“Race for freebies could lead to bankruptcy of states”


Political competition for such sops is a “quick pass to fiscal catastrophe,” says Finance Commission chief Finance Commission chief NK Singh is warning of populist moves in Punjab, Rajasthan

Political competition for such scammers is a “quick pass to fiscal catastrophe,” says the head of the finance commission

India could face subnational bankruptcies if states continue to hand out giveaways to sway voters, the chairman of the 15th Finance Commission, NK Singh, warned on Tuesday, calling the political competition for such sops a “quick pass to a fiscal catastrophe.” .

Mr Singh spoke on the need to issue sovereign credit ratings based on their fiscal health, citing the example of the heavily indebted state of Punjab, which is expected to spend an estimated ₹17,000 crore to fund recently announced “freebies” such as 300 Units implement free electricity per household.

Without referring directly to Punjab, the finance commission chief said “a classic example” is a state that has become wasteful and can’t pay its bills, so it immediately rushes to the center for help. Beyond transferring revenue to states according to the commission’s recommendations, the center can only assist states in times of emergency or disaster, he stressed.

“Governments from across the political spectrum are now increasingly drawn to this new freebie policy slogan. The broader question that has troubled me for some time is whether the politics and economics of the freebies are forcing us now to think about what we can loosely call sub-national bankruptcy,” Mr Singh said in an address at the annual Day of the Delhi School of Economics.

Mr Singh called the Rajasthan government’s decision to return to the old pension system for its employees “regressive” and “full of dangers”, saying it resulted in a small fraction or just 6% of the population receiving benefits of claim 56%. of government revenue that goes into his pension and salary spending.

While subsidies are needed for merit and public goods that have greater benefits, such as the public distribution system, employment guarantee schemes and greater support for the education and health sectors, Mr Singh pointed to the need to differentiate these from other subsidies that are part of the are Contemporary Political Narrative.

“Both the economics and the politics of freebies are deeply flawed. It’s a race to the bottom. In fact, this is not the route to efficiency or prosperity, but a quick pass to fiscal disaster,” he noted, emphasizing that “cheap” freebies are costly to the economy, quality of life and social cohesion in the long run.

The culture of excessive electoral incantations to influence voter preferences also undermines job creation and growth, while hampering the quality of Indian manufacturing and harming environmentally sustainable aspirations. “Free energy, free water, free fertilizers of any kind – all of these distract from environmental goals.”

Mr Singh suggested that constitutional provisions such as Article 282 must be taken into account in cases of sub-national bankruptcy, saying the race to the bottom implies government deregulation of markets and companies.

“This ultimately means states will compete with each other to cut taxes, spending and regulations. We must instead seek a race to efficiency through laboratories of democracy and optimistic federalism, where states use their authority to unleash innovative ideas and solutions to common problems for other states to emulate.”

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