Why do governments offer subsidies and freebies, especially around elections?

Subsidies make good political sense, even when they are bad fiscal policy. To see why, start with the gap between who benefits and who bears the cost.

Whether it is a loan waiver, a subsidised electricity bill, or a direct cash transfer, the person receiving it feels the benefit every month. The cost is spread across hundreds of millions of taxpayers and buried in a budget document almost no one will read. A visible, concentrated benefit set against an invisible, dispersed cost is the basic engine of subsidy politics. The recipient has every reason to reward the government that delivered it. The taxpayer, losing a few rupees among many, has almost no reason to object.

And the cost is higher than the headline figure suggests. India’s central government subsidy bill reached roughly Rs 5.62 lakh crore in 2023-24. At the state level, electricity subsidies alone accounted for 97 per cent of Rajasthan’s subsidy outlay in 2021-22 and 80 per cent of Punjab’s, according to PRS data. The true burden runs higher still once the distortions caused by taxation are counted. Economist Vijay Kelkar, in his 2017 CD Deshmukh Memorial Lecture, estimated that every rupee the government spends may cost society around three rupees once those distortions are accounted for. The figure is one economist’s estimate rather than a settled number, but even a fraction of it implies that the real cost of a subsidy far exceeds the line item in the budget.

India’s first-past-the-post electoral system sharpens these incentives. A party does not need a majority to win a seat, only more votes than its nearest rival. That makes it more valuable to lock in a decisive bloc of voters than to offer broad improvements that benefit everyone a little. Free power for farmers, cash transfers to women, and loan waivers for agricultural households: each is designed to mobilise a group large and cohesive enough to swing a constituency. Diffuse benefits win gratitude from no one in particular. Targeted ones win a voting bloc.

The 2025 Delhi election saw all three major parties outbid each other on welfare packages and freebies. That was not an aberration. It was the logical outcome of a system in which visible benefits win votes, and fiscal costs are someone else’s problem.

None of this means subsidies are always wrong. Many address genuine needs, and well-targeted transfers can do real good. The problem is that political incentives push governments to expand subsidies beyond what is sustainable, and to resist reforming them even when they deliver poorly. What is easy to announce is very hard to withdraw.