The costly politics of freebies

State debt and deficits do not capture the damage that doles inflict on the quality of public spending

- M GOVINDA RAO

The proliferation of subsidies and transfers for electoral gains at both the Union and state levels has raised concerns about the government's ability to provide buffers when the economy faces exogenous shocks such as the present West Asian crisis.

As the war continues, these vulnerabilities have become increasingly apparent, and the government may no longer be able to shield consumers from supply shortages, inflation, decelerating growth, exchange rate depreciation, and current account imbalance.

Energy prices have increased sharply and remain elevated as the hostilities continue in West Asia. With the Strait of Hormuz remaining closed, the prospects for a reduction in energy prices and an easing of supply disruptions appear unlikely in the near term. Every $10 per barrel increase in crude oil prices is estimated to raise the current account deficit by 0.4 per cent of gross domestic product (GDP).

The Reserve Bank of India (RBI) has already reduced the GDP growth forecast for the year to 6.6 percent from the 6.9 per cent projected earlier and has raised the inflation forecast from 4.6 per cent to 5.1 per cent. In addition to the war in West Asia, the rainfall deficit projected for the year will adversely impact the growth and inflation scenario.

In a healthy fiscal environment, both the Union and state governments can provide the buffer needed to protect the affected and vulnerable sections of the population. However, there is very little fiscal space to provide such a buffer. The freebies culture has permeated governments at both the Union and states and is being embraced by all political parties.