Delhi remains in good financial health for now, but focus on freebies could derail capex

Revenue expenditure by the Delhi government could increase further, cutting down the space for capital expenditure if the slew of freebies announced by political parties in their election manifesto are implemented.

Delhi goes to polls on February 5 and the results for all 70 seats of the Legislative Assembly will be announced on February 8. In the run up to the state elections, all three parties in the fray including the Aam Aadmi Party (AAP), Bharatiya Janata Party (BJP) and Congress have promised several freebies to voters including higher cash transfer to women, more free electricity, health care and pension benefits to name just a few.  

However, a close look at Delhi’s finances shows that while its revenue expenditure has risen, capital outlay has been trending downwards in 2023-24 and the Budgeted 2024-25.

An analysis of the Delhi Budget 2024-25 by PRS Legislative Research, Delhi’s expenditure (excluding debt repayment) in 2024-25 is estimated to be Rs 71,086 crore, 2% higher than the revised estimates of 2023-24.

Receipts (excluding borrowings) for 2024-25 are estimated to be Rs 64,521 crore, an increase of 4% over the revised estimate of 2023-24. While Delhi is estimated to remain revenue surplus in 2024-25 at Rs 3,231 crore, it is 35% lower than the revised estimate for 2023-24 (Rs 4,966 crore).  Revenue surplus in 2023-24 is estimated to be 65% lower than the actual figure for 2022-23 (Rs 14,457 crore), said the report by PRS Legislative Research.    

Ahead of the assembly elections, Delhi had also proposed borrowing Rs 10,000 crore from the National Small Savings Fund (NSSF) to meet its expenditure for the current fiscal.

At present, Delhi provides a Rs 1,000 per month cash transfer to specified women beneficiaries under the Mukhyamantri Mahila Samman Yojana for which an outlay of Rs 2,000 crore is Budgeted for FY25. However, with AAP promising to increase it to Rs 2,100 per month and BJP to Rs 2,500, this allocation will have to increase in coming fiscal years.

For now, analysts believe that the impact of this move on the state’s finances will not be much but the focus on freebies could moderate its capital spending and revenue surplus.

Paras Jasrai, Senior Economic Analyst, India Ratings & Research noted that Delhi's fiscal position has been quite good. “There has been a decline in tax revenue growth in the past couple of years with the normalisation of the base effect post Covid, but the growth has fallen short of the growth in nominal GSDP which indicates inefficiency in tax collection. Having said that, the good part has been focus on expenditure on developmental expenditure in improving lives of the people,” he said.

The increased allocation to women beneficiaries would be constraining, he further said. “Given the tight situation for borrowing by Delhi government these measures would be spread over the years, so the impact won't be that much on the fiscal position,” he noted.

Jasrai however warned that the focus on freebies can possibly reduce the focus on capital expenditure which is important from the point of view of lifting long term growth. The revenue surplus could remain moderated.

In FY25, the revenue expenditure is seen to increase by 8% over the revised estimates for FY24 while the capital outlay is estimated to decrease by 29% in the current fiscal over the RE for the last fiscal. “Between 2015-16 and 2021-22, on average, Delhi spent 39% lower on capital outlay than budgeted.  This was much higher than average under spending on capital outlay by states (19%),” highlighted the report by PRS Legislative Research In FY25, Delhi has allocated a much higher proportion of its expenditure to sectors including health, education, water supply and sanitation, energy and urban development compared to the average by other states but its allocation on roads and bridges is lower than the average by other states, the report further noted.