Structuring populism

It is time that we looked at freebies and waivers as irresponsible use of public resources for which the parties and governments should be reprimanded.

Election season brings out the competitive populism of different political parties, but over a period of time, they seem to have exhausted all the ideas and are moving into ridiculous “return gifts” to the voters. In this light, it was very apt for the Planning Commission to advise the States to exercise restraint on “freebies” and invest in schemes that provide long term benefits. More recently the Supreme Court has also advised the Election Commission to put the freebies under a scanner.

While the issue of freebies is gaining momentum, the political parties seem to believe that populist schemes are a necessity in a manifesto. There is a scramble for ideas moving from waivers, write offs to giving away blenders, fans, televisions and laptops at the cost of the exchequer. If we cut through the clutter we can classify populist programmes in four categories:

Schemes

Something like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) could be a desirable. As long as the scheme is non-discriminatory, encourages self-selection and is universal, it could create a win-win situation if the States were to implement it. Assuming there is no corruption, MNREGA encourages physical labour; ensures that there is some output at the end of the season; and structurally ensures those in need – by being dependent on physical labour – opt for it.

Entitlements

The rights and entitlements that the State confers on its citizens is the second type of populism. This would include Right to Information, which comes with little financial costs to the exchequer; or Right to Food or the mid-day meal scheme which could be a drain on the finances. While these drain the economy, many such schemes are necessary from the point of justice and equity. Therefore, one needs to assess how these entitlements will be funded on a recurring basis.

Freebies

While the Planning Commission might have given an advisory on such freebies like gifting laptops, it is more desirable than waivers. While freebies like blenders, laptops and televisions do not achieve much, they do not cause deep harm. They are one time events and non-repetitive. While they could be discriminatory, the downside of an error is not significant. If an entitled poor does not get a television and a non-poor gets it, it does not cause much harm/benefit to either. Since it is non-recurring, the State has to find resources to fund them once.

Waivers

The most dangerous of the populist schemes are waivers. Waivers could be in the form of write off of loans, providing free electricity, interest subventions or schemes that interfere in the normal commercial transaction between a supplier of a service and a user. This is dangerous because the states burn a hole in the finances and destroy the institutions between the state and the customer. The sad state of electricity boards and the distribution companies, the pathetic state of co-operatives and the need to constantly watch the health of the banking system are all a result of the waivers.

While the governments and political parties could use the first two categories to create a win-win situation, often they embrace the route of freebies and waivers. While the centre could pat its back for some of the schemes and entitlements, it is not to be absolved of guilt on the give-aways.

Waivers, interest subventions and such announcements work against the very people it was meant for, but the political parties and governments are myopic.

I discuss two announcements to highlight how they are against the interest of the beneficiaries. The agricultural loan waiver scheme announced by the finance minister a few years ago helped the banks to clean up their balance sheets rather than put money in the hands of the farmers. The farmers were in any case defaulters and the portfolio was a non-performing asset in the books of the banks. It would have helped the farmers if the write off resulted in bringing them back into the banking system.

The waiver scheme did not stipulate incremental lending to the farmers. It just helped the banks to clean their books. By providing a ceiling on the interest rates and subventions to agricultural loans, the centre incentivises banks to misclassify their loans and removes the natural incentive to do “business” with this segment.

Second instance is from Karnataka. The announcements made by the Chief Minister on the day he took office were economically disastrous. Paying Rs 4 extra for every litre of milk to the farmers was ill-advised. While the milk subsidy appears to be pro-farmer, it is actually pro-consumer because Karnataka sells the most inexpensive milk in the country. The farmer could just have got this money through an appropriate price discovery process by the market forces. This scheme destroys the milk federation (KMF). KMF does not have processing capacity and working capital to handle excessive milk procured through this price incentive. By adding volumes, without a commensurate increase in profitability and processing capacity – KMF is as good as destroyed.

All these happen before the model code of conduct kicks in, or gets embedded in the manifestos of the political parties. It is heartening that the Supreme Court stepped in to advise the Election Commission on this matter.

(The writer is with the Centre for Public Policy, Indian Institute of Management, Bangalore.)

Read more:

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