AAP is to economic sense what BJP is to social harmony. Disastrous

Both have defied common sense and pursued political power ruthlessly, without regard to long-term consequences

The current uninformed and political debate on freebies reminds me of a similar fuss during the early years of reform in 1992 and 1993. The Narasimha Rao-Manmohan Singh duo had been left with no option by Rajiv Gandhi’s spending spree during 1985-89 but to stop spending at once.

Subsidies were drastically pruned by them and the Congress was in turmoil. Two of its leading members, Arjun Singh and N D Tiwari, even quit the party to form their own party. Why, even Manmohan Singh, who was finance minister, offered to resign if he was part of the problem. Rao said “don’t be silly”.

It was also a time of frequent seminars on the reforms. I don’t know why but I was asked my opinion at one of those. I said the answer must lie in the capital and technology intensity of the thing being subsidised, that’s all.

The higher the capital and technology intensity, I said, the lower must be the subsidy. In a capital-scarce country like ours, things that required a lot of capital to produce couldn’t simply be given away free. Electricity was a case in point. A zero or best-zero price was a perfect recipe for bankruptcy.

India, I said, is the only country in the world that subsidises highly capital-intensive things and simultaneously charges a lot for low capital-intensity things like bureaucrats, who actually help slow down growth. No one paid any heed, of course, to this strange advice from a “mere journalist”.

But to the credit of politicians, for 25 years after that, the idea of reducing subsidies for most goods and services that didn’t deserve them came to be widely accepted. Even the CPI(M), after some shrill shrieking by its economists, fell in line.

An excellent account of the rationalisation of subsidies was given in the article by a fellow columnist young Rajesh Kumar this week. It was based on a 2019 paper by Sudipto Mundle and Satadru Sikdar. Mr Kumar says “it limited merit subsidies to food, primary and secondary education, health, water supply and sanitation. All other subsidies were considered non-merit or unwarranted”.

But what’s a democracy if tragedies don’t occur? In 2015 along came Arvind Kejriwal, whose AAP has become to economics what the BJP has become to social harmony. Both have deliberately defied common sense and pursued political power ruthlessly, without regard to long-term consequences.

Subsidies and outcomes

The finance minister declared in Parliament a few weeks ago that her government was not opposed to all freebies. After all, education and health simply had to be provided free to the poor.

I wish, however, she had added two elements to her defence of the policy of reducing subsidies, something that’s been going on for 30 years. One was the capital- and technology-intensity criterion and the other is the capital-creation criterion.

By capital creation I mean social capital that free education and health create. It’s no coincidence that all the states in India that have done well — barring UP and Bihar — have focused on the supply of free or very cheap education and health. Even, as it happens, West Bengal.

Mr Kejriwal has been absolutely right in focusing on health and education in Delhi. But his Budget has had a lot of financial support from the Centre. We will see how he fares in Punjab.

The real states are however completely different. They don’t have as much money so they spend less because bureaucrats have to be paid and subsidised.

That said — for what it’s worth — there is a contradiction even in the two ways I have suggested. Non-technical education is nowhere as capital and intensive to produce as, say, medical and engineering services are. There’s no harm in making such non-technical education free for the BA/BSc level.

But whether the teaching should be done by teachers who are given government jobs — they double up as election-duty officials during elections and helpers of the party in power afterwards — needs to be discussed. Ideally not. The answer is contract teachers.

And if you think about it you will see that this high capital intensity of technical education defines the issue very well because there are things which, even if they are highly capital-intensive to produce, the social capital outcome makes the free or highly subsidised provision worthwhile.

The IITs are a case in point. They are not free but still quite cheap compared to other countries. The outcomes, excepting for Mr Kejriwal, have made India very proud.