Delhi Model 2.0: How AAP govt has prioritised subsidies over infrastructure

The AAP dedicates nearly 40% of its Budget to health and education and nearly 15% to subsidies such as free electricity, free water and free bus rides for women.

Data compiled by The Indian Express shows that capital expenditure as a percentage of total expenditure during the AAP rule (from 2015) has fallen sharply, while revenue expenditure has risen drastically.

While revenue expenditure is the estimated cost on salaries, allowances, subsidies and other expenses required for the normal running of government departments, capital expenditure is the cost of constructing or acquiring an asset of a lasting nature, which yields revenue – such as constructing buildings or buying machinery.

Under the AAP government, capital expenditure as a percentage of total expenditure peaked at 25% in 2022-23. During the Congress rule that preceded AAP’s, capital expenditure crossed 40% each year between 2005-06 and 2010-11. Between 2011-12 and 2013-14, it was between 20% and 30% of the total Budget.

While the Budget outlay grew on average by Rs 5,000 crore every year (Rs 37,750 crore in 2015-16 to Rs 76,000 crore in the latest Budget), Delhi’s inflation-adjusted Gross domestic product (GDP) rose from Rs 4.28 lakh crore in 2014-15 to Rs 6.26 lakh crore in 2022-2023 – a rise of 150%.

What the data shows about Delhi government’s spending

Despite all the expenditure on subsidies, Delhi’s debt to GDP ratio was 3.9% as compared to an all-India average of 27.5%. While revenue expenditure (including subsidies) has grown rapidly along with the Budget, capital outlay (money spent on acquiring, maintaining, or improving fixed assets, such as land, buildings, equipment, or vehicles) has not kept up.

In the first four years of AAP rule, capital outlay as a percentage of total net expenditure nearly halved from 14% to 7.68%. During this time, revenue expenditure shot up from 78% to 86.7% of the net expenditure.

In the next four years, the capital outlay bounced back to 13.5% of net expenditure, and revenue expenditure still remained high (from 80% to 82%). Capital outlay is a component of capital expenditure. Other components include – repayment of loans to the Centre and loans and advances by the state government.

Capital outlay – which is essentially the productive component of capital expenditure – ranged from 35% in 2018-19 to 54% in 2021-22.

Why is this important?

While revenue expenditure is important to raise the living standards of people and has more immediate impact as compared to capital expenditure, the latter has a higher multiplier.

For instance, a 2019 Reserve Bank of India report found that the Central Capex has a multiplier of 3.25 – a Re 1 rise in Capex increases output by Rs 3.25 and by states increases output by Rs 2. The corresponding multiplier figures for revenue expenditure were 0.45 and 0.82, respectively.

A 3.25 multiplier essentially means that if the government spends a rupee on capital expenditure, it will lead to an overall increase (over time) in the income by Rs 3.25. When the government spends, it can lead to a boost in private investment and household consumption, increasing the income of the population by an amount greater than what it spent in the first place.

Debt to GDP ratio

While Capex as a percentage of total expenditure has fallen during the AAP’s rule, the debt to GDP has also fallen indicating good fiscal health. In the 10 years preceding AAP rule, the outstanding liabilities as a percentage of GSDP (Gross State Domestic Product) fell from 16.3% to 7.3% – a drop of 9 percentage points. During this period, the state GDP grew by a factor of 5.12.

From 2015 to 2023 (till which actual data is available), the outstanding liabilities as a percentage of GSDP fell from 6.6% to 1.6% – a 5-percentage point drop. The GSDP during this time doubled.

This indicates that while fiscal health was maintained and even improved, and the state’s GDP grew under the AAP’s rule, a clear priority for the government became revenue expenditure in place of capital expenditure.

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