Everything comes with a trade-off. No one can forget the Sri Lankan turmoil, a stark reminder of how fiscal irresponsibility can spiral into disaster. So, what exactly is a freebie? It’s something given free of cost, often with strings attached. Here’s the bit: intent is the real game-changer. If it’s designed to attract the support of a particular group, it’s a freebie. On the other hand, welfare policies are those “free” public services aimed at uplifting society as a whole.
In economic terms, more spending on freebies means less money for genuine welfare policies. This trade-off directly impacts the ‘G’ component of Aggregate Demand (AD), creating ripples across the economy. So, are freebies really bad economics? Let’s break it down.
Welfare State and Freebies
Marshall emphasised the importance of ‘social rights through social policies in the areas of education, healthcare, unemployment insurance, and social security’ as essential components of liberal democracies. However, the rise of neoliberal market forces and globalisation has led to heightened inequities in growth, thereby increasing challenges for welfare states.
The Reserve Bank of India (RBI) has drawn a distinction between public or merit goods such as education and healthcare and other state expenditures, which often include so-called freebies or non-merit goods. Merit goods, like free or subsidised food, education, shelter, and healthcare, are essential for human development and contribute to a country’s long-term growth. By addressing key factors like poor education, malnutrition, high morbidity, and early mortality, these welfare goods uplift the poor and catalyse economic growth.
On the other hand, the mass distribution of non-merit goods, such as mixer grinders, laptops, televisions, or gold jewelry, can drain government revenues without yielding comparable economic returns. Analysts argue that while welfare goods serve a clear developmental purpose, distinguishing them from non-merit freebies can often be challenging in practice.
The Dual Role of Freebies: Addressing Market Failures or Creating Fiscal Burdens?
Freebies are commonly associated with populist giveaways, such as free electricity or consumer goods, which often appeal to voters but fail to address structural economic inefficiencies. However, certain targeted freebies in healthcare and education can function as effective tools to address market failures. For example, free vaccinations and mid-day meal schemes tackle public health and education challenges, thereby enhancing human productivity and economic potential.To better understand this divide, it is essential to differentiate between economically justified freebies that focus on addressing basic needs and enhancing productivity. Unsustainable freebies that include consumer goods or unconditional cash transfers, such as free appliances or laptops, which may create fiscal burdens without contributing to long-term economic growth.
While economically justified freebies address structural inefficiencies, politically motivated giveaways often result in fiscal inefficiency and fail to resolve fundamental market failures. Understanding and maintaining this distinction is crucial for ensuring that state resources are utilised effectively for sustainable development. A survey by the Association for Democratic Reforms (ADR) showed that 41% of voters in the state of Tamil Nadu considered freebies as an important factor in voting.
But the critical part here is, some critics consider this distinction futile and talk about creating opportunities rather than freebies. Understanding efficiency in Public Expenditure is crucial.
Balancing Welfare and Fiscal Discipline: Global and Local Lessons
Some countries have successfully struck a balance between welfare policies and fiscal discipline. For instance, Singapore offers targeted subsidies in essential sectors such as healthcare, housing, and education while emphasising self-reliance. The Central Provident Fund (CPF), a compulsory savings scheme, encourages citizens to save, with the government providing matching contributions. This system ensures that welfare benefits are available when needed while fostering financial responsibility and minimising the long-term fiscal burden. Singapore’s model exemplifies how strong institutional frameworks can deliver welfare effectively without compromising the fiscal health of the state.
The Problem with Universal Freebies
One significant issue with freebies is their universal nature. Instead of targeting the most vulnerable, many of these schemes provide benefits to all, regardless of need. For example, Delhi’s free electricity scheme applies to all households, including high-income groups. This approach diverts resources from those who genuinely need assistance to those who do not. Implementing institutional reforms such as means-testing and targeted subsidies can ensure that limited state resources are allocated efficiently, focusing on the most vulnerable sections of society.
Long-term Investments Over Dependency
Policy focus should prioritise empowering citizens rather than fostering dependency. Kerala serves as a successful example of this approach. Through sustained investments in education and healthcare, the state has achieved near-universal literacy. These investments have led to better social and economic outcomes, enabling a more self-reliant population that contributes to economic growth rather than relying on state handouts. Kerala’s model underscores the importance of investing in human capital for sustainable development.
Freebie Culture: A Fiscal Warning
“The freebie culture is not a road to prosperity. It is a passport to fiscal disaster”, noted NK Singh, chairman of the 15th Finance Commission. He emphasised that freebies cannot substitute for policies aimed at enhancing economic growth and often become an expensive liability in the long term.
The provision of widespread freebies comes with significant fiscal challenges. Without adequate revenue generation, governments often resort to additional borrowing to finance such schemes. Over time, this leads to an escalating debt burden, with growing principal and interest payments that further strain the primary fiscal balance.
The Reserve Bank of India (RBI), in its 2022 State Finances: A Risk Analysis report , highlighted the adverse effects of unchecked freebies. These include weakening credit culture, distorting market prices, discouraging private investment, and reducing labour force participation. India’s debt-to-GDP ratio in 2024 was around 83.1%. This was a significant increase from pre-pandemic levels.
Public Services or Targeted Freebies: Role in Reducing Inequality
Far from being a panacea, private provision of services often benefits the wealthiest, exacerbating inequality. For example, among the poorest 60% of Indian women, the majority rely on public sector facilities for childbirth, while most women in the top 40% deliver in private facilities. Public services, therefore, play a crucial role in bridging inequality gaps. Esp for a developing country like ours that has been a welfare state.
Reports from Oxfam and the OECD have reinforced this idea. An OECD study examining public services and income distribution across 27 countries highlighted their critical role in reducing economic inequality. In these countries, the benefits of public services, particularly healthcare and education, which constitute 85% of the data, are distributed equally in absolute terms across all income groups. The study also demonstrated this positive correlation through Gini Coefficient.
India faces a significant skills gap, as highlighted by the India’s Graduate Skill Index: 2023. The report revealed that the employability rate among educated Indians is less than 45%, while only 4.69% of the workforce has received vocational training. This disparity is particularly alarming given India’s anticipated contribution of 25% to the global workforce in the near future. To bridge this gap, targeted transfer payments in the form of education-related freebies, such as vocational training subsidies, skill development programmes, and free higher education initiatives, are essential.
Lessons Drawn from Across the World regarding Corruption and Inefficiency in Freebie Distribution
The misuse of funds and inefficiency in implementing freebie programmes have raised serious concerns in various regions. A notable example comes from Thailand, where the military government faced allegations of graft involving the misappropriation of 85% of funds intended for the poor and HIV patients. The Office of Public Sector Anti-Corruption Commission (PACC) uncovered evidence of US $3.2 million missing from these allocations, highlighting the risks of corruption in welfare schemes.
Similarly, in Tamil Nadu, populist freebie schemes, including the distribution of free TVs, mixers, grinders, and laptops, have been criticised for fostering inefficiency and corruption. Audit reports by the Comptroller and Auditor General of India (CAG) revealed significant irregularities in these programmes, such as Procurement of substandard products at inflated prices, resulting in wasteful expenditure. Awarding contracts without proper tendering, raising suspicions of favoritism and kickbacks. These inefficiencies had a direct economic impact, with Tamil Nadu’s fiscal deficit escalating to ₹92,305 crore in FY 2021-22, driven partly by such populist spending.
In Punjab, free electricity schemes for farmers have also faced criticism. While intended to support agricultural productivity, these subsidies contributed significantly to the state’s already high fiscal deficit. Reports of misuse, where affluent farmers and non-agricultural users benefited from the scheme, further diverted resources away from marginal farmers who genuinely needed support. These examples reiterate how unchecked freebies can exacerbate fiscal pressures and foster systemic inefficiency. Similarly, in the UK, Labour Party MPs availed more than £700,000 worth of free gifts and hospitality has been received by MPs in the past year for everything from Taylor Swift tickets to helicopter rides.
Therefore, unchecked populist giveaways often lead to fiscal inefficiency, corruption, and dependency, undermining long-term economic growth. Striking a balance between targeted welfare policies and fiscal discipline is crucial for sustainable development. The focus must shift from short-term political gains to long-term societal benefits, ensuring that state resources are utilised effectively and equitably.