Free is costlier in reality

19 Jan

As elections are getting closer, political parties in India are announcing more and more populist schemes across India. None of the major national parties or prominent regional parties are exception to this.

Even though these populist schemes work in the short term to please masses (and in return fetch votes), the impact of these schemes are actually felt in the long run. Here are a couple of examples of what went wrong because of some of the populist schemes and how people are indirectly paying higher price for what they are getting for free.

Engineering Fees Reimbursement

The state of Andhra Pradesh started with this scheme a few years ago. The argument – instead of spending lot of money on government maintained colleges, the government will reimburse fee for people who can’t afford professional education (a.k.a. Engineering) in private engineering colleges. The scheme looked great for various sectors of the society. The government spent lot of money on this scheme in the last few years. Now let us see the net result.

  • The infrastructure in the government owned professional colleges became slowly obsolete.
  • The government college infrastructure for non-professional courses got completely collapsed. (For a test, try to think about a government college in Andhra Pradesh which can be seen as a best place for pursuing a Bachelors or Masters degree in commerce or fine arts. How many can you find?)
  • A small percentage of the mid income group are benefited by the scheme. This is the group which got seats in “good” engineering colleges and also got benefits of the reimbursements. For the rest of the people who enjoyed the reimbursement, they are forced to chose a college of lower quality or a engineering stream of lesser demand, just to enjoy the benefit.
  • A majority of mid income groups and low income groups got an engineering seat in (recently mushroomed) colleges that are of zero or very low quality, but this group happily took it because it is “free”. The attitude of “free” led to less efforts to excel from the students. The free phenomena also led to the situation where the colleges invest less on infrastructure and faculty. The consumers don’t question/complain and the suppliers don’t need to ensure quality. Once these students come out of college, they have very low scores, no exposure to the industry and just have a paper degree in hand after investing 4 years of their life on free stuff.
  • As a net result, we end up with spending lot of money for temporary benefit, no improvement in infrastructure even after spending that much money, overall benefit to a small subsection of people and a vast majority of benefactors eventually  realizing that their free benefits got nullified in the process.
Free Electricity

Free Electricity for farmers is a much touted about program in the state of Andhra Pradesh. Started with a big fanfare a few years ago by the government, this scheme eventually led to more losses for the economy than benefits:

  • Government spent most of its money on giving away free electricity than investing in power plants – both existing and new.
  • Private investments on power sector are encouraged than government enhancing its power production capability. However, the cost of power from these plants is much higher, given the commercial nature of the power plants (right from acquiring the land, they had to spend more money than what government would have spent on setting up plants.) Also, there is no assurance that these power plants sell power to the same state. During high consumption seasons like summer, these plants are selling power to high paying states than to the local distribution companies.
  • A section of farmers got free power, but that is no joy. Power is out most of the day and the supply is at odd hours. Due to load and distribution issues, power is of low quality and it impacted farmers’ infrastructure like motors and pumps. There are scenarios where farmers had to spend more on infrastructure issues due to bad quality free power than what they would have spent on good quality power.
  • As the power situation deteriorated, the government started imposing more restrictions on levies on consumers across the board. Like telescoping billing and ridiculously high tariffs during summer. Majority of the consumers are hard hit due to the free policies that gave little or no net benefit to the rest of the consumers.

There are several other populist schemes (within our state and rest of the country) that follow the same path: give an impression that the scheme is using saved money, pretend that the load on rest of the consumers is going to be low and tell that the benefits are huge. Eventually, the scheme leads to neglecting the production/infrastructure, leads to substantially higher costs for vast majority of consumers and lowers the quality to benefactors as well as rest of the paying consumers.

I am not completely against subsidizing or uplifting poor. As a developing country, the economy for sure needs certain levels of stimulus from governments both at the federal and state levels. This stimulus, only in certain critical sections, can be realized by giving well controlled subsidies. These subsidies shouldn’t be across the board, they should rather stimulate only the needy industries, production efforts and low income groups. The subsidy shouldn’t be so high that the full paying consumers feel the pinch. Once they feel the pinch, they either stop paying (by somehow enrolling themselves into the subsidy-needy groups) or stop consuming – both of these will lead to eventual increase in cost to everybody.

So when a government promises anything for free or at a highly subsidized price, it is actually making all of us to pay higher in the long run. Hope we realize that and make political parties announce stimulus packages that work, but not sink the economy. Otherwise, we will continue to be a developing country for a few more decades, if not centuries.




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