There Should Be An Informed Debate On What Freebies Are: Ex-Finance Minister P Chidambaram

As long as a state has the capacity to borrow and the capacity to service the debt, we should not worry too much about the expenditure on health, education and other welfare measures, said Former Union Finance Minister P Chidambaram in an interview with Outlook.

Former Union Finance Minister P Chidambaram

Prime Minister Narendra Modi's recent comment on freebie schemes has kicked up a row in the political corridors. The subsequent debate over it has divided the parties into two schools of thought — one supporting freebies as welfare measures and second dubbing it as a ‘revdi culture’.  

In an interview with Rajiv Nayan Chaturvedi, senior Congress leader and former Union Finance Minister P Chidambaram shared his thoughts on the ongoing debate, the current economic situation of the country, and much more. Edited Excerpts:

Inflation is at its peak around the world. In the United States, this figure is at the highest level in four decades. In India also, the situation does not seem to be particularly good. How seriously do you think the inflation concerns us?

Whether inflation in India has peaked or not cannot be predicted now because not all the causes of the current inflation are under the control of the government. For example, the prices of crude oil and several commodities are not determined in India or by India. Among non-economic factors, for example, whether the Ukraine-Russia war will end or continue or intensify is not under the control of the government.

The point is not whether inflation has peaked. The point is whether inflation is outside the RBI’s comfort zone of 4 +/- 2 per cent.  The answer is “yes” and that is a cause for worry. RBI’s latest assessment is that inflation will not moderate to 4 per cent until 2024 and that is certainly a cause for worry.

Taking on 'freebie' schemes, Prime Minister Narendra Modi has said that they will have to be uprooted from politics. Being the former finance minister of the country, what is your stand on this?

When I was Finance Minister, I commissioned and published a study on subsidies. That report made a distinction between ‘merit’ subsidies and ‘non-merit’ subsidies. Merit subsidy was defined as a subsidy that has many ‘externalities’, that is to say, other indirect benefits. The PM must specify which, according to him, are merit subsidies that deserve to be continued and which are non-merit subsidies. And he must state his position on each present-day subsidy. If he and the power minister think that free power or subsidised power is a subsidy, I would argue that a limited quantity of free electricity is an “essentially good” and a basic human right. It is not a revdi as depicted by the government.  

Such examples can be multiplied. Therefore, instead of making sweeping statements, the government should spell out its position on each subsidy including (i) the corporate tax cuts; (ii) write off of bank loans to corporates; (iii) production-linked incentive (PLI) scheme; and (iv) price obtained in 5G spectrum auction.  

I do not say that ‘A’ subsidy is bad or ‘B’ subsidy is good. My argument is that there should be an informed debate instead of branding all subsidies- especially to the poor- as revdi.

Recently, RBI released a report titled State Finances: A Risk Analysis in which the apex bank expressed serious concern over the expenditure of states on subsidies. What is your take on this report?

Fiscal health is important. So are human development indicators (HDI). We have to balance the interests of future generations and the present generation.  As long as a state has the capacity to borrow (which, by the way, is approved by the central government) and the capacity to service the debt, we should not worry too much about the expenditure on health, education and other welfare measures. A faster GDP growth rate, helped by better HDI, will stabilise the fiscal position of the State.

What are the challenges facing the Indian economy?  What should be the government's approach to deal with this?

The economy is facing many challenges. I shall list the most important challenges but I do not think the NDA government has the capacity or wisdom to address those challenges. So, I shall not give them any advice. 

The main economic challenges are: Fiscal deficit, current account deficit (CAD), trade balance, inflation, low expenditure on health and education, low gross fixed capital formation (GFCF), pre-empting tax revenues and sharing less than 30 per cent with the States, and the GST muddle. 

There are other challenges too.  Besides, there are political, security, and social challenges.