Define boundaries and state the fiscal costs of election freebies

I have written at length (Mint, 2 December 2022 and 6 January 2023) on the folly of switching back to the Old Pension System (OPS), so will leave that aside for now, although it has surfaced again as an election promise in Madhya Pradesh. Besides, the pension issue is currently under the lens of a high-level committee constituted by the finance ministry at the Centre.

Among the freebies currently on offer in Madhya Pradesh is free electricity up to 100 units (kilowatt hours), 50% subsidy beyond that up to 200 units, and full rate levy thereafter. The problem is that the offer is seemingly open to all consumers. Subsidizing electricity for poor households at low connected loads is a common (and commendable) practice in all states. In the annual report of the Central Electricity Authority on state-wise electricity tariffs for 2020-21 (dated May 2022), Madhya Pradesh charged a subsidized rate of ₹3.25 per unit for an individual household with a connected load up to 100 watts and monthly consumption up to 30 units. But the minimum monthly charge of ₹45 is roughly three times the cost of likely daily usage of a 40-watt light bulb over three to four hours. There is also a bulk supply provision for slum clusters (without a minimum charge per household), but those charges are often unfairly distributed between households within the cluster.

It could be argued that zero-pricing the first slab at low connected loads is the push poor households need to migrate to an individually metered legal connection to the grid. That then makes possible identification of the remaining (large) illegal connections and so getting rid of them altogether. This could potentially place utility distribution companies (Discoms) on a universal billing platform, as a secure basis for future revenue growth.

The current freebie on offer by one of the contesting political parties does not draw the boundaries to cover only low connected loads. The subsidy bill paid by Madhya Pradesh to Discoms in 2020-21 to cover revenue shortfalls was ₹20,371.61 crore, by far the highest among all states. In that context, an initial free slab for all consumers looks seriously infeasible.

Also on offer is a subsidy on liquefied petroleum gas (LPG) cooking fuel, capping the price for an LPG cylinder at ₹500. That is roughly a 50% subsidy. Currently, about 40% of the price of petroleum consists of central excise and state value-added tax (VAT) including dealer commission (petroleum products are outside the GST system). Halving the issue price of an LPG cylinder essentially amounts to paying the central excise on the product along with forgoing the state VAT on it.

If offered universally to all LPG consumers, a cap on the number of subsidized cylinders is the only way to contain the fiscal cost. If not universal, it raises the same problem of identifying beneficiaries as that arising with other freebies such as the basic income to every woman head of household (offered in Karnataka). External identification of beneficiaries can be rife with injustice. A woman may head the household because her husband has migrated elsewhere but his remittances could make it a non-poor household. Another woman may not head her household, but the nominal male head may be unemployed or ill or disabled.

The most famous freebie of all was the Mahatma Gandhi National Rural Employment Guarantee (MNREGA), a brilliantly conceived scheme because its beneficiaries are self-selected. Those households that come voluntarily forward to get a job card for performance of manual labour on public work sites get automatically included.

Free bus travel for women is similar to MNREGA in being self identified. In some other cases, such as farm loan waivers (on offer again in Madhya Pradesh), the qualifying parameters are usually tightly drawn so as to contain the fiscal cost. But that makes for arduous calculations of the dues to each farmer, and delays the receipt of benefits by qualifying farmers.

The freebie packages currently on offer are typically a motley collection seemingly thrown out as a net to pull in the votes of whichever voters think they may benefit from this or that element of it.

I now realize that my earlier suggestion that the Election Commission require political parties to quantify the fiscal impact of freebies is infeasible. What political parties themselves can do is credibly quantify the cost of freebies offered by a rival party, and display for voters the size of the bite other programmes and schemes will suffer as a consequence. Such actions would raise the level of electoral debate, but it has not happened so far.

Indira Rajaraman is an economist.