Daily Editorial Analysis for 16th June 2022

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Good and bad freebies

What constitutes “freebies”?

• They constitute a sub-set of goods and services distributed by the government.
• What is a “freebie” depends on the nature of the commodity or the services distributed.

The two categories of Freebies

• Providing support to low-income households for augmenting their consumption of selected goods and services.
E.g., this category would include the free or subsidised provision of food grains and services such as health and education.
• Offering incentives to support selected categories of investors and producers.
E.g., The central government’s recent initiative for production-linked incentives to various sectors and tax concessions. In the past, incentives in the form of reduction of corporate taxes have been offered to promote investment in general, or in certain regions such as backward areas.

What goods and services should be selected for such programmes?

1. Distribution of essential goods:

The distribution of commodities which are considered “essential”, primarily foodgrains, faces no criticism. In fact, there is enough evidence that such a distribution has helped to reduce poverty.
• The practice of providing certain goods or services free or at highly subsidised prices has been common in budgets.
• Foodgrains, particularly wheat and rice, are supplied to target groups at a highly subsidised price through the public distribution system.
o The subsidy is the difference between the price at which they are procured and the price at which they are sold.
o In the central budget, the food subsidy amounts to Rs. 2.06 lakh crore.
• The provision of foodgrains at a heavily subsidised price to target groups has found general acceptance.

2. Distribution of Merit Goods:

There is also a category of goods which are called “merit” goods where significant positive externalities are associated with their consumption – for instance, health and education – related provisions, including mid-day meals and breakfast.
• In these cases, the benefit of the use of such goods extends beyond the immediate consumer to the wider community.
• In such cases, subsidisation is justified: If only market prices prevail, the community will consume less than what is socially desirable.
Thus, while subsidisation or the free provision of essential and merit goods can be justified on the grounds of meeting social objectives.

What should be their ideal mode of delivery?

• The question of a suitable model for providing budgetary support arises in the context of both consumption and production supporting initiatives.
• Budgetary support to a targeted segment of the population for augmenting their consumption of essential items may be provided either through direct income support or by a free or highly subsidised provision.
o Both involve fiscal costs. In the former, income is raised for the targeted households which will support an increase in consumption according to the household preferences.
o In the latter, the consumption of the selected goods and services will increase. When the provision of subsidised goods is involved, there may, in general, be a requirement of a procurement setup and a public distribution system.
o Managing procurement and distribution by government agencies involves additional costs which tend to be higher than the corresponding supply through the market because of leakages and avoidable ad ministrative costs.
• In the case of production related incentives, alternative methods include direct budgetary support and indirect support through tax concessions. Both have a differential impact. These schemes also require to be carefully designed to avoid their misuse and minimise their costs.

What should be a prudent fiscal limit for funding such programmes?

• Production may be incentivised more effectively by other methods such as infrastructure expansion.
o In respect of production-related incentives also, greater care is required for determining the total quantum of support as well as the specific forms of such support.
o It is also important to consider a limit to the fiscal cost of undertaking such initiatives.
• This question should be considered in light of our limited budgetary resources.
o In India, the revenue to GDP ratio has been stagnating over a long period of time. During 2010-11 to 2019-20, combined revenue receipts of central and state governments, relative to GDP, have languished in the narrow range of 18.4 per cent to 20.3 percent.


• When the list of commodities expands to include such items as TV sets, serious doubts arise. For example, one unintended consequence of free power up to 300 units is likely to be an undue increase in the power consumption of households which use less than 300 units.
• The provision of free power to farmers was often misused it’s a common practice, for instance, to leave the pump sets running for long hours.


• The distribution of commodities and services at highly subsidised levels should be limited to essential and merit goods. Any distribution beyond these two categories must be treated as “freebies “. The words “essential” and “merit ” should not be made so elastic as to lose their meaning.
• Considering the fiscal trends, it would be prudent to limit overall fiscal support to such schemes to less than 10 per cent of the total expenditure of the central government and state governments until their revenue GDP or GSDP ratios are successfully increased in a sustained way.


The Governments must distribute the Goods and services very judiciously. Governments that do not pay adequate attention to the strength of their fisc eventually become exposed to the cost of the choices that they make.

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