Freebies & states’ fiscal reality
The recent observations of the Supreme Court of India on the expanding culture of electoral giveaways revive a fundamental constitutional and economic question. How can a welfare state reconcile social justice with fiscal discipline? The apex court observed, “Most states… are revenue deficit, and yet they are offering such freebies.”
It asked, “What kind of a culture are we developing?” In a country marked by structural inequality, redistributive policy is not optional. It flows from constitutional commitments to equality and economic justice.
The challenge arises when electoral competition converts budgetary policy into an escalating contest of untethered promises whose long-term fiscal implications are opaque. India’s constitutional framework is explicitly welfare-oriented. The Directive Principles of State Policy require the states to reduce inequality, and promote social and economic justice. Public spending on food security, employment guarantees, education, and health is part of a design. The concern is not welfare, but the design and financing of schemes that prioritise consumption, and do not integrate them into a sustainable fiscal framework.
From an economic standpoint, every fiscal decision carries an opportunity cost. Resources devoted to universal consumption subsidies or recurring loan waivers are resources that are not invested in crucial infrastructure, climate resilience, judicial capacity, or public health systems. Capital expenditure generates productivity gains and long-term growth dividends. Recurrent revenue expenditure, especially when politically timed, often produces limited economic returns. Persistent expansion of revenue commitments without commensurate revenue mobilisation widens fiscal deficits. Borrowing consistently, and in huge amounts, to finance current consumption shifts the burden onto future taxpayers, raising concerns of intergenerational equity.
In a federal system, unsustainable state-level debt accumulation can increase borrowing costs for the broader economy, affecting macroeconomic stability. Incentive distortions compound the fiscal concern. Universal free electricity can detach consumption from costs, encourage overuse (even misuse), and intensify groundwater depletion. Repeated farm loan waivers may weaken credit discipline, and raise moral hazard in rural lending markets. When prices cease to reflect scarcity, economic signals weaken and efficiency declines.
None of this suggests that welfare spending is inherently imprudent. Targeted transfers that correct market failures, build human capital, and support vulnerable households can strengthen inclusive growth. The distinction lies in whether public spending enhances capabilities or merely fuels short-term electoral advantage.
Comparative experience is instructive when institutional structures are similar. India’s situation resembles other large federal democracies that combine electoral competition with high inequality and fiscal pressure.
Brazil provides a relevant example. As a federal democracy with pronounced regional disparities, it faced political incentives to expand redistributive programmes. Its Bolsa Família initiative consolidated fragmented welfare schemes into a targeted conditional cash transfer system. Benefits were directed to low-income households, and linked to social measures and metrics like school attendance and health checkups.
Crucially, the Brazil welfare schemes operated within a Fiscal Responsibility Law that imposed borrowing limits on sub-national Governments. Redistribution was integrated into fiscal rules rather than detached from them. Poverty reduction progressed alongside macroeconomic stability. Hence, unlike India, there were limits to the welfare mindset. Indonesia offers another parallel. It confronted politically-entrenched fuel subsidies that strained public finances, and distorted energy consumption. Instead of sustaining universal subsidies, it gradually reduced them while introducing direct cash transfers to vulnerable households. Savings were redirected toward infrastructure and social investment. Reforms required political capital, but it preserved fiscal credibility while protecting vulnerable citizens.
India faces comparable distortions in electricity pricing, water use, and agricultural credit. The relevance of these examples lies in structural similarity. Each country navigated electoral pressures while redesigning subsidies to align welfare objectives with fiscal sustainability. The shared lesson is institutional discipline. Welfare measures were transparently costed, targeted at identifiable beneficiaries, and integrated into medium-term fiscal planning. Political leadership acknowledged tradeoffs, and did not obscure them. India possesses institutional tools to support such reforms. The Direct Benefit Transfer system reduces leakage, and improves targeting. Fiscal Responsibility legislation provides a framework for deficit management, though enforcement requires strengthening. Legislative scrutiny of pre-election fiscal commitments, and mandatory disclosure of long-term cost projections will reinforce democratic accountability. As the Indian Supreme Court observed, “It is understandable that as part of the welfare measure, you want to provide to those who are incapable to pay…. But without drawing a distinction between those who can afford, and those who cannot, you start distributing.”
From a law and economics perspective, four principles need to guide the welfare designs of the Centre and states. First, any scheme must address a clearly-identified social need or market failure. Second, targeting should focus on vulnerable groups, rather than lead to universal extension across sections and segments without any differentiation. Third, the fiscal costs must be transparently disclosed, and debated within the respective legislatures. In many cases, while interim costs are evident, the long-term burden on the budgets are lost, or not accounted for. Fourth, sustainability within medium-term fiscal projections must be demonstrated before implementation.
Hence, the recent Supreme Court’s remarks need to be understood as an institutional caution rather than a hostility toward welfare schemes. Courts are not the architects of fiscal policy, but they serve as guardians of constitutional balance. When electoral incentives weaken budgetary discipline, long term developmental objectives are naturally and logically jeopardised. They may have social consequences, as the apex court maintained. If a state provides free food, free electricity, other items like cycles, then there is a reduced incentive to work, and such largesse impacts the work culture, stated the Court.
Democracy requires compassion, but it requires credibility. Promises that expand capabilities, strengthen health systems, improve education, and provide basic amenities to the beneficiaries that need it urgently can enhance resilience and growth. Instead, promises that focus on immediate consumption, and across sections, rather than limited ones, without fiscal planning risk, weaken the social contract they seek to reinforce. The debate on electoral giveaways is therefore not a choice between redistribution and reforms. It is about responsible governance. Fiscal credibility and social justice are complementary pillars of a stable constitutional democracy. The task before the policymakers, at both the central and state levels, is not to retreat from the welfare commitments. In a country with economic and social inequalities, such schemes are inevitable, and even noteworthy. But the aim and objective need to be to design them prudently within the limits of economic and fiscal realities. The states need to ensure that political compassion is matched by fiscal accountability. Or else, the state of states’ finances can go haywire.
The author is Associate Professor (Economics), Law and Public Policy, National Law University, Jodhpur ; views are personal
