Of late, several State governments have been disbursing cash to people under various programmes. Such handouts, labelled as freebies, have become an integral part of all poll campaigns and supposedly clicked with the electorate. The RBI has pointed to the need to curb such revenue expenditure and nudged States to use borrowings for capex.

The role of state, as defined in public economics, is to bring about effective redistribution. The principles of taxation are loaded towards a progressive tax structure where the more affluent pay higher taxes. The revenue garnered is to be used to help the needy and in building social and economic infrastructure. The FRBM (Fiscal Responsibility and Budget Management) law placed limits on the fiscal deficits for the government — both the Centre and States — , in an effort to rein in expenditure.

Redistribution is an amorphous term. Conventionally, one form of redistribution is by creating hospitals, schools, roads, irrigation facilities, etc. which benefits people. Normally, these facilities would not be used by people in the higher income groups, and hence there is matching of expenses with the beneficiaries.

The other approach to redistribution has been through the elaborate subsidy schemes which have been rolled out by governments. These include subsidies on food, fertilizer, housing loans which benefit farmers and weaker sections.

Loan waivers help farmers when crops fail. Subsidised meals in certain States benefit street vendors, drivers, etc. At times, cycles, laptops and sewing machines have been given to girls/women as part of the effort to empower them.

This provides a boost to these industries as well, which is often not highlighted. And in some States women are allowed to travel free in State-run buses. These forms of transfers have helped improve the living standards of people.

Cash transfers

The third form of redistribution is in the form of pure cash transfers. At the Central level, the PM Kisan scheme gives ₹6,000 a year to every farmer. The MGNREGA programme gives employment for 100 days at an average wage of around ₹250 a day. State governments have traditionally given free power to farmers. The same holds for water used for farming. Lately, women have been entitled to cash transfers in some States. Such moves have invited criticism, which may not be right.

In India, are no social security schemes as in the West, where those out of a job get on a dole, which enables respectable living. Therefore, there is a compelling case for direct action from the government to support the weaker sections. For instance, cash transfers to women or free travel facilities have multiplier effects. Socially, women have been empowered with such transfers and are able to lead a more dignified life. Further, free transport encourages women to take up jobs and girls to attend school. In traditional families, such spending on women is considered a cost. The government filling the gap can be seen as a gender enhancing scheme.

How about the other cash transfers? These are always more efficient than schemes which tinker with the market. The free food scheme of the Centre is progressive, as this releases considerable resources of the poor, which they can use for buying other goods. One of the takeaways from the NSSO household consumption survey is that people were spending less on food and moved up the ladder. This was possible as basic food was provided by the government. Even in case of, say, the PM Kisan scheme, the cash given is used exclusively for consumption.

Growth effect

Hence, governments at all levels have been working to provide incentives for the corporates and direct relief to the needy as growth hasn’t quite percolated enough to create jobs and raise incomes.

In 2019, the government had lowered the corporate tax rate to incentivise investment, which however has not risen, thus casting doubts on the linkage. The question to ask is that if the organised sector is being subsidised, why can’t the same be done for the needy. The support provided has enabled them to have a more respectable life and given that they have a lower propensity to save, all the handouts do get channelled into consumption.

Therefore, it is necessary to pause and think before passing judgments on cash handouts by governments. There is surely room for tightening these schemes. First, the beneficiaries should be the deserving segments. Second, the governments must keep all the expenses within the fiscal deficit norms that have to be strictly adhered to. Third, the handouts should gradually be made conditional to ensure that social objectives are also realised.

Today it has become axiomatic to applaud Budgets which allocate more for capex. The fundamental question is how does one allocate resources. Do we need more highways which allow transport of goods in an efficient manner and enable shorter travel time for the rich, or give to the needy to empower them to live better lives?

Governments need to strike a balance between these two issues. Cash handouts have similar linkages to the rest of the economy as direct capex, as they spur consumption, which in turn will prop up investment. This takes more time assuredly than direct capex. But both have their merits.

The writer is Chief Economist, Bank of Baroda. Views are personal