'Very fragile fiscal situation': Economist Shamika Ravi warns things aren't so great in Delhi

Delhi, once a revenue surplus union territory and one of India's wealthiest regions, is now in the middle of its worst financial crisis in nearly three decades, according to Dr Shamika Ravi, a Member of the Economic Advisory Council to the Prime Minister. "Things aren't so great in Delhi anymore," she said in a podcast conversation with Dr Vinay Sahasrabuddhe.   

"One thing to understand is that Delhi has always been a revenue surplus state. It has traditionally been one of the richest states in the country. Though it's not a full-fledged state, this particular place has always been the richest in terms of per capita income. So, it's a very affluent and wealthy area of the country. Unfortunately, what has happened in the last 10 years — you can see some of the trends that started right after 2010 — is that many of those positive trends, which essentially meant a very healthy and robust local economy, have now gradually given way to what is increasingly being seen as a very fragile fiscal situation," she said. 

The economist said that Delhi used to be a positive outlier until 2014-15 but now it has been a negative outlier to the all-India average. "I’m not even comparing it with any other fast-growing state; I’m saying Delhi used to be far superior fiscally. And now, in terms of outlay, it has become a negative outlier."

She explained that Delhi had a unique financial advantage because the central government shouldered much of its administrative burden, including policing and pensions. "Delhi traditionally spent more on development, which is a good thing. But part of it is also the way Delhi is structured. It is small state with limited bureaucracy. The policing and many things are part of the Center. So, the Center has been bearing a lot of the administrative burden of running this place. If you look at pensions, there is very little. There is almost no pension burden on the state. It’s only now that the state is waking up to pensions as an important instrument," she explained.

That advantage once allowed Delhi to invest heavily in infrastructure and long-term growth. But the shift in spending priorities has left key areas neglected. "Delhi had always had the luxury of spending more on development. Now, Delhi has started spending much more on social spending—health and education, which is a good thing. But what has happened is that things like urban development, tourism, and local infrastructure—all of this have seen a massive dip," Ravi pointed out.

Perhaps the most alarming indicator of Delhi’s financial distress is its revenue deficit. She said Delhi plunged into revenue deficit for the first time in 31 years. "For the first time, there has been a deficit in revenue. Over the past 31 years, the situation has been worsening, but now it is absolutely the worst," Ravi warned.

The numbers paint a stark picture. From 2016-17 to 2021-22, Delhi’s borrowing from the National Small Savings and Security Fund (NSSSF) skyrocketed from Rs 2,896 crore to Rs 11,000 crore. "A state like Delhi shouldn't need to borrow so much, as it traditionally has had a revenue surplus. It's a rich state, and because of the economic activities here, people have traditionally been capable of paying taxes. But now the situation is such that revenue collection is falling, and expenditures continue to increase on matters that are not going to yield future revenue," she said.

Also, Delhi’s revenue collections have now fallen behind its expenditures — something that had never happened before, she said. "For the first time, they are facing a revenue deficit. This means that while the situation had been becoming increasingly fragile for the last 10 years, now the situation is such that revenue collections have fallen behind revenue expenditures."

Ravi also suggested that Delhi’s financial decisions are focused more on immediate popularity than long-term stability. "The issue is that when you start putting money into certain activities, which are part of larger development areas, they are needed — but the management means you also need to generate future revenue to spend money. So, if you're not going to spend money into urban development, tourism, basic infrastructure, and similar matters, then it will affect the overall economic structure," she stated.

The economist didn’t mince words about the economic consequences. "If I'm so myopic that I'm going to spend in ways that make me popular rather than in ways that maintain long-term fiscal health, then I’m actually weakening the economy and Delhi as a growth engine, which has slowed down considerably," she said.

"This (current) administration actually inherited what might have been the growth center of the country, from the time of 2010 to 2014-15, because that was the time when you saw a massive surge in infrastructure development. Traditionally, when there is massive capital outlay on infrastructure, it predicts long-term growth. But the upkeep of that, matters of housing, urban development — when you keep cutting down on these basic things repeatedly, it will lead to a worsening, not just in terms of the deficit, but in the quality of life for the average citizen," she warned.