Freebies & Fiscal Folly: The Hidden Cost Of Populism

In this incisive follow-up, the complex landscape of subsidies and freebies in India, raising urgent questions about their long-term impact. He critiques the unchecked proliferation of populist schemes—from livestock giveaways to indiscriminate loan waivers—and explains how such practices can distort the economy, crowd out private investment, and erode institutional integrity. Drawing from his experience in public service, especially in agriculture, one is warned against the dangers of fiscal imprudence and advocates for a governance model rooted in Gandhian trusteeship, leaner administration, and transparent regulation

The subject of subsidies and subventions is important enough to be dealt with a little more at length.

In the earlier article, the importance of the need for privatisation and exit policies was looked at. One important aspect of the process is to leave the government machinery healthy and fit or, in other words, lean and hungry. In that context, it needs to be noted that as the emphasis increases on privatisation, the insistence on putting in effective and transparent regulatory mechanisms also needs to keep pace. It is in that context that the establishment, by the government of India, of the Competition Commission of India is indeed a farsighted step. The need for rationalistion of the extant regime of subsidies and subventions was also pointed out.

Another malady that is threatening to assume alarming proportions, is the practice of extending freebies, easily the most pernicious, of the many populist measures currently being employed by political parties in the country, to garner short-term benefits. The number and variety of doles and freebies is truly mind-boggling. From handing out sheep and goats to providing sewing machines, bicycles for school-going girls, series and dhoties to laptops, the list is almost endless.

Nowhere are subsidies so important, and yet so controversial, as they are in the agriculture and allied sectors, sectors in which this columnist has spent the major part of his career in civil service. What one sees, at first glance, is confusing enough to be almost funny. To begin with, substantial assistance is provided to the sectors, both financially and otherwise. Still, the total assistance provided is nowhere near what is permissible in terms of prescriptions insisted upon by the World Trade Organisation. The amounts are large enough, for governments to make political capital out of, but nowhere near enough, having regard to the needs. What is more, what little is provided is almost entirely in the shape of interventions that are not only unnecessary but, in fact, pernicious and counter-productive.

An equally dangerous practice is the across-the-board waiver, of repayment of institutional loans, to the extent of thousands of crores of rupees mainly to the farm sector, fishermen, and rural artisans, such as weavers and potters. A politically motivated action, arising from complete ignorance of the frightening dangers it is fraught with- economically, institutionally, socially, and to the health of the institutional infrastructure. Most regrettably, it has not only come to stay but continues to expand, in size and geographical coverage, as an unstoppable evil. Even worse is the giving away per hectare cash grants to agricultural land owners (without reference to the economic status of the beneficiary, or the purpose to which the money is being put),

Unproductive expenditure, particularly on freebies, can negatively impact the imperatives of rapid growth and sustainable development, by resulting in the neglect, of the needs of critical economic and social infrastructure, such as energy, transport and irrigation, or housing, healthcare, and education.

The total expenditure of the government of India increased from Rs1,13,422 crores in 1991–92 to Rs48,20,512 crores in 2024-25. To help raise the necessary funds, and to minimise the nation's fiscal deficit, the government of India, in 1991-92, initiated the process of privatisation of government establishments, including public sector undertakings, despite stiff resistance from labour unions. When governments increase spending or borrowing, in order to undertake new activities or expand the scope of those already undertaken, they naturally feel the need for extra finance, which is often secured by raising taxes, borrowing from the public, or printing money. This leads to a higher demand for credit in the economy, with the increased demand for credit pushing up interest rates, and consequently, higher interest rates make borrowing more expensive for businesses, leading to reduced investment spending.

In economics, the expression ‘crowding out’ refers to a decrease in private sector spending, particularly investment, following an increase in government spending or borrowing. This happens because increased government demand for capital (through borrowing or spending) can drive up interest rates, making it more expensive for businesses to borrow and invest. In essence, crowding out means that government activity ‘pushes out’ private activity, particularly investment, on account of changes in interest rates and credit availability. The net effect of crowding out is that increased government spending, and borrowing, may not lead to a proportionate increase in overall economic activity, because private investment is diminished.

Gandhiji felt that all the major political institutions inevitably become instruments for pursuing power, enhancing one's own authority, and acquiring ownership of property. He also believed that those, with wealth and resources, should act as trustees for the benefit of the wider community, rather than using their power for personal gain. That philosophy of trusteeship is a middle ground between capitalism and communism, advocating the adoption of a system where the wealthy are stewards of their resources, to be used for the collective good. It suggests that individuals with wealth should see their possessions as a trust, to be managed for the benefit of society, rather than as their own, to use as they please. How the governance system in the country has gradually evolved suggests that, perhaps, Gandhiji's philosophy has been the foundation upon which the concept of democratic socialism was developed.

As we have seen, leakages are among the most important reasons why the efficacy of delivery, of goods and services by government interventions, is substantially diluted.

There is this story about Frederick the Great, the King of Prussia sitting at the head of the high table in a Royal Banquet. At one point of time during the meal, he picks up a piece of ice and passes it on to his Finance Minister, sitting on his side, and requests the minister to continue to pass it on. By the time the piece moves, from hand to hand, and reaches the King again, nothing is left, but a drop of water.

The King looks at the Finance Minister and says, with a mischievous twinkle in his eyes, "I understand that this is what is happening, with the programmes we are launching for the benefit of the poor people!"

(The writer was formerly Chief Secretary, Government of

Andhra Pradesh)