Is AAP’s ‘Delhi Economic Model’ Replicable In Punjab With Differing Financial Constraints On The States

Considering the case of NCT of Delhi and the state of Punjab, though both are part of India but still the rules and regulations governing the two are completely different.

Delhi Chief Minister and Aam Aadmi Party (AAP) convenor Arvind Kejriwal with Punjab Chief Minister Bhagwant Mann. (ANI Photo)

New Delhi: The AAP government has been professing to implement the economic model of Delhi in the state of Punjab. But I was intrigued by how “Delhi Economic Model” can be successfully implemented in a state that was already reeling under serious financial constraints.

Considering the case of NCT of Delhi and the state of Punjab, though both are part of India but still the rules and regulations governing the two are completely different. Punjab is a full fledged state whereas Delhi is the National Capital Territory which is more or less governed like a Union Territory.

Delhi functions according to Article 239AA, Government of National Capital Territory of Delhi Act, 1991, and Transaction of Business Rules. These three together provide a mechanism to run Delhi. In Delhi the main authority lies with the Lieutenant Governor. The Council of Minister is bound to communicate to LG all the decisions related to matters mentioned in Transactions of Business rules.

Parliament can legislate for Delhi on any matter in the State List and the Concurrent List. The executive power however lies with the State Government headed by the Chief Minister except for in case of ‘Police’, ‘Land’ and ‘Public Order’.

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Delhi and Punjab does not only have different administrative setup rather their economies are completely different. While Punjab is largely an agrarian economy, the economy of Delhi is majorly focused on services sector.

Delhi (Source: IBEF)
Punjab (Source: IBEF)

Punjab’s economy is transitioning from agrarian to services. This transition is pathetically slow mainly because of the absence of infrastructural backlogs.

Understanding Budgets of Punjab and GNCTD:

For understanding whether the financial model followed by the AAP Government in Delhi can be replicated in the state of Punjab we need to understand the differences in the economics of these two states. To understand it one needs to look at budget presented in their respective assemblies in the past few months.

Capital Receipts (CR):  Capital receipts are loans taken by the government from the public, borrowings from foreign countries and institutes, and borrowings from the RBI. These receipts create liabilities or reduction in assets as they needs to be repaid.

When comparing the Capital Receipts of the two, we can see that Delhi is not borrowing much as this increases liability. But the state of Punjab has shown an increased appetite for borrowing, thus leading to commensurate liability for Punjab.

But the fact that needs to be checked is how the Punjab Govt. is using these Capital Receipts.

Capital Expenditure (CE): It refers to money that is spent on building assets like roads, buildings or others. These long-term assets allows, the economy to generate revenue for many years by adding or improving production facilities and boosting operational efficiency.

Looking closely at heads under the Capital Expenditure to understand the type of spending:

From the above table we found that in the state of Punjab the Capital Expenditure has been used to pay off debts. This is the worst form of repayment of debt. CapEx creates liability and that is why it is meant for creation of Capital assets that leads to economic growth.

But, when used solely for the purpose of debt repayment it leads economy to a “Debt Trap”, as the infrastructure for economic growth remains absent.

In Delhi also some amount of loan is repaid using CapEx but it is also used for creation of infrastructure. Moreover, in Delhi the CE is much greater than the CR.

Source: Economic Survey of Delhi, 2021-22

Revenue Receipts (RR): These receipts neither create liability nor cause reduction on the assets of the government. They are regular and recurring in nature and the government receives them in the normal course of activities.

These include the proceeds from taxes and other duties levied by the centre; the interest and dividend it receives on its investments; and the fees and charges the government receives for its services.

In case of Revenue Receipts in both Delhi and Punjab we can see that there has been expectation that it will increase. This might be due to the fact that the country has now come out of Covid impact and is on its way to economic revival.

Revenue Expenditure (RE): Revenue Expenditure is that part of government expenditure that does not result in the creation of assets nor increases liability. Payment of salaries, wages, pensions, subsidies and interest falls in this category.

Source:    Economic Survey of Delhi, 2021-22

In Delhi from 2014-15 onwards the RR has been greater than RE, i.e. for the above period the Delhi Govt. was a Budget Surplus state.

Source:    Economic Survey of Delhi, 2021-22

But even this gap in Delhi has started showing a declining trend. From the above graph we can see that from 2020-21 onwards this Budget Surplus trend of Delhi Govt. has started declining.

Debt to GSDP Ratio:

The term Debt to GSDP ratio became important after the financial crisis that unfolded in Sri Lanka. It is the metric that compares state’s public debt to its GDP.

This compares what state owes and what it produces. This gives clear picture of state’s ability to pay back its debts. This is expressed as percentage, and can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

For the state of Punjab this debt as percentage of GDP has increased from 49.1% in 2020-21 to 53.3% in 2021-22 (RE) (Source: RBI Bulletin, June, 2022).

The current economic scenario in Punjab is the result of fiscal profligacy as evident from unchecked increase in unproductive revenue expenditure, freebies and unmerited subsidies. This decreases the expenditure that can be used to undertake developmental activities.

Source: RBI Bulletin, June 2022
Source: RBI Bulletin, June 2022

Freebies can be further segregated into “merit and non-merit freebies”. In the AAP model the freebies are available to all irrespective whether they are required or not.

Like free water and 200 units of power is available to all. These freebies are called non-merit as the target population is not defined and freebie uniformly available.

But this creates pressure on the state’s exchequer. In case of Delhi this was sustainable but now even DISCOMS and DJB are facing the problems. In the state of Punjab where the financial situation is already bad, this can lead to disaster.