A blueprint for fiscal management & development

In the recently released State Finances Audit Report of the CAG for Delhi, it has been highlighted that Delhi has performed exceptionally well in managing its fiscal deficit and public debt. Many had earlier alleged that the state has been populist in its outlook by giving free water, free electricity and now free bus rides for women. The state has also devoted a large portion of its Budget to high quality public education and health care. It has been seen across the world that any government spending heavily on government services, that are available to citizens free of cost, ends up having high levels of fiscal deficit and public debt. But the Delhi government still manages to roll out these schemes while maintaining fiscal prudence. 

So how does Delhi manage to do that? And what are the lessons for other governments?

A closer look at the current macro-economic situation of India will tell us that it is not easy for any government to increase its expenditure considerably and yet maintain fiscal deficit and public debt at the stipulated levels. The fall of India’s GDP growth rate to 4.5 per cent in the second quarter of 2019-20, the lowest in last six years, has once again triggered the debate on the government’s role in the economic growth of the country. It is quite an opportune time for the discussion as the GDP growth for the July-September quarter was largely driven by government expenditure, which grew by 15.64 per cent. The non-government part of the economy, which tends to form nearly 90 per cent of the total economy, grew by a meagre 3.05 per cent. The situation is indeed grim.

The question is: Can government expenditure be the only way to induce growth in the economy? There is a limit to what the government can spend given its constraints under the Fiscal Responsibility and Budget Manag-ement Act, 2003, which has a target of reducing fiscal deficit to 3 per cent of GDP in the years up to March 2020. Simply put, fiscal deficit is the difference of total expenditure and total revenue (except borrowings). Fiscal prudence means that government should spend largely within its total income, and not more than that. While this is a principle we all apply to our household budgets, governments routinely spend much more than their revenue and put the government in debt. In Budget 2017, the then Union finance minister deferred the fiscal deficit target of 3 per cent and chose a target of 3.2 per cent. The target was again revised to 3.3 per cent in Budget 2019. With the economic slowdown and reduced GST collections, the target is slated to be breached for the next year as well.

In the wake of the present economic and fiscal situation in the country, there is a glimmer of hope shown by the fiscal prudence and development model of the government of Delhi. The recent CAG report for Delhi highlights that fiscal deficit, which was Rs 3,942 crore in 2013-14, was turned to a fiscal surplus of Rs 113 crore during 2017-18. This is no mean achievement, as the total expenditure increased by nearly 20 per cent during the same period from Rs 32,000 crore to Rs 40,000 crore. The sustained increase in expenditure and the fiscal deficit was managed despite the decrease of Rs 641 crore of grant-in-aid from the government of India from 2016-17 to 2017-18.

Another achievement, which has been largely missed, is the efficient public debt management by the Delhi government. Public debt, essentially, is the total liability of the government. During the period 2013-14 to 2017-18, the percentage of public debt to GSDP (gross state domestic product) for Delhi, reduced from 7.23 per cent to 4.89 per cent, with no part of debt receipts being used for meeting the revenue expenditure. Moreover, the borrowed funds were exclusively used for capital expenditure and repayment of the principal debt. This assumes greater significance following a recent red flag by the Reserve Bank of India in its report State Finances: A Study of Budgets of 2019-20, describing the state’s rising public debt as a potential medium-term challenge. The debt-to-GSDP ratio of at least 20 states has crossed the threshold of 25 per cent, with Punjab and Uttar Pradesh having the highest debt-to-GSDP ratio of 39.9 per cent and 38.1 per cent respectively. In light of this, Delhi, having consistently reduced its debt-to-GSDP ratio, can provide a guiding framework for other states to emulate.

But how has Delhi managed to do that while other states find it difficult? The answer lies in what development economists, including Nobel Laureate Prof Amartya Sen, have been saying for ages. The investment in building human capital through interventions in essential areas like health care, education, nutrition, water etc. would have a high multiplier effect on the economy. This has been proved by the model Delhi followed. A close look at the Budget spending in Delhi shows that it has focused extensively on the priority areas of health care, education, water, nutrition among others. The share of social services (which includes all of the above) in the total expenditure is whopping 53.96 per cent, as per the CAG report. The trend in the last five years shows a steep increase in spending in these areas.

This is in stark contrast to India’s expenditure on health, which is merely 1.4 per cent of GDP, while the same on education is 4.6 per cent. This is abysmally low, in comparison to Western countries and the global benchmark stipulated by experts. Health care spending by the US is 16.9 per cent of GDP. Countries like Switzerland, Germany, France etc spend more than 10 per cent of GDP on health care. The WHO recommends a minimum of 5 per cent (of GDP) spend on health care. 

In the area of education, the US spends 7.3 per cent of its GDP towards it, and the OECD countries spend 6.3 per cent of GDP on an average. In the Strategy for New India @ 75 report, the NITI Aayog recommends a 6 per cent spend on education by India. Needless to say, India is far away from these targets. An immediate focus on these areas is needed; otherwise, India will not be able to reap the benefits of its demographic dividend.

Clearly, there is a lesson to be learnt from Delhi on the focus areas for the Union and different state governments, and on ways to manage financial resources prudently. As Prof Amartya Sen rightly said, “Economic growth without investment in human development is unsustainable and unethical”. Therefore, investments in human capital, which is the biggest asset of a nation, is the way forward.
Atishi is the national spokesperson for the Aam Aadmi Party and former advisor to the education minister of the government of NCT of Delhi; Bajpai is a New Delhi-based media researcher

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