Freebies galore: The 16th Finance Commission warns against them and so does ancient history

Within two generations, it had become free distribution. By the Augustus era, 200,000 Romans were on the rolls; by the Aurelian, 600,000, and pork had been added to the ration.

Historians still argue whether this generosity strengthened Roman cohesion or hastened the ruin of its treasury. It was probably both.

The Asian Development Bank (ADB), in a study commissioned by the 16th Finance Commission (FC), has added up India’s subsidies and transfers with unusual thoroughness.

The numbers are not reassuring. Start with their scale.

The Union government spent ₹6.33 trillion on subsidies and transfers in 2023-24, up from ₹2.76 trillion in 2018-19, a compounded annual growth rate of 21%. This is before one adjusts for what governments prefer not to report. The ADB study found that official figures undercount actual subsidy expenditure by about ₹3 trillion at the state level alone; dozens of schemes, pensions, loan waivers, investment promotion subsidies and electricity shortfalls are simply not classified as subsidies.

Now add off-budget borrowings. For instance, Andhra Pradesh has parked ₹35,100 crore of food subsidy liabilities in its Civil Supplies Corporation and has ₹26,466 crore in power discom debt. Kerala has quietly accumulated ₹11,733 crore in off-budget social security pension liabilities through a corporation created for that purpose. The numbers that governments report and what they owe rarely match.

The 16th FC notes that state unconditional transfers have grown at 28.8% annually since 2018-19 and are projected to reach ₹4.14 trillion in 2025-26. Large-group cash transfer schemes grew 53.6% over the same period. In 2018-19, only Telangana allocated more than 10% of its revenue expenditure to unconditional transfers. By 2025-26 budget estimates, nine states are at that level.

The composition of what India calls a subsidy has shifted too. Unconditional cash transfers, which accounted for 16% of state subsidy spending in 2018-19, are projected to account for 47.4% by 2025-26.

The pendulum has swung from subsidized food to cash handouts, which distort the economy less but are no less fiscally treacherous if done without close targeting.

This matters because money is finite. The 16th FC found a statistically significant negative relationship between subsidy expenditure and capital outlay. Every rupee that goes into an unconditional transfer is, at the margin, a rupee that does not build a road, school or a hospital.

Six of India’s nine states spending over 5% of revenue expenditure on unconditional transfers have a revenue deficit. In effect, they are borrowing to give money away.

Now consider what the money actually buys. In Tamil Nadu, 89.5% of all households receive free electricity, 85.2% of the wealthiest quintile included. In Punjab, 75.1% of the richest households get free power.

The 16th FC calls this “somewhat regressive.” These states are spending thousands of crores subsidizing electricity for people who can comfortably pay for it, while pleading fiscal stress when it comes to settling their electricity discom dues. Punjab’s power subsidy consumed 15.5% of its total revenue expenditure in 2023-24. Across all Indian states, the total electricity subsidy bill reached ₹2.60 trillion, more than double the ₹1.29 trillion figure of 2018-19.

The power sector deserves a special mention because it illustrates how the same problem haunts us even after repeated discom bailouts, revealing perfect institutional memory and little institutional learning.

The Centre restructured discom debt in 2001. It restructured it again in 2012 via the Financial Restructuring Plan, which only seven states signed up for and none met its improvement conditions. It restructured it once more in 2015 through Uday, under which states issued ₹2.32 trillion in bonds. Total discom debt today stands at ₹7.42 trillion, up from ₹4.71 trillion in 2018-19.

We have seen three bailouts in 25 years. The 16th FC diplomatically calls this a “loss-debt-bailout cycle.” A less diplomatic observer might call it a perpetual motion machine, except that the ‘energy input’ in this case is the taxpayer’s money.

Then there is the question of who is actually receiving these subsidies. Andhra Pradesh found that 9% of its social security pension beneficiaries were ineligible or wrongly included. Another 0.6%, on examination, were found to be deceased.

The 16th FC’s recommendations are sensible: sunset clauses for non-merit transfers, rigorous exclusion criteria, no off-budget borrowing for subsidy financing and standardized disclosure across states. The ADB study adds independent fiscal monitoring and performance-based conditionalities. None of this is new. The 13th FC had said much the same. The 14th and 15th FCs echoed it. Now the 16th FC has said it again.

The problem isn’t diagnosis. The ailment is well known. But will the political economy of competitive federalism, where states watch each other’s transfer schemes the way traders watch index futures, permit any government to be the first to stop?

Gaius Gracchus, incidentally, was killed for trying to reform the Roman grain dole, not for creating it. Posterity noted the irony. Perhaps ours will too.

The author is a public policy professional.