Author:
Dr. P. Praveen
Associate Professor
Department of CSE, SR University,
Warangal, Telangana – 506371
Introduction
In Indian democracy, the practice of distributing welfare schemes—popularly known as “freebies”—has long been a prominent strategy used by political parties to woo voters. From loan waivers and free electricity to subsidised food grains and direct cash transfers, these schemes are often promoted under the banner of inclusive growth and poverty alleviation. While such schemes may offer short-term relief and political dividends, their unregulated expansion without regard to fiscal discipline has sparked a heated debate regarding their long-term macroeconomic impact. This debate becomes even more relevant when evaluated in the broader context of India’s fiscal situation and growth trajectory.
The Role of Welfare Schemes in Socioeconomic Development
Welfare programs are often justified as tools to bridge socio-economic disparities. Despite being the fifth-largest economy globally with a GDP of $3.73 trillion (2023), India continues to grapple with severe inequalities. According to NITI Aayog’s National Multidimensional Poverty Index (2021), nearly 25% of Indians still live in multidimensional poverty.
Flagship schemes such as the Public Distribution System (PDS), Pradhan Mantri Awas Yojana (PMAY), and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) have significantly contributed to food security, housing, and rural employment. However, increasing political dependence on fiscally unsound freebies—such as free electricity or mobile phones during election periods—raises serious concerns.
The Fiscal Burden of Populism
A 2022 Reserve Bank of India (RBI) report highlighted that most Indian states hover dangerously close to or exceed the 3% GSDP (Gross State Domestic Product) fiscal deficit limit. States like Punjab, Andhra Pradesh, and West Bengal have accumulated unsustainable debt levels due in part to populist spending. For instance, Punjab’s debt-to-GSDP ratio in 2021–22 stood at an alarming 48.6%, driven by schemes such as 300 units of free power, farm loan waivers, and old-age pensions.
Such measures, while politically expedient, provide limited long-term benefits. Many of these programs are poorly targeted, leading to inefficiencies, leakages, and misuse. Estimates by the State Bank of India (SBI) and ICRA place the annual cost of freebies at around ₹3.2 lakh crore—approximately 1.2% of India’s GDP. This amount could otherwise be invested in infrastructure, healthcare, education, and innovation—key drivers of long-term growth.
Opportunity Cost and Misallocation of Resources
India’s public expenditure on education, at 2.9% of GDP, is notably below the global average. If redirected from populist freebies to human capital development, the returns in terms of productivity and sustainable growth could be substantial. The PM-KISAN scheme (2019), which provides ₹6,000 annually to small and marginal farmers, has reached over 110 million beneficiaries. However, when such central schemes are supplemented by state-level schemes like Andhra Pradesh’s YSR Rythu Bharosa, the fiscal burden can become excessive without a proportional rise in farm productivity.
Additionally, subsidies such as free electricity for agriculture have led to groundwater over-extraction. The Central Ground Water Board classifies over 70% of India’s groundwater blocks as critical or over-exploited. The hidden cost of such practices far exceeds the benefit of the subsidy itself.
Competitive Populism and Its Consequences
The trend of escalating populist giveaways has created a cycle of competitive populism. Political parties tend to offer increasingly extravagant incentives—free mixers, fans, washing machines, even livestock—not based on developmental needs but on electoral calculations.
While some welfare schemes, such as MGNREGA, Ayushman Bharat, and PMGSY, yield long-term dividends through rural infrastructure, health, and employment, others like blanket loan waivers and untargeted subsidies can erode credit discipline, distort market signals, and deter private investment.
Institutional Responses and the Way Forward
The Supreme Court of India, in 2022, suggested that an impartial body—possibly under the Finance Commission or Election Commission—should be established to oversee and regulate welfare schemes. This would ensure that such programs are consistent with development goals and fiscal sustainability.
According to a report by the National Institute of Public Finance and Policy (NIPFP), every ₹1 crore invested in infrastructure can generate 12–15 jobs, while direct subsidies offer negligible economic return. Capital expenditure thus holds a significantly higher multiplier effect compared to revenue spending.
Encouragingly, reforms such as Direct Benefit Transfer (DBT) and Aadhaar-based digitisation have reduced leakages and eliminated ghost beneficiaries. However, the core question remains: do these schemes enhance productivity and promote long-term economic growth?
Conclusion
Welfare schemes remain central to addressing poverty and inequality in India. However, when misused as vote-buying tools without fiscal logic, they risk becoming economically unsustainable. Such unchecked populism leads to rising debt, fiscal imbalances, and lost opportunities for capital formation.
To realize the vision of a $5 trillion economy, India’s political leadership must strike a delicate balance between social welfare and economic discipline. The focus must shift from indiscriminate handouts to well-targeted, outcome-driven, and fiscally prudent welfare programs that promote inclusive and sustainable development.
