22 Mar 2016 21:07 IST

Freebies: the Indian version of ‘people’s QE’

There is a need to take a more nuanced look at freebie culture

A recent Bloomberg news report talked about how a group of physicists in Europe worked out a model to portray the growing income inequality in the world and its debilitating impact on the economy. Though the issue of inequality has been drawing attention in the recent past, especially after Thomas Piketty’s Capital in the 21st Century, this is perhaps the first time scientists have grappled with this issue. The findings of these physicists are not surprising, though they have painted a grimmer view of inequality prevailing in the world.

The interesting part of this news report was the policy solutions thrown up by the study to combat inequality. The report says that in an economy driven by inequality, capital tends to flow from the poorer sections to the richer sections, and so, to ‘pump prime’ the economy, it would be better to give money directly to the poor and spur economic activity.

Helicopter money

So the interesting conclusion here is that the traditional quantitative easing will not work very well in economies with high levels of inequality, as this tends to “boost wealth at the top end of the distribution”. Under quantitative easing, the government purchases bonds and injects liquidity into the system and encourages spending by boosting prices of stocks and bonds. What the study prescribes as an alternative is ‘people’s quantitative easing’ where money is given directly to the poor to spur the economy, also known as ‘helicopter money’.

People’s quantitative easing was also proposed by UK Labour Party leader Jeremy Corbyn last year. Corbyn wanted the Bank of England to be given the mandate to invest in housing, green energy industries and transport which was expected to benefit the lives of the vulnerable sections. His criticism of the traditional quantitative easing was that it was put in place to rescue the battered financial sector in the aftermath of global financial crisis and had little impact on the real side of the economy and the economically weaker sections.

Indian angle

Now my question is: can the policy of ‘freebies’ — giving consumer durables such as TV, grinder bicycles, washing machines, etc — to the poor be seen as a variant of ‘people’s quantitative easing’? After all by providing these goods to the poor, isn’t the State helping these people save money which they can spend on other important things like education or health?

Tamil Nadu is seen as a pioneer in spreading the freebie culture. This culture has come in for severe all-round criticism from economists, policy analysts, media and even politicians. There is at least one regional party in Tamil Nadu which has come out strongly against freebie culture and has been strongly campaigning against this. Their argument is that instead of giving freebies the State should focus on improving infrastructure and create an environment that boosts investments and jobs. The State’s focus on freebies and neglect of infrastructure also came in for severe criticism when Chennai and few other parts of Tamil Nadu were hit badly by floods last December.

Though these criticisms are valid, my argument is a balance can be achieved between providing freebies on the one hand, and infrastructure investment and job creation on the other. After all the ‘Amma canteens’ set up in Tamil Nadu where food is provided at subsidised rates has come in for much praise with a few other States like Telangana, Rajasthan, Maharashtra and Delhi wanting to replicate it. Even a delegation from Egypt visited Tamil Nadu to explore the feasibility of setting up such canteens.

So may be it’s time to take a more nuanced look at the freebie culture – a unique Indian variant of ‘people’s quantitative easing’.

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