Policy | The economics behind AAP’s freebies and its viability

Representative Image

Puja Mehra

The stunning result in the Delhi assembly polls has political experts scratching their heads to explain the Aam Aadmi Party (AAP)’s enduring popularity in the capital city. The quest for answers has put Delhiites’ supposed love for ‘freebies’ from the AAP government under the lens.

Whether the schemes explain the election outcome is for political experts to find evidence of. However, they raise interesting public finance questions: Such as if the AAP’s policies are fiscally viable.

AAP’s supporters are right when they say the Arvind Kejriwal-led government in Delhi is India’s most fiscally prudent. However, it is equally true that Chief Minister Arvind Kejriwal inherited a tightly-run ship from his predecessor Shiela Dikshit.

Delhi is better compared with its own past rather than the other states. In 2010-11, Delhi ran a revenue surplus of 4.2 percent of GSDP (gross state domestic product). From the next year till 2014-15, the surplus remained between 1.2-1.3 percent of GSDP. Since then, the surplus has been in the range of 0.6-0.9 percent of GSDP, lower than that it was in Dikshit’s tenure. In other words, she built the cash buffer in the exchequer that Kejriwal’s government has used.

The fiscal balance was improving under her too. From 1.63 percent of GSDP in 2008-09, the fiscal deficit narrowed to 0.58 percent of GSDP in 2012-13. Under Kejriwal, the Delhi government turned in a surplus of 0.04 percent of GSDP in 2014-15, which improved to 0.24 percent of GSDP. However, the balance tipped back into deficit, which has widened to 0.7 percent of GSDP this year.

While the AAP government is not running its schemes by borrowing money, Delhi’s revenue surplus is coming down with each passing year and its fiscal deficit is growing. The financial audit for 2013-18 by the Comptroller and Auditor General (CAG) concluded that the Delhi government has no debt sustainability issues.

Borrowed funds were being used only for capital expenditure and repayment of debt. During 2013-18, the GSDP increased annually at a higher rate than annual growth rate of public debt. Interest payment as a percentage of revenue receipt decreased from 10.09 percent in 2013-14 to 7.42 percent in 2017-18, which shows that the interest payment on public debt was decreasing resulting in availability of funds for development.

Is Delhi’s comfortable fiscal position sustainable? It certainly is. The Reserve Bank of India’s (RBI) state finances report calculates that Delhi has the highest funds available in India for development spending. It could have spent Rs 20,142 crore this financial year and yet remained under the prescribed fiscal deficit limits. In comparison, even Maharashtra, the largest state as per GSDP, had lesser additional fiscal spending power of Rs 20,002 crore.

This is because there has been a decline in Delhi’s development and capital expenditures as a proportion of total expenditure during 2013-18. The development expenditure share reduced from 78.9 percent to 77.4 percent. The capital expenditure reduced from 13.6 percent to 7.7 percent.

The share of expenditure on health and education in total expenditure has registered an increase during this period. However, the government can clearly afford to focus a lot more on asset creation, necessary for future growth and development. If it does, the spending will stimulate Delhi’s economic growth and tax receipts.

Is the AAP government doing well because of money received from the Centre? On the contrary. The Narendra Modi-led government seems to have given the tight-fisted treatment to the Kejriwal government. The CAG report observes that grants-in-aid to Delhi have reduced. In the year 2017-18, no grants were received by Delhi under 16 centrally-sponsored schemes. The schemes where grants were decreased include Sarva Shiksha Abhiyan, Delhi State Health Mission, Management, Monitoring and Evaluation (MME) of the mid-day meal scheme.

It’s not clear if funds were held back on technical grounds with the Delhi government failing to release its share, or on account of political rivalries in the run up to the elections. Under the head ‘smart cities’, no money was released by the Centre as nearly Rs 200 crore transferred the previous year, 2016-17, remained unspent.

More importantly, the CAG report notes that grants to Delhi from the Centre in lieu of share in central taxes remained stagnant at Rs 325 crore since 2001-02, although central tax collections have grown substantially since then.

Finally, can the AAP’s spending model be replicated in other states? It cannot. Other states are already spending a lot more than Delhi is, and yet running deficits. In the RBI’s state finances report, Delhi does not figure in the top five spending states on any of the heads of: Education, sports, art and culture; Urban development, and; Medical and public health.

Puja Mehra is a Delhi-based journalist and author of The Lost Decade (2008-18): How the India Growth Story Devolved into Growth Without a Story. Views are personal.