In the following analysis, I have tried to cover the basic economics of freebies with some important facts and financial insights. I have also tried to access the feasibility of freebies and their impact on society as a whole. My views are completely non-political.
The freebies provided by Mr. Arvind Kejriwal include free electricity upto 200 units [1], free water supply upto 20k litres [2], free bus and metro rides for females [3]. Recently, many people have started calling Delhi residents “Mufthkhor” due to these freebies and claim the freebies to be one of the biggest reason for Aam Aadmi Party’s victory. Also, here we will only access the quantitative aspect of the freebies not the qualitative part.
According to the 2019-20 Delhi budget [4] the Annual Expenditure for
- 200 units of free electricity = Rs. 1720 cr.
- 20k litres water supply = Rs. 468 cr.
- Free Bus rides for females = Rs. 140 cr.
- Free Metro rides for females = Rs. 150 cr.
Total Freebie expenditure = 1720 + 468 + 140 + 150 cr. = Rs. 2478 cr.
Delhi Population = 2 cr. (Not all the citizens are the beneficiaries of the freebies)
Cost of freebies per citizen = 2478/2 = Rs. 1239 per year.
Total expenditure for 2019-20 = Rs. 60000 cr.
% of freebie expenditure relative to total expenditure = 2478/60000 = 4.13%
It is being portrayed that Arvind Kejriwal is spending everything on freebies. However, it is clearly not the case as you can see from the above numbers. This fact becomes more clear when we look at the fiscal deficit and revenue surplus numbers of the Delhi government as presented in the budget.
Delhi Government has maintained a Revenue Surplus over the last 5 years despite a fall in Grants-in-Aid to the State from the Centre. [5] A revenue surplus signifies that the government’s earning is sufficient to meet normal functioning of govt. departments and provision of various govt. services. Revenue surplus can be calculated as follows: revenue collection (tax and non-tax revenue) – revenue expenditure (subsidies, employee salaries, pension, education, health services, grants, interest payments excluding capital expenditures.)
Despite the rollout of the several so called freebies, Delhi’s Fiscal Deficit is the lowest in the country. [6] Delhi is 3 times less fiscal deficit than the average of all other states. Fiscal Deficit can be calculated as follows: Total revenue collection – total expenditure (capital + revenue). Capital expenditure includes long term non-recurring expenditure. For example: infrastructure expenses like road, electricity lines, etc.
So, how did Delhi government financially perform so well? This is because they have been able to successfully collect more taxes and reduced incidents of bribery and bureaucratic corruption. The numbers don’t lie: The budget of Delhi has doubled in the last 5 years. There is a direct correlation between poverty and corruption. It is known that the best economies have the least corruption rates. If there will be corruption – The govt. won’t be able to collect enough taxes to be used later in capital allocation to escape poverty. Thus these economies can’t invest in education, health, transport and thus can’t escape the poverty trap. These basic amenities should be the right of every citizen and more for poor because the rich can manage and it is the poor who suffer the most.
Concept of freebies from an economic point of view:
Money saved from travel, electricity and water would enable people especially the poor to spend more on education, well being, goods, services, etc. And one person’s spending is another person’s income because every rupee you spend, someone else earns and what you earn someone else spends. Therefore, income rises, people become more credit worthy and overall demand increases. This increased spending drives economy and leads to economic growth.
What about Inflation? Won't prices just rise making everything just like it was before? Inflation occurs when spending is fuelled by credit and amount of spending and income grows faster than the production of goods. Since the money used for freebies is not being created by magic or printers it needs to be transferred from somewhere. It's more of a shift of funds than the creation of new ones. Hence, no inflation.
If we continue to give freebies, will people become lazy and work less? The money saved every month can be looked at as an additional source of income for each family. Now, how the family spends this will determine their well being in the future. People might provide better living conditions for themselves and their kids. If they reduce their working hours, the extra time can be used for achieving other goals. On the other hand, people might waste it on tobacco and alcohol. I believe for the majority, instead of a ceiling it will create a floor from which people can lift themselves up. Thus eliminating/reducing fear, suffering, and existential panic for a significant part of the population and additional income would make their financial situation better.
So is it a good idea to give freebies? The honest answer is that we don't know yet. The potential is huge. It might be the most promising model to sustainably eliminate poverty. There needs to be a lot more research and bigger test runs. Not all freebies are good so we need to think about what kind of freebies people require and whether the state government is ready and prepared to pay for it.
Also, it is essential to understand that nothing is free. There is nothing wrong with giving back to people if the government finds it appropriate based on the present state of economy and has enough surplus after efficiently allocating capital to education, healthcare, transport, well being, energy and other important areas. However, sustaining the present fiscal deficit of Delhi will require more revenue generation in the future by increasing tax collection and reducing govt. spending through prioritisation and even better capital allocation.
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