'Free is the most expensive word in public policy,' says CEA Nageswaran
Chief Economic Advisor V Anantha Nageswaran warned that offering utilities like water below cost undermines infrastructure, encourages waste and weakens investment. Speaking at the CII Tamil Nadu Infrastructure Summit, he said users must pay fair prices while the government should directly support the vulnerable.
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Context
Chief Economic Advisor (CEA) V. Anantha Nageswaran, addressing a summit, strongly criticised the policy of providing vital utilities like water for free, terming 'free' the most expensive word in public policy. He argued that zero pricing leads to resource depletion, fails to protect the vulnerable, hinders infrastructure financing, and negatively impacts urban planning.
UPSC Perspectives
Economic
The CEA's critique targets the economic inefficiency of subsidies and freebies (often termed 'revdis' in political discourse). When public goods or utilities are priced at zero, it distorts market signals, leading to overconsumption and resource misallocation. The core issue highlighted is the lack of cost recovery in infrastructure projects. For patient capital (long-term investment in assets like infrastructure) to materialize, projects need to be financially viable, yielding a dependable return. When user charges are zero, the financial burden falls on the state exchequer, crowding out private investment. This necessitates a shift towards rational pricing mechanisms where the user pays a fair charge, ensuring the financial health of utilities (like Discoms or Water Boards) so they can maintain assets and expand services to unconnected, marginalized areas. This aligns with the principles of fiscal prudence and objectives.
Governance
From a governance perspective, the CEA debunks the myth that free utilities act as effective social safety nets. His argument underscores the problem of inclusion and exclusion errors in broad-based subsidy schemes. Providing free water through piped connections disproportionately benefits 'comfortable' households that already possess the infrastructure, effectively subsidising the relatively affluent. Conversely, the genuinely vulnerable, lacking formal connections, are forced to pay exorbitant rates to private providers (like water tankers). This highlights the need for targeted welfare delivery, potentially through (DBT), rather than universal freebies. Honest pricing allows the government to directly support those who cannot afford essential services, while charging those who can, leading to more equitable outcomes and better public resource management.
Geographical
The CEA links poor pricing and policy choices directly to urban sprawl and environmental degradation. He criticizes artificially low (FSI) limits, which restrict vertical growth and force cities to expand horizontally. This horizontal urban expansion consumes valuable peri-urban land, often encroaching upon critical ecological zones like historical tanks, filled-in ponds, and natural catchments. This destruction of natural capital to accommodate urban sprawl severely disrupts local hydrology. The consequence, as seen in the 2019 Chennai water crisis, is a dual threat: severe urban flooding during monsoons due to lost natural drainage and debilitating droughts when rains fail. This highlights the critical need for sustainable urban planning that balances development with environmental conservation, a key aspect of (Sustainable Cities and Communities).