COMMENTARY
free electricity, water, health services,
Legitimate versus
Distortionary Freebies
Akhilesh Kumar Sharma, Atul Sarma
This article argues that based
on constitutional provisions
and prudent fiscal management
principles, freebies can be
classified into two broad
categories, namely legitimate
freebies and distortionary
freebies. Legitimate freebies
have a significant positive impact
on the well-being of vulnerable
sections of the population. In
contrast, distortionary freebies
have an adverse impact on fiscal
health, resource utilisation, and
resource allocation and can
distort economic development.
Akhilesh Kumar Sharma (aksbhu2608@gmail.
com) is an assistant professor at the Institute
for Studies in Industrial Development, New
Delhi. Atul Sarma (sarmaatul@yahoo.com)
is a distinguished professor at the Council for
Social Development, New Delhi.
Economic & Political Weekly EPW october 22, 2022
I
n the course of a recent hearing of a
public interest litigation seeking the
Election Commission of India to issue
directions to prevent political parties
from announcing distribution of freebies
before polls, the Supreme Court of India
had observed:
This (freebies) has to be controlled. How it is
going to be done needs to be examined.
The Court added that the government, as
well as institutions like the NITI Aayog,
finance commission, Law Commission of
India, Reserve Bank of India (RBI), and
opposition parties have to be involved in
brainstorming on the problem of free-
bies and come up with constructive solu-
tions. The Court also directed the politi-
cal parties to make suggestions for the
composition of a panel which would ex-
amine the ways to resolve the issue of
freebies. The Prime Minister has also
expressed his anguish over the issue by
saying that the spread of “free revdi cul-
ture” is dangerous for economic develop-
ment. Others like the RBI, bureaucrats,
media and economists have also expres-
sed concern over the use of populist po-
litical announcements during elections
as an instrument to influence voters.
Obviously, the recent financial crisis in
Sri Lanka, where distribution of freebies
was a major issue, might have also
prompted this widespread concern over
the spread of freebies and the need to
develop a mechanism to regulate them
and to limit any distortions in resource al-
location that adversely affect growth.
The Cambridge Dictionary defines
“freebies” as
something that is given to you without you hav-
ing to pay for it, especially as a way of attract-
ing your support for or interest in something.
It clearly highlights the nature and ob-
jectives of all kinds of freebies offered by
an individual, a group, an organisation
or a political party. In electoral politics,
freebies are offered to lure voters. In India,
there are wide range of freebies, including
vol lVii no 43
health insurance, canteens, rations, wash-
ing machines, houses, tablets, phones,
laptops, televisions, grinders, bicycles,
transportation, etc.
Freebies can be classified into two
broad categories: (i) legitimate freebies
and (ii) distortionary freebies. The for-
mer category comprises those which are
in conformity with the letter and spirit
of the Constitution. The latter comprises
those which are not in conformity with
the sound principles of prudent fiscal
management and rather distorts resource
allocation. When considered in this per-
spective, the current concerns should
relate to the second category.
Subsidies and cash transfers that are
primarily meant to remove poverty and
inequality and promote inclusive growth
in the country are part of social security
programmes that should be treated as
legitimate freebies. Distortionary free-
bies would cover all those government
payments that distort resource alloca-
tion, including various perks to legisla-
tors, bank recapitalisation due to non-
performing assets of banks, several types
of revenue forgone by the union govern-
ment year after year, debt waiver, various
types of subsidies like fertiliser and power
subsidy and cash transfers such as Prime
Minister’s Kisan Samman Nidhi, Telan-
gana’s Rythu Bandhu, Odisha’s Krushak
Assistance for Livelihood and Income
Augmentation (Kalia), are all part of
the “free revdi” culture.
The genesis of legitimate freebies can
be traced to the concept of “welfare state.”
Freebies from the government owe its
legitimacy in the preamble of the Indian
Constitution which prescribes that state
will “secure to all its citizens justice—
social, economic and political.” Articles
38 and 39 of the Constitution under the
directive principles of state policy fur-
ther make it explicit: Article 38(1) states:
“The State shall strive to promote the
welfare of the people ….” and sub-clause
(2) provides: “The State shall in particu-
lar strive to minimise the inequalities in
income ...” And Article 39 states:
The State shall, in particular, direct its
policy towards securing (a) that the citi-
zens have the right to an adequate means
of livelihood; ...
17
COMMENTARY

Clearly, therefore, freebies in the form of
subsidies and income transfers, particu-
larly legitimate ones, have legal sanction.
The need for expanding the role of the
legitimate category of freebies arises
essentially from the failure of the coun-
try’s development policy to empower
and provide means of livelihood to a
large section of population. While the
distortionary freebies could be inter-
preted as legal, these are required to be
scrutinised more in the framework of
prudent fiscal management, morality
and socio-economic implications.
In the light of the above discussion,
one can argue that the current debate/
concerns should be restricted to the free-
bies which are of a distortionary nature.
Freebies versus Empowerment
It is important to recognise that all free-
bies do not empower people. With free
power, for instance, farmers earn profits
through reduction in cost, but it does not
enable them to find ways to survive
without free electricity. Thus, it does not
empower them. Similarly, free food or
income transfer make the people depen-
dent on these schemes which might even
reduce their willingness to work and earn
income. In contrast, free education, free
skill generation and free health services
empower people. Employment schemes
like the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA)
programme create assets in the rural
areas while generating income for the
poor. Therefore, there is a need to
design freebies that empower people
and enhance their capabilities while at
the same time also take care of their
basic needs.
Political Economy of Freebies
Apart from diverting attention from fail-
ure of governance and dousing people’s
anger, freebies generate a new political
constituency—beneficiary—for the politi-
cal parties. Beneficiaries vote for the party
that offers them more freebies and thus
generates a competition among political
parties. In this process, key developmental
issues are sidelined. In recent elections,
freebies (such as food, electricity, gas
cylinders, income transfers to farmers,
etc) have played a significant role in win-
ning elections. In this process, other im-
portant issues (such as health, educa-
tion, employment, etc) have been ignor-
ed. We do not raise questions on the
wisdom of the voters. But it reflects the
preferences of voters over key issues.
The main reasons behind such prefer-
ences by voters could be traced to the
rise in relative wealth inequality in the
economy and in people’s aspiration to
quickly copy socio-economic behaviour
of the affluent classes of society influ-
enced by advertisement and the media.
Under emotive response to real life chal-
lenges, people fail to understand the
long-term role of goods and services that
empower them and enhance their capa-
bilities, and they are attracted towards
short-term benefits of goods and services
offered to them as freebies. Political parties
intelligently exploit the emotive response/
behaviour of the common masses. It

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18 october 22, 2022 vol lVii no 43 EPW Economic & Political Weekly

also helps political parties to divert the
attention of the people from failure of
governance and development.
In a parliamentary democracy like
ours, political parties have to face election
at every five-yearly intervals. Parties
compete with each other to announce
freebies irrespective of whether they are
legitimate or distortionary to divert att-
ention of people from the real issues and
get their votes. One can even argue that
the political class has developed vested
interest in keeping the poor and the
marginalised perennially dependent on
freebies so to keep them vulnerable to
the lure of freebies poll after poll. Possi-
bly, “freebies” are the price of failure to
ensure development and acts as a safety
valve to douse the people’s anger over it.
Need for Legitimate Freebies
As per the World Inequality Report 2022,
income and wealth inequalities have been
increasing in the world since the 1980s
following economic reforms promoting
liberalisation and privatisation. Countries
such as India have experienced spectac-
ular increase in inequality (Chancel et al
2022). The pandemic-induced global re-
cession has further worsened the situa-
tion and created new inequalities among
cohorts of young people (IMF 2021). The
distribution of free rations and other so-
cial protection measures during the pan-
demic could save millions from extreme
poverty and destitution.
The ICE360 Survey 2021 data show
that the all-India average household in-
come increased by 8% from 2016 to 2021
and the total personal disposable income
of all Indian households rose by 19%.
But the poorest 20% and the next quin-
tile class suffered a heavy income loss,
while the top quintile class have gained
enormously as can be seen from Table 1.
Table 1: Variation in Annual Household Income
between 2016 and 2021 (at 2011–12 Prices)
Population Slabs Based on per Capita Income
Q1 Poorest 20%
Q2 Lower middle 20%
Q3 Middle 20%
Q4 Upper middle 20%
Q5 Richest 20%
All-India average household income
Total personal disposal income of
all-India household
Source: ICE 360 data, https://www.ice360.in/.
Economic & Political Weekly EPW
These facts indicate that the growth
model adopted through economic ref-
orms in the 1990s has been successful in
generating high growth and making the
country one of the fastest-growing econ-
omies in the world. But it has failed to
reduce inequality and achieve inclusive
growth. Such a scenario calls for provid-
ing social security so to support the
weaker sections of society and promote
inclusive growth. Free rations, subsidies,
employment programmes and income
transfers are a few such policy measures
that come under legitimate freebies.
Impact on Inclusive Growth
There is no study which has assessed the
overall impact of freebies. However, there
are a few studies that have assessed the
impact of social protection programmes
like the MGNREGA, Prime Minister Awas
Yojana (PMAY), National Social Assis-
tance Programme (NSAP). The MGNREGA
is welfare programme—a self-targeting
employment scheme in rural areas. The
NSAP is a pension scheme for old, disa-
bled, and widows—a type of cash trans-
fer to the weaker section of the society.
The PMAY aims to construct houses for
the poor—a type of transfer in kind to
the poor. In general, these schemes rep-
resent different types of freebies.
A study evaluating the economic imp-
act of these programmes has clearly
brought out that the expenditure under
these programmes has significant imp-
act on income, output, gross domestic
product (GDP), and employment genera-
tion through multiplier effect resulting
from inter-sectoral linkages (Sharma et
al 2016). Some other studies relating to
social protection programmes (Sharma
et al 2015, 2017) have also arrived at sim-
ilar findings. Interestingly, around one-
fifth of the expenses on these progra-
mme goes back to government as tax
revenue. More important, these expenses
Per Cent Change
Table 2: Macroeconomic Impact of Expenditure
-53 under MGNREGA, PMAY, and NSAP
-32 Macroeconomic Iindicator Total Impact of Expenditure under
-9 MGNREGA, PMAY, and NSAP
Output effect
+7
+39 Income effect
Households income effect
8 170/1, Rastreeya Vidyalaya Road
Revenue effect
+19 Employment effect 9.12 million
Source: Sharma et al (2016).
october 22, 2022 vol lVii no 43
COMMENTARY
create demand in the economy by enh-
ancing purchasing power of the benefi-
ciaries who belong to the poorer seg-
ment of the society. It can be argued
therefore that a well-designed scheme of
“freebies” like the above can not only
provide social security but also generate
positive macro effects in terms of inc-
ome, output, and employment generation.
Implications for Fiscal
Management
The potential source of fiscal risk for
India is that its tax–GDP ratio at 18% is
the lowest among the major emerging
economies where they range from 22%
to 28%. Similarly, lacunae in tax admin-
istration has pushed up tax arrears to
`6.6 lakh crore in the union budget for
2020–21. Similarly, states registered dec-
lining own tax revenues because they
lost tax manoeuvrability following the
subsummation of its various taxes into one
single goods and services tax (GST). Yet
there has been a large increase in govern-
ment expenditure with growing alloca-
tions for distribution of “freebies,” re-
launching of old pension scheme by some
states, relief during natural disasters,
realisation of government guarantees
extended to state-owned enterprises and
rising dues of loss-making power distri-
bution companies (RBI 2022). The new
risks have resulted in rising expenditure
on distortionary freebies, expanding con-
tingent liabilities and the ballooning over-
dues to power distribution companies.
“Freebies” expenses are revenue exp-
enditure. Revenue deficit is a major com-
ponent of fiscal deficit. Both the union
and state governments have revenue
deficits that are funded by borrowing.
For example, in 2021–22, the union gov-
ernments’ fiscal deficit was 6.8% while
the revenue deficit was 4.4% accounting
for 64.7% of the fiscal deficit. This means
the revenue deficit has to be funded by
borrowing causing a ballooning fiscal
(%)
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0.18
Visveshwarapuram
Bengaluru 560 001
19
COMMENTARY
deficit which is the measure of borrow-
ing. When revenue deficit is covered by
borrowing, interest, which is a part of
revenue expenditure needs to be paid.
With an increase in interest, revenue
expenditure also increases. The revenue
receipt remaining unchanged, the revenue
deficit rises to that extent. Therefore,
“freebies” may create a vicious cycle of
poor fiscal management if it is not man-
aged properly.
The state’s fiscal conditions are also
deteriorating because of the growing
stress. With several state taxes being
subsumed in GST, states are left with less
fiscal flexibility to plan and start new de-
velopment projects after financing the
“freebies.” Therefore, announcements and
implementation of “freebies” need a
careful fiscal assessment both at the
level of the union and the states.
Resource Utilisation
Freebies, in the form of free power and
water in general, lead to overexploita-
tion or misutilisation of resources. For
example, provision of free electricity
increases its consumption. Electricity is
consumed inefficiently. Farmers over-
exploit groundwater which leads to
groundwater depletion and land degra-
dation. It is also argued that such dis-
tortionary freebies have led to growing
water-intensive crops, such as rice and
sugar cane even in the water-scarce are-
as. Such misallocation of resources are
clearly suboptimal choices.
At another level, free or highly sub-
sidised power has led to accumulation of
losses by power distribution companies.
The state government, which has res-
cued the loss-making power distribution
companies, has been burdened with
huge debt.
Implications on Labour Market
Food, clothing, and shelter are the three
basic needs of people which motivate
them to work and earn money. “Free-
bies” such as free or subsidised foods or
direct income transfer may weaken
one’s willingness to work and earn mon-
ey as food comprises around 45% of the
cost of the consumption basket. Labour
force participation rate in India is one of
the lowest, at around 49% as against the
20
global average of 60% and it has even
declined to some extent. So, the ques-
tion is whether freebies and other social
security measures enabling the labour to
meet their survival, have played a role in
the decline in labour force participation
rate. There is a strong case for studying
whether freebies have an impact on
labour force participation rate.
Ethics—Morality and Values
Accepting a “freebie” can also be a moral/
ethical question. However, this question
has been less researched. In our person-
al interactions with MGNREGA workers,
some of the workers mentioned that get-
ting payment for the work done under
the employment scheme is a matter of
pride. It is neither free nor a dole. It gives
them self-respect. Though it cannot be
generalised for lack of any serious stu-
dies, the virtue of perceiving them as a
reward for work in contrast to the “free-
bies” could be made out from the anec-
dotal evidence.
Wrapping Up
We have argued that “freebies” are not
illegal. Therefore, it is essentially a poli-
tical issue and does not really come
within the domain of judiciary. We have
also argued that freebies, should be divi-
ded into legitimate freebies, the need for
which largely arises from the failure of
development policy and poor governance.
Growth has bypassed a large section of
population and failed to promote inclu-
sive growth and empower people with
adequate access to health and education
but led to a hugely skewed income distri-
bution. The NITI Aayog’s estimate of multi-
dimensional poverty in 2021 has placed
the poor at 25.1%. We have shown that
legitimate freebies, apart from augment-
ing the well-being of the beneficiaries,
could also have a positive macro impact
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october 22, 2022
if the schemes are imaginatively de-
signed like in the case of the MGNREGA.
The other category which can be
called distortionary freebies have been
ballooning because of the political par-
ties seeking support to capture or re-
main in power. This class of freebies has
adverse impact on fiscal health, resource
utilisation, and resource allocation and
indeed is dangerous for economic devel-
opment as claimed by the Prime Minis-
ter. This is the class of freebies that need
great attention. If a panel of experts is
appointed, its terms of reference should
include the following measures: (i) to
identify freebies schemes which are dis-
tortionary in nature and (ii) indicate
how best to eliminate/minimise these
schemes. In our view, more than any
panels, it is the political class which has
to be aware of the pernicious impact of
competitive freebies on the economy
and, if it is possible at all, arrive at a con-
sensus to eliminate distortionary free-
bies as instruments to lure voters. They
should rather compete among them-
selves to design schemes that empower
and enhance capabilities of the poor and
the marginalised.
References
Chancel, L, T Piketty, E Saez, G Zucman, et al
(2022): “World Inequality Report,” World Ine-
quality Lab.
IMF (2021): “Inequality in the Time of COVID-19,”
https://www.imf.org/external/pubs/ft/fandd/
2021/06/pdf/inequality-and-covid-19-ferreira.
pdf.
RBI (2022): “State Finances: A Risk Analysis,” RBI
Bulletin, June, Mumbai: Reserve Bank of India.
Sharma, A K, Atul Sarma, C Kaur and D Tayal
(2017): “Macro-economic Impact of MGNREGA
in India: An Analysis in CGE Modelling Frame-
work,” PEP (Partnership for Economic Policy)
Working Paper 2017–11.
Sharma, A K, M R Saluja and Atul Sarma (2015):
“Economic Impact of Social Protection Pro-
grammes in India: An Illustrative Exercise in
SAM Framework,” SARNET Working Paper
No 1/2015.
— (2016): “Macroeconomic Impact of Social Pro-
tection Programmes in India,” Economic & Po-
litical Weekly, Vol 51, No 24, pp 121–26.
vol lVii no 43 EPW Economic & Political Weekly