Lessons from Sri Lanka: Politics of freebies has serious repercussions

In 2019, Rajapaksa govt in Sri Lanka cut taxes to keep up with election promises. Global ratings agencies were quick to downgrade Sri Lanka saying that it undermined its fiscal and debt sustainability

Sri Lanka: Protests (Representative Photo)
Sri Lanka: Protests (Representative Photo)

Akash Singh & Ashish Kumar Singh

Recently some top bureaucrats warned PMO that freebies given by state government will lead to serious economic crisis like Sri Lanka. A close look at why Sri Lanka fell to such hard times will make it clear that promises and granting of freebies subsequently casts an ominous shadow on the economy of a country.

As per the World Bank guidelines, any country must have a controlled GDP to debt ratio which is 20%. It is ideal condition for any developing country. If it crosses 60% per cent then the economy of that country will face serious challenges. Any country that has a 100 and above percentage of GDP to debt ratio is considered as bankrupt by the IMF.

A debt-to-GDP ratio is an indicator on how much a debt a country owes and how much it produces to pay off its debts. Expressed in percentages, it is alternatively interpreted as the number of years needed in paying back the debt, in case the entire GDP has been allocated for debt repayment. In simple words, if the earning of any country via taxation, FDI etc is 100 per cent then it must have payable loan interest and EMI equal to or less than 20 only.

In 2019, the Rajapaksa government in Sri Lanka cut taxes in the country to keep up with election promises. S&P Global Ratings and Fitch Ratings were quick to downgrade the country saying that the tax cuts undermined the country’s fiscal and debt sustainability. After that some other policies were introduced such as the usage of organic fertilizer, tax exemption for companies to attract FDI. As we all know tourism is major source of income in Sri Lanka. Rajapaksa family members are holding major positions in its government and those with close relations of this family were appointed as top bureaucrats. Neglect of talent by government became a major factor for downgrade of the Sri Lankan economy. The question comes why we are discussing the Sri Lankan model and why is there a concern for the Indian economy. It is important to note here that freebies played a major role in shaking down the Sri Lankan economy.

In recent past some of the major Indian states like West Bengal, Tamil Nadu, Uttar Pradesh, Punjab and Uttarakhand went through the assembly election and all political parties came up with lucrative freebies offer to gain popular votes. Over the years, the politics of freebies has become an integral part of the electoral battles. Political parties promise to offer free electricity/water supply, monthly allowance to unemployed, daily wage workers and women as well as gadgets like laptops, smartphones etc. in order to secure the vote of the people.

There are arguments in both favor and against the freebies, at the same time the distinction between freebies and subsidies should also be made clear. Government offers subsidies to a target sector people for a limited time frame by examining the current situation and effective majors.

Freebies are used mostly as tool by political parties to gain momentum in during elections. While the concept can be put to good use if it targets the needy and under privileged, the established belief that the only way to win votes is by giving such gifts/ offering such schemes, is not beneficial for a state and a country's economy.

Nobel Prize winner professor of economics Dr. Abhijit Banerjee has cited an example in his book POOR ECONOMICS related to target subsidies to improve potential of farmers. He gives examples of two farmers. One was given money for the land, seeds, fertilizers for grain cultivation and another one got grain and cereal for his food need. The first one will aspire to be self-dependent whereas the second one will look for another installment for grain and cereal needs.

Twenty seven out of thirty one states and UTs saw an increase in their debt ratio by 0.5 to 7.2 percentage points on year in FY21 as the states borrowed more to fund regular expenditures as well as provide for Covid firefight, amid a sharp dip in revenues.

A country which is capable of paying interest on its debt regularly-without refinancing, and without hampering economic growth, is generally considered to be stable. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt. According to the recommendations of the N.K. Singh Committee (2016), Debt-to-GDP ratio should have been 38.7% for the Centre and 20% for states by 2022-23 (FY23).Covid-19 pandemic has created a wider fiscal deficit and a higher public debt-to-GDP (gross domestic product) ratio. The Centre’s debt-to-GDP ratio for FY22 was 59.9%, while budget estimates for FY23 have pegged it at 60.2%.

According to the respective budget estimates, states with the highest debt-GSDP ratio in FY22 are Punjab (53.3%), Rajasthan (39.8%), West Bengal (38.8%), Kerala (38.3%) and Andhra Pradesh (37.6%). All these states receive revenue deficit grants from the Centre.

Data from Financial Express
Data from Financial Express

If no actions are taken soon, the central government will have to face the repercussions and it could affect the Indian economy badly. All state heads must think about it and control their freebies expenditure and in route this expenditure in the permanent solution of social uplifting of backward people. Such policies should be formed that will make people contributors to state GDP not the liabilities to the state and society.

(Ashish Kumar Singh is a doctoral candidate of political science at the NRU-HSE, Moscow. Akash Singh is a business development professional in polymer and chemical sector and has worked in Oman & Qatar. Views are personal)

Click here to join our official telegram channel (@nationalherald) and stay updated with the latest headlines