The grapevines are abuzz with the freebie topic post the election results in Karnataka. The opinion of the tax payer has become insignificant as the policy makers think it to be a waste of time to consult them on how they want to squander away the tax payer’s hard earned money.

It is again the classic three-pronged approach of the Indian polity to gain a state. This time the victim is the  number two state of India by way of GST collection.

Lure them: Promise them a utopian world or at least offer a drug (freebies) that gives the masses a temporary high (Euphoria).

Scare them: Warn the masses of an impending danger lurking and they are the only ones who would save them.

Snare them: Trap the masses by taking advantage of their short sightedness and short memory span.

In the recent elections in Karnataka the Congress came to power on the promise of the following:

-Gruha Jyothi promises 200 units of free electricity to every household

-Gruha Lakshmi promises Rs 2,000 a month to women heads of families

-Under Anna Bhagya, 10 kilos of foodgrain have been promised to BPL families

-Yuvanidhi promises support to the unemployed by paying Rs 3,000 a month to a graduate and Rs 1,500 to diploma holders

-Shakti will allow free travel for women in state buses

This is the latest Rs. 50,000 crore scam, atleast from the point of view of the working population. Someone always pays the tab. The tax payer is that ‘someone always’. He is the middle class ‘someone’ who is waiting for better days.

It is the game of passing the parcel. All political parties, repeat all, play this game. Congress, AAP, BJP et all. While the first two are masters of the game and illiterate in finance and economics (remember Siddaramaiah (2013-2018) emptied the treasury to the extent of not having enough to pay the salaries), BJP is the fringe player, balancing the finances with freebies.

There are two clear political and governance models. Those who provide freebies will never be able build infrastructure such as new expressways, airports & defense corridors. They will never be able to create assets for the future. They will never be able to build infrastructure that can facilitate business expansion & investment.

Karnataka’s receipts last year, excluding net borrowings last year (excluding borrowings) was Rs. 2.27 lakh crore rupees. The promises my made the congress party in the recent elections account for 22% of this. So in lay terms about a fourth of the states revenues will go in just funding the Congress victory in Karnataka. In ever more lay terms in 25% of the taxes you pay go towards funding the election victory.

The thrust of the central govt in recent times has been capital expenditure. The benefits of these capital expenditures and Infrastructure push are long term. It has a multiplier effect on the economy. These are the foundation stones to make India a giant manufacturing hub and topple Chinese from the world market.

Contrary to that, others such as the victors in Karnataka focus on a short term gain. Their politics heavily rely on revenue expenditure in forms of doling out exchequer money on freebies. While whatever may be the claim, the burden of freebies leaves minimal or no scope for new requisite infrastructure for basic needs like Health and Education.

The five most stressed Indian States are Bihar, Kerala, Punjab, Rajasthan and West Bengal.

Take the case of Rajasthan. The government has gone back to the old Pension Scheme as a tool of appeasement putting a huge burden on the state’s finances. This scheme was found to be financially unviable back in the year 2000. It was found to be a huge burden on the national treasury because it amounted to a whooping 60% of the GDP. This means there was hardly anything left for development. As per the old pension scheme you would get a pension of 50% of the last drawn salary as pension regardless of the market conditions and government’s financial stability.

To rectify this anomaly, in early 2000, the central Government introduced a New Pension Scheme wherein the salaried person would contribute 10% of the salary and the employer would add 10% to the new scheme. This money would be invested in the market instruments like government bonds, corporate bonds, equities etc. In fact, you could even allocate the percentages you would like to invest in each category. Once the person reaches the age of 60, his accumulated corpus will be used to fund his pension. The person can withdraw up to 60% of the corpus and the balance 40% would lie in the scheme to fund future pension needs. So, the growth of the money going to the pension comes from the money generated from the market and thus de-burden the government’s finance.

When this scheme was launched, all the states opted for the new scheme except West Bengal and Tamil Nadu. Now the governments of Rajasthan and Chhattisgarh have reverted to the old pension scheme which is going to be a financial disaster. Rajasthan spends 56% of its revenues on the pension and salaries. This means there is no money for development and actual welfare. Rajasthan’s GSDP percentage is coming to 39.5%. The recommended percentage is below 20%.

RBI has cautioned these states on their financial health and feel may go the Sri Lanka way. These states’ falling revenue and the growing freebies are of concern to the Indian economy. Add to the list of these states is Andhra Pradesh who is fast approaching bankruptcy.

Sri Lanka went bankrupt for three reasons:

• The long civil war in Northern Sri Lanka
• The did not diversify their exports. They were heavily reliant on plantation and tourism.
• They undertook a heavy load of debt and channeled it into freebies.

Freebies takes politics to the Centre stage and slides the economy into bankruptcy. Freebies do not bring tangible returns to the state. The only thing that is certain is the beneficiaries of freebies are extremely happy. But this is short term because soon there will be no more freebies left to be distributed. The beneficiaries will then realize that in future they will be the ones to pay for the freebies. Non availability of power, water and subsidies will give rise to the monster called inflation and the freebies beneficiaries will bear the brunt of inflation, rationing and food and fuel shortages.