Since independence India is facing various challenges including food security, farmers’ distress, social discrimination, poverty, etc. The government came up with subsidy schemes and freebies to overcome these challenges for the welfare of the people. The Sri Lankan crisis has given rise to a fresh debate on the government’s role in state planning. The Sri Lankan government provided free goods and services to an extent that it fell into indebtedness and failed to deliver its commitments. As a result, the issue of freebies given out by Indian states has come under the lens here. In this blog, we will understand how freebies impact economic growth… Freebies/subsidies given by the government help in the welfare of the poor, however, everything comes at a cost and so do freebies/subsidies. The government pays for these facilities by borrowings and tax revenues. How do freebies impact fiscal stability? Revenue expenditure on freebies does not lead to any capital formation, hence no returns on the revenue expenditure. Increase in revenue expenditure and no capital formation results in a widening fiscal deficit. An increase in fiscal deficit leads to pressure on the government to make higher interest payments. The government now resorts to printing money to make interest payments which leads to more money supply and hence increases inflation in the economy. A high deficit and more freebies/subsidies reduce the financial credibility of the country which adversely impacts foreign investments from other countries. Other impacts of Freebies and subsidies? Due to freebies, young people in the country lack the motivation to work and earn due to which formation of human capital is jeopardized. It creates free riders problem in the economy and discourages genuine taxpayers of the economy to pay taxes further. When should the freebies/subsidies be provided to the public? Emerging economies have a big problem: poverty. The government must give freebies/subsidies on basic facilities to the masses such as food security, an incentive to farmers, medical facilities, and education. Also, during a recession, these freebies/subsidies can create demand in the market that can revive the growth to a certain level. Freebies and subsidies are crucial for a nation's growth and development, especially in developing countries with a wide range of economic conditions. As a result, the government should rationalize the plans by utilizing the different technological fields—such as artificial intelligence and machine learning—that are already available. In order to maintain the financial stability of the government, it is important to strike a delicate balance between pushing the budget to its limit and offering the public logical subsidizing programmes. Thank you.
If the tax rates are high and the government is not providing freebies, the government is just inefficient.
ReplyDeleteVery well articulated. Countries like India where population is huge subsidy on a few essential things based on income distribution can be an option.
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