Political Freebies And Economic Consequences Lessons From Sri Lanka

Political freebies have become a contentious topic in governance and economic policy, with recent events in Sri Lanka serving as a stark warning about potential consequences. Freebies, defined as goods or services provided free of charge or at minimal cost by political parties, have been used increasingly as election strategies across various countries. This article examines the nature of political freebies, their historical context, and the economic concerns they raise, using Sri Lanka's recent economic crisis as a case study.

Understanding Political Freebies

Political freebies refer to goods, services, or subsidies offered by political parties to citizens, typically during election campaigns. These offerings are designed to secure votes and can include electricity, water supply, medicines, insurance allowances, laptops, and network services at reduced or no cost. The term "freebie" itself carries negative connotations when applied to subsidized goods, as it suggests practices aimed at attracting voters rather than sustainable welfare programs.

The concept gained prominence in Indian politics when K Kamaraj introduced free education and free food in schools. This approach was later expanded by CN Annadurai, who promised approximately 4.5kg of rice for just 1 rupee. The practice reached new heights under Jayalalitha in Tamil Nadu, who offered an extensive range of free items including salt, fans, loans, scooters, gold, laptops, sarees, goats, and cows. Over time, the scope and scale of political freebies have expanded to multiple states and continue to evolve.

Arguments in Favor of Freebies

Proponents of political freebies present several arguments supporting their implementation. They contend that certain free services provided by the state or central government can facilitate economic growth. For instance, the Public Distribution System, which involves the free distribution of wheat, sugar, and rice, is viewed as contributing to individual and national economic development. Similarly, programs like NAREGA (National Rural Employment Guarantee Act) and free COVID-19 testing during the pandemic have demonstrated positive economic impacts by improving productivity and building a healthier, stronger workforce.

Advocates also argue that well-designed freebies can boost industrial growth by increasing consumer purchasing power and stimulating demand. When targeted effectively, these programs may help achieve developmental goals at both family and national levels by addressing basic needs and improving living standards.

Sri Lanka's Economic Crisis: A Case Study

The economic crisis in Sri Lanka serves as a critical case study examining the potential consequences of unsustainable political freebies. In 2019, the Rajapaksa government implemented significant tax cuts to fulfill election promises. This decision, combined with substantial free goods and services without proper consideration of the nation's economic status, ultimately led to economic collapse.

Global ratings agencies quickly downgraded Sri Lanka's credit rating, noting that such policies undermined fiscal and debt sustainability. The crisis resulted in severe shortages of essential goods, long power cuts, and nationwide protests as the country struggled to pay for basic imports like food and fuel.

Economic Indicators and Debt Concerns

Economic experts emphasize the importance of maintaining controlled debt-to-GDP ratios to ensure fiscal stability. According to World Bank guidelines, an ideal debt-to-GDP ratio for developing countries is 20%. When this ratio exceeds 60%, a country faces serious economic challenges. Ratios of 100% or higher indicate potential bankruptcy as classified by the IMF.

The debt-to-GDP ratio measures a country's debt relative to its economic output and indicates how many years would be needed to repay the debt if the entire GDP were allocated for this purpose. In simpler terms, if a country's earnings through taxation and foreign direct investment total 100% of its GDP, its loan interest and EMI should not exceed 20% to maintain fiscal health.

Warnings for Other Nations

The Sri Lanka crisis has prompted warnings for other countries, particularly Indian states, that may be following similar paths. During a four-hour meeting with Prime Minister Narendra Modi in early April, some top Indian bureaucrats expressed concerns that populist schemes in states such as Punjab, Andhra Pradesh, and West Bengal could potentially wreck their economies, mirroring Sri Lanka's experience.

These officials highlighted that with the introduction of GST in 2017, states' income sources have become limited to excise on alcohol, VAT on petrol, receipts from property sales, and motor vehicle registration. This constrained revenue base makes unsustainable freebie programs particularly risky.

The financial parameters of some Indian states, including Punjab, have been noted as being alarmingly similar to those of Sri Lanka before its economic crisis. This similarity has raised concerns among economic observers about the potential for similar outcomes in these regions.

Expert Opinions on Freebies

Economic experts have expressed caution about poorly-directed freebies. According to ICRIER Chairman Pramod Bhasin, most freebies (except during emergencies like the COVID-19 pandemic) that are poorly directed represent a fiscal mistake with significant adverse consequences.

The Supreme Court of India has also weighed in on the issue, stating that freebies funded by taxpayers' money may push the country toward imminent bankruptcy. This judicial perspective underscores the seriousness of the fiscal risks associated with unsustainable populist spending.

Balancing Political Compulsions and Fiscal Health

A recurring theme in discussions about political freebies is the need to balance political compulsions with fiscal responsibility. During meetings with government officials, concerns have been raised about states needing to find this balance to avoid long-term economic harm.

The experience of Sri Lanka demonstrates how political promises of free goods and services, when not matched with sustainable economic planning, can lead to severe economic crises. This lesson is particularly relevant for countries and states facing elections and considering populist spending measures.

Conclusion

Political freebies represent a complex intersection of democratic politics and economic policy. While proponents argue that certain free services can contribute to economic growth and social welfare, the case of Sri Lanka demonstrates the potential consequences of unsustainable freebie programs. The economic crisis in Sri Lanka, precipitated by tax cuts and extensive free services without proper economic planning, serves as a warning about the importance of maintaining fiscal sustainability even when making popular promises.

As evidenced by the concerns expressed by Indian bureaucrats and economic experts, many regions face similar challenges in balancing political expectations with economic realities. The Sri Lanka experience underscores the importance of maintaining healthy debt-to-GDP ratios and avoiding policies that could lead to economic instability, even when they offer short-term political benefits.

Sources

1. Political Freebies: Importance, Limitations, Issue and Challenges
2. Freebies
3. Lessons from Sri Lanka: Politics of freebies has serious repercussions
4. Poorly-Directed Freebies May Have Adverse Economic Impact. Sri Lanka Best Example: Experts
5. Poorly-directed freebies may wreak havoc on state finances and have adverse consequences on the economy as in the case of Sri Lanka, experts say while noting it is important to define a freebie and how it is different from welfare expenditure.
6. High debt, freebies galore: Indian states may soon face Lanka-like crisis
7. States may go the Lanka way with too many freebies: Bureaucrats to Modi