PM’s comments on freebies put focus on finance panel’s suggestions

NEW DELHI: In recent years, there have been several instances of states working out borrowing arrangements which are not in line with the Constitutional provisions. But often the Centre fails to detect it in time despite the involvement of public sector banks.
PM Narendra Modi recently made references to freebies being doled out by states and the Supreme Court asked the Centre to consult the finance commission on the issue. As a result, the spotlight is back on how “irrational freebies” — often doled out ahead of polls — can be reined in.

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The Constitution mandates that Centre shares the tax revenue with states based on the Finance Commission’s recommendations. But there are several other recommendations that are not binding. There have been suggestions that some of the grants and the borrowing limits can also be adjusted if the states are seen to be indulging in wasteful expenditure through freebies.
But the bigger problem is who decides what constitutes freebies, said government officials and experts. The 15th Finance Commission and some of its predecessors have suggested the establishment of a neutral body in the form of a Fiscal Council to look at the records of the Centre and the states, although it was proposed to have only an advisory role.
Agovernment official said that this could be a starting point along with several other suggestions that were made, including public financial management reforms since several of the issues at the state level and the Centre are not
uniform.
NK Singh, who chaired the 15th Finance Commission, refused to comment specifically on freebies. He, however, said, “The issue of cross subsidy in multiple ways being distortionary has been debated for long. There are several ways of cross subsidy — cost of freight subsidising passenger fares in railways or one segment of power consumers subsidising another.
They undercut competitiveness and impact employment. Power is the most grotesque example of freebies, of flawed welfare economics neither guaranteeing welfare, much less growth. Merit subsidies, which are welfare-enhancing, must be distinguished from debilitating freebies. We must be mindful of inter-generational equity as well as obligations for sustainable development by adhering to national and international commitments. Some of the mechanisms (for reducing freebies) were articulated in the Finance Commission report submitted to the government”.
Power is the biggest freebie on offer across states and every political party, when in power, is guilty of not clearing dues of generation and distribution companies.