependency on family members for immediate needs. 
• Enhancing Human Capabilities: Welfare schemes like free food and health insurance align with Amartya Sen’s “capability approach,” enhancing dignity, immunity, and reducing healthcare burdens. 
• Boosting Consumer Spending: Direct cash transfers boost demand, enhance purchasing power, and stimulate local economies through increased spending. 
• Poverty Alleviation: Food security schemes, like the Public Distribution System (PDS) and Mid-Day Meal, ensure basic sustenance, preventing extreme poverty. 
  • Targeted welfare measures help bridge the gap between rich and poor, fostering inclusive growth. 
• Long-Term Benefits: Poor health causes personal suffering and strains public resources by raising healthcare demand. Early investment in nutrition brings long-term benefits for individuals and society. 

How Freebies Can Harmful for Development? 

• Rising Revenue Deficit: Freebie-driven spending increases the fiscal burden, leading to a decline in the revenue surplus of States. 
  • E.g., Delhi’s revenue surplus dropped by 35% between 2022-23 and 2024-25. 
• Higher Subsidy Expenditure: RBI warns that unchecked subsidies divert funds from infrastructure, healthcare, and education, with annual costs rising by Rs 10,000- 12,000 crore due to new freebies. 
• Increased Tax Burden: Governments may raise taxes to cover rising government expenditure, potentially reducing disposable income and hurting middle-class consumption. 
• Crowding Out Investments: Excessive expenditure on freebies could crowd out the resources available and hamper states’ capacity to build critical social and economic infrastructure. 
• Potential Credit Default Risks: Worsening fiscal health affects states’ ability to borrow and higher debt servicing costs may increase credit default risks. 
  • It may not boost demand because people save more in the present, expecting future taxes to cover expenses on government borrowing (Ricardian Equivalence). 
• Distort Decision Making: Some argue that freebies amount to bribery and discourage voters from making informed choices. 

What is the Judicial Stand on Freebies? 

• S. Subramaniam Balaji Case, 2013: The Supreme Court ruled that freebies fall within legislative policy and are beyond judicial scrutiny. It emphasized that certain freebies align with the Directive Principles of State Policy (DPSP). 
• Expert Panel on Freebies: In 2022, a PIL claimed that freebies undermine free and fair elections, proposing an expert panel to gather stakeholder recommendations. 

How Freebies Differ From Welfare Schemes?

Criteria	Freebies	Welfare Schemes
Conceptual Distinction	Goods or services provided free of charge, often for political gain.	Government initiatives for social and economic upliftment.
Merit vs. Non-Merit Goods	Non-merit goods like TVs, laptops, mixer grinders, and cash handouts.	Merit goods like education, healthcare, food security, and rural employment.
Socio-Economic Impact	Provides short-term benefits but lacks structural economic improvements.	Reduces poverty, improves living standards, and enhances productivity.
Fiscal Sustainability	Can lead to excessive borrowing and revenue deficits.	Budgeted with policy backing for economic inclusion.
Political Motivations	Often distributed before elections to influence voters.	Aimed at structural development with long-term policy planning.
Implementation Challenges	Distributed indiscriminately, sometimes benefiting non-needy sections.	Essential for addressing inequalities.
Accountability and Governance	Lacks transparency, leading to financial mismanagement.	Subject to fiscal planning, coordination, and oversight.

Note:  

• Merit goods are goods and services that have positive externalities, meaning they benefit not just individuals but society as a whole. Education, Healthcare, Food Security etc. 
• Demerit goods are goods and services whose consumption leaves a negative impact on its consumer and on others in the society. E.g., alcohol. 

Click Here to Read: What is the Ethical Perspective on Freebies? 

Way Forward 

• Fiscal Reforms: Strengthen the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 to prevent reckless fiscal spending. 
  • Implement time-bound and well-targeted subsidies to ensure sustainable social welfare. 
• Defining Welfare and Freebies: Define policy guidelines to differentiate essential welfare from electoral freebies, using social utility, long-term impact, and fiscal sustainability as criteria. 
• Strengthening Institutional Mechanisms: Strengthen financial regulators to monitor public spending and improve tracking of off-budget borrowings and hidden subsidies (e.g., Underpricing of electricity). 
• Balancing Welfare and Fiscal Prudence: Focus on education, healthcare, and job creation for economic stability, ensuring subsidies and social schemes promote capacity-building over dependency.

Drishti Mains Question: 

Discuss the socio-economic impact of electoral freebies in India. How do they differ from welfare schemes?