Government gifts put budgetary balances under pressure

When making economic judgments, the way things are presented matters a lot. For example, today the buzz revolves around giveaways where state governments have been reprimanded for giving free sewing machines, cycles or electricity to different sections of society, putting fiscal balances under pressure.

But when there is something like the Performance Linked Incentive Program (PLI), where companies have to show a certain level of performance to claim the benefit, it is applauded. Similarly, the reduction in the corporate tax rate is seen as positive because it stimulates growth and is not seen as a “gift” – even if such concessions have not led to increased investment.

The problem is really all about terminology and communication. If one looks at, say, the Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY), a free food program that benefits over 800 million people, there has never been a complaint against such expenditure. But when it comes to the Public Delivery System (PDS) – really the same concept – there have always been criticisms of poor targeting. But if 800 million people get free food, that means they need it. So the PDS or the food subsidy is necessary.

A rose by any other name would smell just as good. But that doesn’t seem to hold up in economics. As soon as a government program is called a subsidy, it is frowned upon. It is applauded whether it is an “incentive” or a tax. When free bicycles are donated by states, it is not unproductive as the cycle industry (mainly in Bihar) benefits from this expenditure. The same goes for sewing machines (made popular in Tamil Nadu). Therefore, if the programs were called ‘women’ or ‘girls’ empowerment programs with the prefix of a leader, they might have passed the ‘test’.

Again, when looking at the PLI, this seems fair, as recipients must produce a certain amount of goods. But free energy for farmers should then ideally come under the ‘incentive’ umbrella, with wheat and rice being the ‘target industries’. The fact that farmers have free electricity allows them to produce at a lower cost, which translates into stable prices. This is also the philosophy of the fertilizer subsidy.

One argument is that free energy has led farmers to run their pump sets too long and lower the water level to ground level. But, then, the 14 industries with LIPs also have emissions that affect the climate.

There is also a stigma attached to agricultural loan waivers, less shading on non-performing asset (NPA) write-offs. In fact, loan waivers come from taxpayers money, while NPA settlement is effectively based on deposit money where savers continue to get a lower interest rate, and borrowers pay more on loans because banks are forced to balance loans with deposits.

If NPAs were low, fewer provisions would be made and banks would operate with lower spreads, and thus pass the benefit of the interest rate on to both savers and borrowers. But governments bear the brunt of criticism here when the budget is used for settlements. If the same set of agricultural loans were settled through asset reconstruction companies (ARCs) or failing banks, the emotion would be different.

More recently, a debate over service charges by restaurants has arisen. A fee for one service, if acceptable, can then be extended to all services. Shopping malls, supermarkets and banks are visited for various transactions. If a restaurant can charge this amount, we should also be open to other vendors with service charges.

Restaurant associations have challenged the Central Consumer Protection Authority (CCPA) July 4 guidelines banning restaurants from automatically levying service charges, which the Delhi High Court will hear in November. They argued that the service fee goes to the staff. But don’t they all receive wages or salaries? Unbundling labor costs and forcing them on customers seems unethical.

It is also argued that everyone knows what awaits them when they enter the restaurant and can refrain from returning if the services are not good. This logic can also be applied by other services, if the argument is accepted. The government has rightly said that the hotel industry can include all of these charges in regular menu prices. Therefore, here too, labeling the cost as a “service charge” opens the door to debate. Airlines have already imposed convenience charges on top of the fare. Obviously, we need more transparency here.

The writer is Chief Economist,


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