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Tuesday, February 25, 2020

Explained: For AAP 2.0, what is the challenge ahead?

Despite the rollout of several so-called freebies by the AAP government, Delhi’s fiscal deficit is the lowest in the country. Sustaining its fiscal health, however, will require more revenue generation in future

Written by Udit Misra | New Delhi | Updated: February 12, 2020 11:02:57 am
delhi election results, aam aadmi party, aap, arvind kejriwal, aap government, delhi revenue expenditure, aap freebies, delhi elections freebies, express explained, fiscal deficit, indian express news Arvind Kejriwal with his wife and Manish Sisodia at Hanuman Temple after winning the Delhi election in New Delhi on Tuesday. (Express Photo by Praveen Khanna)

The Aam Aadmi Party (AAP) routed its closest rival, the BJP, for the second successive time in Delhi’s Assembly elections on Tuesday. Many of AAP’s detractors, especially in the BJP, have repeatedly argued that AAP solely relies on offering fiscally-ruinous “freebies” to the voters and luring them to vote for AAP. Its supporters, on the other hand, argue that AAP’s policy choices — with stress on improving provisioning of public education and public healthcare — present a new model of governance, and point out that under AAP, Delhi has not only grown faster than the India average but also increased its share to the national GDP.

Where does the truth lie? Has the AAP government run its schemes by borrowing money from the market and increasing fiscal deficit? Or has it run one of the most fiscally-prudent governments in India? More importantly, is the AAP model sustainable?

What are the schemes that are referred to as the “freebies”?

The most recent example was the AAP government’s decision to allow free bus rides for women in Delhi. But it was not the first time nor the only scheme that involved the government subsidising a section of the society.

Since 2015, when it came to power with 67 (out of 70) seats, AAP has provided:

* Subsidy for those using less than 400 units of electricity; moreover, there has been no hikes in power prices over 5 years and Delhi now has the lowest electricity tariffs among the metropolitan cities of the country.

* Free water for families that use less than 20,000 litres a month; the number of such families has almost trebled as a result.

* Private schools have had to return the increased fee they charged “arbitrarily”; these schools now also provide 25% seats for students from marginalised backgrounds.

* The government provides a loan of up to Rs 10 lakh to every student so that no student has to leave studies; it has also started a scheme of waiving up to 100 per cent fee for children of extremely poor families.

* The government provides free treatment, medicines and test facilities in nearly 200 mohalla clinics, apart from free surgeries in empanelled hospitals; the government also bears the expenditure for the treatment of road accident and fire burn victims.

* The minimum wage for every worker has been raised from Rs 9,500 to Rs 14,000.

* Similar increases have been seen in the salaries of guest teachers in schools, honorariums of Anganwadi and Asha healthcare workers as well as the pensions of senior citizens, divyangs, and distressed women.

This is not a complete list but the maximum stress of these schemes is towards education and healthcare provisioning by the state government.

Source: RBI

Read | Diminishing returns in states for BJP’s ideological push

How does this affect Delhi expenditures?

Predictably, in Delhi’s budget, the share of expenditure on education and healthcare sectors (as part of the overall expenditure) has zoomed. The line graphs are taken from the Reserve Bank of India’s latest study of state finances. They show how Delhi’s expenditure on education and healthcare shot up when AAP took over. The spike in Delhi is in stark contrast to the attention these sectors received on an average across all other states.

Has this not ruined Delhi’s fiscal health?

Yes, and no. That’s because this can be answered both ways.

The bar graphs detail the two key parameters when judging the fiscal health of any government.

The most commonly used parameter is fiscal balance. The bar graph on fiscal balance contrasts where Delhi stands as against the India average — and it basically maps the level of money (as a percentage of Gross State Domestic Product) that a state government has to borrow from the market in order to fill the gap between its overall expenditures and total revenues. Data show that despite these expenses, the AAP government ran lower fiscal deficits not just when compared to the rest of India’s average but also past Delhi governments. Despite the expected slippage in the current financial year, AAP has the lowest fiscal deficit of any state in the country.

But what is even more striking is its performance on revenue balance, which maps the gap between revenue expenditure and revenue receipts. Typically, maintaining a revenue surplus is very difficult as subsidies and freebies tend to raise the revenue expenditure; states rarely achieve a revenue surplus. But as the graph on revenue balance shows, Delhi continues to have a revenue surplus right through — and makes it charges of fiscal imprudence rather hard to stick, especially when most of the states in the country stay in the negative territory.

Read | Congress wipeout: Zero seats, under 5% vote share, clueless in ideas battle

Source: RBI

Then, what is the reason for worry?

As the revenue and fiscal balance graphs show, Delhi’s revenue surplus is coming down with each passing year and its fiscal deficit is starting to grow significantly. The revenue surplus, for instance, has come down from 1.6% of GSDP to just 0.6% over the AAP’s tenure.

Manish Gupta, Assistant Professor at the National Institute of Public Finance and Policy (NIPFP) said: “If we look at the own tax revenues (OTRs) of Delhi, we find that they have fallen from 5.49% of GSDP in 2015-16 to 4.93% in 2018-19. Despite this fall, its overall revenues have stayed roughly the same because of the GST compensation. But declining OTRs is a worry for sustaining expenditures”.

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Apart from this growing weakness in raising its own tax revenues, there was another structural disadvantage of AAP’s policy focus. Capital expenditure — that is investments into making new infrastructure like schools and hospitals — has been falling. “To be sure, capital expenditure had fallen from 1.16% of GSDP in 2011-12 to 0.89% in 2014-15. But, under AAP, it has further fallen to 0.54% in 2018-19,” said Gupta. So while spending more money into improving the functioning of existing schools and hospitals is creditable, not investing adequately towards raising the productive capacity of a growing city like Delhi will create bottlenecks in the medium- to long-term.

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