SBI warns against freebies, says have huge fiscal costs

The State Bank of India has in its economic report warned against freebies, saying they have large fiscal costs and cause inefficiencies by distorting prices and misallocating resources.

Citing an example of just three states, the report written by group chief economic adviser Soumya Kanti Ghosh said annual pension liabilities of Chhattisgarh, Jharkhand and Rajasthan are estimated at ₹3 lakh crore.

It suggested that the Supreme Court-led panel cap such welfare schemes at 1% of the state's GDP or 1% of its own tax collection.


The report added that when looked at in relation to these states' own tax revenues, pension liabilities are quite high for Jharkhand, Rajasthan and Chhattisgarh at 217%, 190% and 207% respectively.

The report also flagged the off-budget borrowings of states, which are loans raised by state-owned entities and guaranteed by the states, to have reached around 4.5% of GDP in 2022.

"If we look at the state budgets, election promises recently made for forthcoming state elections range from 0.1-2.7% of GSDP (gross state domestic product) for different states and around 5-10% of own tax revenue of the states," the report said.

Such guarantee amount is significant at 11.7% of GDP for Telangana, 10.8% for Sikkim, 9.8% for Andhra Pradesh, 7.1% for Rajasthan and 6.3% for Uttar Pradesh.

Sector-wise, while the power sector accounts for almost 40% of these guarantees, other beneficiaries include sectors like irrigation, infrastructure development, food and water supply, and the extent of such guarantees have achieved a significant proportion of GDP for various states.

"If we include the contingent liabilities along with freebies, then they come to around 10% of the GSDP for all the states combined. We must find a solution to this all-encompassing problem of fiscal hara-kiri," the report added.

It also said that equating the haircuts with freebies or even the loan write-offs is at best a deeply flawed argument, adding that such loan write-offs are purely technical in nature and are added back to bank books once recovered.