Freebies Over Future: How Fiscal Populism Is Pushing States Into A Debt Trap

The union government has exhibited an impressive degree of fiscal prudence over the past decade. But some states are fiscally profligate and are facing ways and means problems on a regular basis and getting into a debt trap.

As a result, their capital investments are inadequate, and future growth is retarded. It will be useful to understand how some of the state governments are mired in fiscal crisis so that remedial steps can be taken to redress the situation.

A democratic government assumes office and survives in power with the consent of the people. It is always relatively easy and tempting to entice the voters with short-term, tangible, and individual welfare programmes that put money into their pockets immediately, rather than investing in collective needs and the long-term future.

This reconciliation of short-term desires with long-term good is difficult even in families, but the bonds of love, trust and loyalty make difficult choices easier. Also, as families are frugal and care for outcomes, the benefits of working for a better future are relatively easy to appreciate.

But in the public domain, there is always a healthy scepticism of the government’s intentions and capacity to deliver the long-term good, and there is a tendency to opt for immediate benefits at the cost of the future.

Short-term maximisation of benefits is exacerbated when corruption is ubiquitous, service delivery is poor, and public expenditure is often not resulting in public good. Even in rich countries and mature democracies, this tendency to indulge in unsustainable individual welfare is evident.

In the United States, about 43 million people, or one-eighth of the population, are on food stamps, the equivalent of free rations in India. In Germany, a robust and powerful economy not too long ago, there is a sense of crisis as welfare expenditure is unchecked and productivity is stagnating.

In the UK and France, too, unsustainable welfare, low investment in the future, and demographic changes with increased life spans are making it difficult to manage public finances. If rich countries are finding it difficult to protect the future, we can imagine the challenges poorer countries face.

In general, in India the government spends more to produce less. The average wage bill of a government employee is most often two to three times what a worker is paid in the market for the same job! The difference is in the competitive market there is accountability, and the worker has to produce quality goods or services the consumers are willing to buy. Otherwise, the business will fail, and the worker will have no livelihood.

As the government enjoys a monopoly and collects taxes by force, whether people get quality services or not, and the employee has lifelong job security, there is no accountability, and often money is spent without any benefit to people. Education is a classic example. For any society, particularly our society, quality education and skills are vital to grow the economy and create jobs.

Governments are spending vast sums on education. In several states, per-child expenditure in schools is over Rs 100,000. And yet the outcomes are appalling! Similarly, many services in government are of poor quality, and people feel cheated.

As a result, parties rely on short-term, tangible welfare at the cost of long-term public good to entice voters. Free power, free food, free water, monthly welfare payments, and many other forms of what are loosely called ‘freebies’ have become the staple of our electoral politics.

Unsustainable welfare at the cost of the core functions of government and collective needs of people only perpetuates mass poverty and undermines the future of the children. Some states and political parties have been reasonably good at balancing short-term welfare with long-term good. Odisha, Uttar Pradesh, Gujarat, and Maharashtra are examples of prudent management of public finances.

But some parties have abandoned even the pretence of building a better future and are focused on maximising short-term individual benefits at the cost of the future. Andhra Pradesh between 2019 and 2024 was an example of an efficient welfare system with very little focus on infrastructure and investment.

The current government in AP has further increased short-term welfare expenditure, deepening the fiscal crisis, though there is also an emphasis on infrastructure and investment. The current governing parties in Punjab, Himachal Pradesh, Telangana, and Karnataka have opted for unsustainable welfare. As a result, relatively rich states are mired in fiscal problems (Telangana and Karnataka), or states already struggling are in crisis.

The promises made to the electorate in Bihar are an extreme example of the impending fiscal crisis and future collapse if remedial steps are not taken quickly. These promises include about 1.25 crore youth to get government jobs (a minimum cost of Rs 450,000 crore per year without any benefit to people), 10.64 lakh Jeevika Didis (community mobilisers) to get permanent jobs (Rs 38,000 crore), direct benefit transfer to women at Rs 2500 per month (Rs 30,000 crore), unemployment allowance of Rs 2000 per month (Rs 19,000 crore), every household to get 200 units of free power (Rs 7500 crore), free health insurance up to Rs 25 lakh to all the poor (Rs 8-10,000 crore) and reverting to old, unfunded, defined benefit to all government employees (potential additional cost running up to Rs 50-100,000 crore per year in the future!).

The cost of these promises amounts to an outrageous Rs 5,50,000 crores per year and a further burden of Rs 50,000-1,00,000 crores per year for pensions in the future at current prices.

Remember, Bihar's GSDP is Rs 9,91,000 crore, and the electoral promises made now will, if implemented, entail a total annual expenditure well in excess of the total wealth produced by all the people of Bihar! Even 100% taxation will not be enough to meet government expenditure! The danger to the country and the future of our children is clear, present and imminent.

There is a potential disaster undermining our future. But all is not lost. If we act with some wisdom and restraint, we can retrieve the situation, protect the future, and balance the short-term desires with long-term needs. Let us look at the realistic options in the next column.

The author is the founder of Lok Satta movement and Foundation for Democratic Reforms. Email: drjploksatta@gmail.com / Twitter@jp_loksatta

Published on: Wednesday, November 05, 2025, 04:14 AM IST