FREEBIES, REVDIS AND MERIT GOODS

 Introduction

        In a recent public meeting, the Prime Minister (PM) of India stated, "Today in our country, attempts are being made to collect votes by distributing free revdis [an Indian sweet]".[i] This statement of the PM has started a great debate on "freebies" that are promised by political parties and financed out of public funds. The issue is important and has a critical bearing on the public finances of the central and state governments. It is, of course, moot whether this was the appropriate way to initiate a serious discussion on controlling wasteful government expenditures.

        It is not my intention to parse the PM's words and decipher the target of his barbs. I want to explicate the issue of using public funds to provide goods/services for the benefit of the country's people. It turns out that economics has a lot to say about these issues and offers a critique of governments that misuse public funds for partisan ends. A vast literature on clientelism[ii], patronage,[iii] and populism[iv] views the provision of goods and services by the government as an exchange in return for votes. Such quid pro quo with voters is, of course, frowned upon by economists. Dani Rodrik notes in his paper on populism: "Economists dislike populism, and for good reason. The term evokes irresponsible, unsustainable policies that often end in disaster and hurt most the ordinary people they purportedly aim to help".[v]

Economic Rational for Government Intervention

        Is there a strong economic rationale for the government to provide goods and services to the people? There is indeed one in a situation of market failure. The connotation of market failure relevant here is a situation where the market does not supply the required good or service (either at all or in adequate quantity) even though there may be a strong demand for it. Market failure is most acute in the context of pure public goods discussed in the Appendix below. The category of goods implicated the most in the discussion on freebies is what Musgrave (1959)[vi] called merit goods.

Merit Goods

        Musgrave (1959) defines merit goods as those goods which can be priced and provided by the market and yet the government provides additional quantities of such goods using public funds. Kirchgassner (2014) notes that this description of merit goods conflicts with the notion that individuals are best placed to judge what is in their best interest and, hence, should be left free to decide for themselves. [vii] But, he also points out that, in recent times, Behavioural Economics has documented a variety of anomalies where individuals do not act in their own interests.

        The pricing of merit goods and the extent of their availability are important issues. Recipients may receive a 100% subsidy (i.e. a price of zero) or may have to pay a part of the price of the good or service. Further, the availability of the good may be universal or may be restricted based on specific criteria. Governments provide such a good/service if it:

Improves the welfare of the recipient: In the absence of the provision of the merit good, the welfare of the recipient would fall below the minimum acceptable level.

Provides a social benefit to society: Even though the individual receives benefits from the merit good, the society also benefits, e.g. basic education or basic health care, which is often heavily subsidised.

        It is important to ask if the merit good should be universally available. For example, till 1997, India's public distribution system was universally accessible.[viii] However, the oft-quoted remark of former PM, Rajiv Gandhi that only 15 paise of every rupee meant for the poor reaches the intended beneficiary[ix] led to a shift towards a better-targeted approach. The wasteful government expenditure due to the inclusion of undeserving beneficiaries (either through error or deliberately) in the coverage of merit goods gives urgency to the discussion on freebies.

        While much of the recent discussion has focused on freebies from the expenditure side, it is also important to consider tax revenues that are foregone, either on the grounds of welfare or social benefit. Arguments have been made that (a) personal income tax exemption limits should be increased to protect the welfare of the salaried groups[x] and (b) corporate income tax rates should be reduced to encourage corporates to use the income so saved for capital expenditure which has a social benefit.[xi]

Votes-Merit Goods Quid Pro Quo

        Standard economy theory seems to believe that, even though individuals may maximise their own welfare, these same individuals seek to maximise social welfare when they form the government. The public choice approach points out this contradiction and asserts that political parties will create policies to gain or retain power in the next elections. Keeping the public choice approach in mind, I note that (a) ruling political parties use public funds to provide merit goods to voters in the hope of harvesting votes, and (b) challenger political parties promise to provide merit goods if voted to power.

        An illustrative list of merit goods which satisfy the two reasons for their provision – welfare of recipient and/or social benefit – is the following:

1.      Subsidised or free education

2.      Subsidised or free health services

3.      Subsidised or free food

4.      Free vaccination programmes

5.      Ujwala Yojana for the provision of clean fuels (LPG)

6.      Mid-day meal scheme for school children

        How does one judge whether the provision of these merit goods has the intended effect? For example, the mid-day meal programme of Tamil Nadu was criticised for waste of government resources by diverting resources from other better uses.[xii] In short, the programme was criticised as a freebie. However, over the last few decades, it has been recognised as an essential intervention in improving nutrition and school enrollment. Likewise, the Ujwala Yojana may be criticised for not permanently weaning away households from traditional fuels which have an adverse impact on health (mainly of women) but can anyone challenge the welfare objectives of the scheme? [xiii]

        Does the provision of such merit goods yield political dividends to the ruling political party or a challenger party that promises such goods? A large amount of literature in this area has supported the view that economic factors influence voters.[xiv] Deshpande and others did find that voters rewarded the BJP for their welfare schemes, especially in the areas where the party was already strong.[xv]

        Whether voters reward political parties that promise them merit goods is a complex question that I do not explore here. Whatever the answer to that question, political parties will seek to exploit this possibility if they believe they may get even the slightest advantage from making such promises. Beyond promises of merit goods, political parties have also sought to attract votes by distributing sarees[xvi] and colour TVs.[xvii] How does one estimate what proportion of expenditure on goods and services provided by central and state governments has been on genuine merit goods and on freebies (i.e. goods which have neither a welfare dimension nor a social benefit dimension)? To the freebies component must also be added the expenditure incurred by deliberately including undeserving beneficiaries in the distribution of merit goods.

        Given the power to provide merit goods, the decision-making of political parties can also be influenced by lobbying. Special interest and lobbies will try to coax the ruling party to provide them with goods which may not have the qualities of merit goods or lobby to get cuts in tax rates.[xviii] It should be evident that, as the provision of merit goods and tax breaks expand, there is increasing stress on the government's public finances.

Conclusion

        Apart from the political fireworks that have erupted from the revdi swipe by the Prime Minister, the critical question is whether the problem of excessive promises of merit goods can be solved outside the sphere of politics and economics. From an economics point of view, the issue is clearly one of fiscal sustainability. An indiscriminate expansion of expenditure on undeserving merit goods may reduce the fiscal space available to the government and may crowd out other more essential expenditures. However, India has developed institutional mechanisms (albeit imperfect ones) to control irresponsible spending by governments. Fiscal Responsibility Legislation, passed by both central and state governments in India, is an important mechanism to usher in fiscal discipline.[xix] This legislation imposes limits on central and state governments' debt as well as on their deficits. In addition, the recommendations of the various Finance Commissions provide one more check on the fiscal performance of central and state governments.[xx] For instance, the Fifteenth Finance Commission's Report recommends grants to states based on specific performance indicators while also recommending limits on levels of debt and deficits.[xxi] [xxii]

        Beyond the institutional controls that may be imposed on governments, the voice of the electorate should be the most important, whereby governments are rewarded or punished based on their performance. A political party that makes bombastic, non-credible promises to the voters will lose its credibility in the electoral market, while a party that delivers on its promises will gain the trust of the voters. After all, this is an essential function of elections. I write this bearing in mind that elections are not necessarily won or lost based on a rational evaluation of performance and that ideological factors may also play a significant role. Bryan Kaplan notes that voters are often irrational and sometimes selectively so: "We habitually tune out unwanted information on subjects we don't care about" (p.2).[xxiii] Hence, voters might be forgiving of a political party that matches their ideology, and they may turn a blind eye to its poor performance.

        The PIL currently being heard in the Supreme Court in connection with freebies is a dead end, given that it might be impossible to define a freebie or distinguish it from a merit good. A Supreme Court judgement deciding what governments can or cannot spend on will play havoc with the democratic system in India. It will tie the hands of governments for the foreseeable future and reduce the flexibility and discretion that may be critical for policy formulation. Imagine the Indian government wasting precious resources and time trying to convince the judiciary that free vaccination against COVID was not a freebie! Any intervention by the Supreme Court on this issue will constitute extreme judicial overreach.

 

APPENDIX

Pure Public Goods

        The category of goods known as pure public goods must be provided by the government even in the most capitalist economies. The presence of public goods leads to complete market failure, and the supply of such goods will be zero if left to the market. Why is this so? Two qualities characterise a pure public good:[xxiv]

Non-rivalness in consumption: More than one person can consume the same unit of a good at the same point of time. For example, numerous persons can stand under a street light and receive its benefits at the same point time. The good is not depleted or exhausted in the process of consumption

 Non-exclusion: It is impossible or very costly to exclude individuals from consuming a good even if they do not pay. Imagine getting individuals to pay for a street light every time they pass under it. Exclusion may be costly in some cases: you need turnstiles and ticket-checkers to prevent individuals from using the train services without paying for them.

        When both of these qualities are present, no individual consumer will have an incentive to volunteer payment for the good; hence, no private producer can cover the cost of providing such goods.[xxv] In such cases, the government must provide these goods. Please note that a distinction is being made between producing a good and providing it. The classic example of a pure public good is defence services. But, even in this case, private producers may produce the defence equipment that is sold to the government, which, in turn, provides defence services to the people. Obviously, such goods cannot be termed as freebies or revdis. A political party that does not commit to providing such goods will severely compromise the welfare of its people. A complex question I do not explore is how the government decides how much of the public good to provide.[xxvi]

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[i] Express News Service (2022) PM slams freebie politics: Revdi culture dangerous, need to end it, https://indianexpress.com/article/cities/lucknow/pm-slams-freebie-politics-revdi-culture-dangerous-need-to-end-it-8034057/

[ii] Pranab Bardhan and Dileep Mookerjee (2016) https://edi.opml.co.uk/wpcms/wp-content/uploads/2018/07/EDI-PF-PAPER-10.III_.5-Bardhan-and-Mookherjee-1.pdf

[iii] Naseemullah (2021) https://www.tandfonline.com/doi/pdf/10.1080/14662043.2021.1910397

[iv] Dani Rodrik (2018) Is Populism Necessarily Bad Economics?, AEA Papers and Proceedings 2018, 108: 196–199, https://scholar.harvard.edu/files/dani-rodrik/files/is_populism_necessarily_bad_economics.pdf

[v] Dani Rodrik (2018), page 196.

[vi] Musgrave R.A. (1959) The theory of public finance : a study in public economy, McGraw-Hill, New York

[vii] Kirchgassner, G. (2014) Soft Paternalism, Merit Goods, and Normative Individualism, https://www.econstor.eu/bitstream/10419/96867/1/cesifo_wp4688.pdf

[viii] Swati Narayan (2021) Time for Universal Public Distribution System: Food Mountains and Pandemic Hunger in India, Indian Journal of Human Development, https://journals.sagepub.com/doi/full/10.1177/09737030211049007

[ix] Press Trust of India (2017) ‘Only 15 paise reaches the needy’: SC quotes Rajiv Gandhi in its Aadhaar verdict, Hindustan Times, https://www.hindustantimes.com/india-news/only-15-paise-reaches-the-needy-sc-quotes-rajiv-gandhi-in-its-aadhaar-verdict/story-I8dniDGXF6ksulggTDgb9L.html

[x] Rituraj Baruah (2022) Increase in income tax exemption limit among top expectations from Budget: KPMG, Live Mint, https://www.livemint.com/budget/news/increase-in-income-tax-exemption-limit-among-top-expectations-from-budget-kpmg-11642780834832.html

[xi] Aditya Murlidharan and Prasanna Tantri (2022) Corporate tax cuts do boost investments, Hindu Business Line, https://www.thehindubusinessline.com/opinion/corporate-tax-cuts-do-boost-investments/article64938246.ece

[xii]  Padmini Swaminathan, J. Jeyaranjan, R. Sreenivasan and K. Jayashree (2004) Tamil Nadu's Midday Meal Scheme: Where Assumed Benefits Score over Hard Data, Economic and Political Weekly , Oct. 30 - Nov. 5, 2004, Vol. 39, No. 44 (Oct. 30 - Nov. 5, 2004), pp. 4811-4821, https://www.jstor.org/stable/4415741#metadata_info_tab_contents

[xiii] Abhishek Mishra (2022) Ujjwala scheme beneficiaries in UP resort to old cooking methods as LPG prices skyrocket, India Today, https://www.indiatoday.in/india/story/ujjwala-scheme-beneficiaries-up-old-cooking-methods-lpg-prices-skyrocket-1972948-2022-07-07

[xiv] Gebhard Kirchgässner (2016) : Voting and Popularity, CESifo Working Paper, No. 6182, Center for Economic Studies and ifo Institute (CESifo), Munich, https://www.econstor.eu/bitstream/10419/149269/1/cesifo1_wp6182.pdf

[xv] Rajeshwari Deshpande, Louise Tillin, and KK Kailash (2019) The BJP’s Welfare Schemes: Did They Make a Difference in the 2019 Elections? Studies in Indian Politics. 2019;7(2):219-233, https://journals.sagepub.com/doi/abs/10.1177/2321023019874911

[xvi] Ashish Pandey (2014) EC says no to Bathukamma saree distribution in Telangana, India Today, https://www.indiatoday.in/india/story/trs-kcr-bathukamma-saree-distribution-scheme-telangana-ec-congress-1355877-2018-10-04

[xvii] PTI (2011) EC orders stoppage of free colour TV distribution in TN, The Hindu, https://www.thehindu.com/news/national/tamil-nadu/EC-orders-stoppage-of-free-colour-TV-distribution-in-TN/article14944523.ece

[xviii] See Mancur Olson (1971) Logic of Collective Action, Harvard University Press, Harvard

[xix] PRS Legislative Research (2017) Report Summary – FRBM Review Committee, https://prsindia.org/files/policy/policy_committee_reports/1493207354_FRBM%20Review%20Committee%20Report%20Summary.pdf

[xx] Finance Commission (undated) Finance Commissions – A Historical Perspective, https://fincomindia.nic.in/ShowContent.aspx?uid1=2&uid2=1&uid3=0&uid4=0&uid5=0&uid6=0&uid7=0

[xxi] Finance Commission (2020) Finance Commission in COVID Times: Report for 2021-26, https://fincomindia.nic.in/ShowContent.aspx?uid1=3&uid2=0&uid3=0&uid4=0&uid5=0&uid6=0&uid7=0

[xxii] PRS Legislative Research (2021) Report of the 15th Finance Commission for 2021-26, https://prsindia.org/policy/report-summaries/report-15th-finance-commission-2021-26

[xxiii] Bryan Kaplan (2007) The Myth of the Rational Voter, Princeton University Press, Princeton

[xxiv] Julian Reiss (2021) Public Goods", The Stanford Encyclopedia of Philosophy (Fall 2021 Edition), Edward N. Zalta (ed.), https://plato.stanford.edu/archives/fall2021/entries/public-goods/

[xxv] The two qualities of pure public goods mentioned above need not be present at the same time and this gives rise to a variety of goods as detailed in the table below:

Characteristics	Rivalness in Consumption	Non-rivalness in Consumption
Exclusion	Private Goods (e.g. ice cream, masala dosa)	Club goods (Fitness centre, train/plane journey)
Non-exclusion	Common resource stock (e.g. groundwater, fish stock)	Pure public good (e.g. defence services, street lights)

 [xxvi] Dennis Mueller (2014) Public Choice, Social Choice, and Political Economy, https://crem-doc.univ-rennes1.fr/wp/2014/2014-03-ccr.pdf. Mueller provides a discussion of a variety of mechanisms that may be used to determine the quantity of public goods.