Opinion | It’s evident that Kejrinomics is neither scalable nor replicable4 min read . Updated: 18 Feb 2020, 11:05 PM IST
The Delhi model of freebies may have stayed within fiscal limits but it’s no template for other states
The results of the recent Delhi assembly elections, which brought Arvind Kejriwal’s Aam Aadmi Party back to power with a massive majority, has been partially attributed to the freebies and subsidies given to the electorate. Among other things, Kejriwal subsidizes power, water and bus rides. Taken together, these subsidies cost the state exchequer around ₹2,500 crore, the bulk of it being Delhi’s electricity subsidy, amounting to ₹1,720 crore for 2019-20.
There is little doubt that, on the face of it, Delhi’s finances can afford this munificence. The current year’s budget has a fiscal deficit of only 0.7% of state gross domestic product (SGDP). This compares very favourably with the kind of deficits run by most states, many of which have hit the 3% limit. Neighbouring Haryana, which has an SGDP comparable to Delhi’s, has a budgeted fiscal deficit of 3.09% for the year ending 31 March 2020.
When it comes to the freebie culture, Delhi is hardly the worst culprit. Most states and the Centre can be accused of doing worse things at a time when their fiscal situation is terrible and careening out of control. The Centre subsidizes everything from food to fertilizer and fuel, not to speak of offering cash payouts to farmers and senior citizens. Many states do the same and more.
However, one cannot jump to the opposite conclusion that Delhi is right to extend its own freebie culture—let’s call it Kejrinomics—because it has as big a chance of things going out of control as other states.
If one were to look closer at Delhi’s state budget and its understated expenditures, the actual situation is not as rosy as it seems at first glance.
The fiscal deficit for 2019-20 is budgeted at ₹5,902 crore, which is estimated to be 0.7% of likely SGDP. However, this deficit figure is up by a massive ₹5,213 crore, compared to the revised estimates of 2018-19, when the fiscal deficit was a minuscule ₹689 crore. In one year, the election year, the state’s fiscal deficit has shot up by 756%. Kejriwal’s budgeted fiscal deficit in 2018-19 was higher at ₹3,164 crore, but even on this base, the rise in targeted deficit is a massive 87%.
That is not all. We need to ask ourselves why the state’s fiscal deficit is so low compared to other states, and whether it is really the right number. The truth is that Delhi does not need to spend on many major heads of expenditure, including law and order, and chunks of urban infrastructure. As the nation’s capital city and a state that is more like a Union territory, those costs are borne by the Centre.
If one were to look at the Union home ministry’s budget for the Delhi Police in 2019-20 (revised estimates), the cost of policing the capital is a massive ₹8,084 crore. Add another ₹469 crore for Delhi police infrastructure, and ₹415 crore as grants for the Delhi Metro in 2019-20, and we are talking of an overall cost of ₹8,968 crore that are essentially Delhi’s costs, but are borne by the Centre.
If one were to add the budgeted Delhi fiscal deficit to this central contribution number, we are talking of a realistic fiscal deficit of close to 1.8% of SGDP. This is still reasonable compared to most other states, but we also need to understand that Delhi’s revenues are unique.
The reason why Kejriwal is able to spend lavishly on education (27.8% of total expenditure versus the all-states average of 15.9%) and health (13.8% of total state expenditure versus all-states average of 5.2%) is because some of India’s richest people live in Delhi, contributing to huge tax revenues.
Delhi is home to not only the central government and its well-paid and well-fed employees, but also an entire diplomatic community that constitutes a big spending class. Given the average Delhi-ite’s penchant for conspicuous consumption, it is clearly an outlier in terms of potential indirect tax revenue. Delhi’s goods and services tax intake is 53% of its total tax revenues, against Haryana’s 45%.
The real problem with Delhi’s subsidy culture is not unaffordability, but the kind of pressure it creates on poorer states to do the same without having the same special fiscal strengths. The decision of Uttar Pradesh to offer farm loan waivers in 2017 prompted a whole raft of loan waivers by other states, including two by Maharashtra in less than three years. West Bengal chief minister Mamata Banerjee, faced with a rising Bharatiya Janata Party in the state, is proposing free electricity for small consumers in the run-up to next year’s assembly elections.
As a nation, we need to worry about setting precedents that will go national and then ruin our economy. In a hyper-competitive political scenario, what one state does becomes the norm in other states, and ultimately goes mainstream. We are all going down the barrel on freebie-nomics.
The Delhi model of freebies, even while nominally staying within fiscal prudence, is the exception rather than the rule. Kejrinomics is neither scalable nor replicable across India. We should remember that before we go gaga over his achievements. Kejrinomics is fiscal prudence subsidized by the Centre, or the national taxpayer.
(Data sources: PRS Legislative Research, Union budget documents 2020-21)
R. Jagannathan is editorial director, ‘Swarajya’ magazine