'Handing out borrowed money': Ex-RBI Governor warns freebies can win elections but won't build nations

Former Reserve Bank of India Governor Duvvuri Subbarao has warned against the politics of competitive handouts, saying that the freebie culture may win elections, but it won't build nations. Citing the Bihar election, Subbarao said the campaign had become "a masterclass in competitive populism" as parties raced to outbid one another with increasingly unrealistic cash promises.

In an opinion piece in The Times of India, the former governor noted that the governing NDA transferred Rs 10,000 to roughly 1.2 crore women even as the campaign was on, while the opposition Mahagathbandhan promised Rs 30,000 to every woman and a government job for every household in the state. 

According to him, there was an air of unreality about these promises, "as though the political class had collectively suspended all fiscal arithmetic." 

Subbarao argued that freebies cancel each other out, saying that when every party distributes money or announces larger handouts, their impact diminishes. "The governing party's last-minute cash transfer may still have swayed some votes, but broader competitive promises tend to neutralise each other," he wrote, adding that "when promises stretch credulity, people simply stop believing them."

He warned that the deeper problem is that governments elected on guarantees now find themselves struggling to deliver on them. Andhra Pradesh, he said, is learning its welfare architecture is "far costlier than imagined", while Telangana, after years of high-octane handouts, is "wrestling with a fiscal hangover." Maharashtra and Karnataka, he added, are realising that ramping up social transfers has left little room for other discretionary expenditure.

Subbarao recalled that Prime Minister Narendra Modi had once decried the revdi culture in politics, but now appears to have embraced it after "witnessing its electoral potency". "This is not a partisan failing; it is a structural political problem," he wrote. "No party wants to be left behind in the freebie race. When electoral incentives are misaligned with fiscal prudence, prudence invariably loses."

Calling every freebie an "admission of political failure", he cited Chairman Mao's line - "Give a man a fish, and you feed him for a day. Teach him to fish, and you feed him for a lifetime." The Indian equivalent, he said, is that leaders promising handouts are effectively telling citizens: "I cannot provide you the dignity of a decent livelihood and a regular income. So here is something for now; make do with it."

He argued that India is no longer debating how to create jobs, raise productivity or build human capital. Instead, the discussion, he added, has shifted to whether Rs 10,000 is good enough when Rs 30,000 can be promised. 

What compounds the danger, he said, is that these giveaways are being financed through borrowings: "What makes this more worrisome is that these giveaways across the states are financing themselves through borrowings. That means pushing today’s consumption burden to tomorrow’s taxpayers."

Subbarao, who served as RBI Governor from September 2008 to September 2013, said democratic institutions meant to restrain fiscal adventurism have eroded. The legislature, especially the opposition, should serve as the first line of defence, but he said no opposition party dares criticise freebies for fear of appearing anti-poor. The CAG, he said, is constrained by the inherent lag in audit reports, while markets no longer price the risks of excessive borrowing because investors assume the Centre will not allow states to default.

He rejected suggestions that the Election Commission could act as an arbiter, saying EC regulates campaigning, not governance, and "should not be dragged into the political economy of welfare schemes."

The former governor wrote that while welfare spending is vital in a country where millions struggle for daily livelihood, the overuse of transfers - especially when financed by borrowing - "crowd out investment in the very things that could improve livelihoods sustainably: education, health, physical infrastructure and job creation."

He said the Bihar episode shows voters will take what is immediately given, and when political credibility is low, it becomes rational for people to choose freebies. He called for a national code of conduct on handouts that prescribes both how much can be spent on handouts and when they can be distributed, and requires parties "to indicate where the money will come from."

"It's time to restore honesty and accountability to our fiscal politics," he wrote. "Freebies win elections; they do not build nations."