Now that the Aam Aadmi Party (AAP) has won an extremely convincing mandate, and Arvind Kejriwal has promised a more mature, less confrontational style of governance, he is not likely to find the going easy in meeting expectations. This is not just because at 67 MLAs in a House of 70 you cannot blame the opposition for holding up legislative business, but because implementing the promises made would run into legal and fiscal walls. More likely he will find himself poised on cliff edges where tactical retreat is the only way out but one likely to disappoint followers.

Constitutionally, the National Capital Territory of Delhi is not a state. Calling it a half-state or almost-state is neither here nor there for the Constitution recognizes no such entity. Like Puducherry, it is simply a Union territory with a legislature. Most are aware that police, law and order and land are completely out of the jurisdiction of Delhi government, but even in respect of subjects that it controls, the lieutenant governor (LG) can interfere, unlike the governor of a state, and where there is difference between the elected government and the LG, who is the nominee of the government of India, the matter gets referred to the home minister for his decision.

Out of Delhi’s five local bodies, one (Delhi Cantonment Board) reports to the defence ministry while the other four (New Delhi Municipal Corporation and the three MCDs of North, South and East Delhi) report to the home ministry. The urban development ministry has had its eyes on the MCDs but the home ministry refuses to relent. But the urban development ministry controls Delhi Development Authority (DDA), which owns substantial land required for development and also land-use. And the ministry is the final arbiter on all land-related issues—regularization of unauthorized colonies, conversion into freehold, etc. The Delhi government, on the other hand, is constitutionally required to share its revenue with the municipal bodies in line with the recommendations of the State Finance Commission and bail them out occasionally when they face fiscal stress. This is in addition to the ₹ 1,700-1,800 crore that flows to the municipal bodies as plan assistance from the Delhi government.

Even functionally, there is considerable overlap between the Delhi government and the municipal bodies. In education, initially the MCD ran primary schools and the government ran middle schools and above. Later on, Delhi government converted many of its schools into composite ones with classes 1-12, undercutting the MCDs efforts. Both run hospitals and dispensaries and both disburse old age pensions. Delhi government has also taken over hundreds of 60ft roads from the MCD which was facing fiscal constraints. And, of course, the central government runs hospital, dispensaries, schools and performs many such state government and municipal functions. An extreme example is of street lights, where there are as many as 17 agencies involved. On a particular stretch of road near the airport, the National Highways Authority of India (NHAI) is responsible for the lights on the original road, and a contractor of Delhi International Airport Pvt. Ltd (DIAL) does the same for the elevated portion.

Looking ahead, Delhi will face extreme fiscal pressures as over the past decade, it had gone on a spending splurge buoyed by resources released consequent on privatization of power distribution. SBI Capital Markets estimated cumulative savings of more than ₹ 30,000 crore a couple of years back. This is possibly an underestimation looking at the position pre-privatization. Then the government was forced to spend ever-increasing sums of money to keep Delhi Vidyut Board (DVB), the state power utility, afloat. The total support was ₹ 860 crore in 1998-99, ₹ 1,136 crore in 1999-2000 and ₹ 1,337 crore in 2000-01. While Plan support for capital investment went up gradually from ₹ 406 crore to ₹ 543 crores in the period, the non-Plan or subsistence support went from ₹ 454 crore to ₹ 794 crore, respectively.

At the time of privatization, DVB was not just a loss-making entity but had unpaid bills of more than ₹ 12,764 crore to public sector generating stations and railways, which is in a stage of being made good by government. There was considerable public dissatisfaction due to load-shedding. DVB could barely meet the peak demand of just 2,879 MW, and load-shedding was up to 5% of the load; the aggregate technical and commercial losses (ATC, earlier version was the infamous T&D losses) were in excess of 55%, which is now at 15%. Today, Delhi can meet peak loads of 6,000 MW, which means actual consumption at the consumer end of 5,000 MW, discounting 1,000 MW towards line losses. In the earlier scenario of 55% T&D losses, a consumption of 5,000 MW would translate to paying for a supply of 12,500 MW. Since tariffs could not have gone up so much, the government would have ended up spending almost its entire Plan budget of ₹ 15,000 crore on subsidizing DVB.

In the financial year ended March 2013, the Delhi government spent ₹ 13,800 crore on the Plan (development) side; the target was ₹ 15,000 crore. The subsidy to power consumers, not power utilities, constituted approximately 2% ( ₹ 270 crore) of the total actual expenditure. A 50% subsidy to consumers of up to 400 units would see a steep jump to ₹ 1,400 crore and would place this at 10% of the total money spent on development. It can be argued that since the development budget increases every year, in percentage terms, this share would come down.

This reading, however, is not correct since for the last many years, Delhi government has been spending more than it has been earning. This growth of expenditure has been driven on the recurrent, and not just the development, side since the government has launched major projects and built up considerable assets such as hospitals, higher education institutions, etc., in the recent past whose operations and maintenance charges have to be provided for. Fiscal space created from past savings arising out of power privatization and better tax administration is playing this balancing role, but such space is running out. Delhi’s net savings (opening balance in public finance jargon) was ₹ 7,713 crore on 01-04-2011, ₹ 4,636 crore on 01-04-2012 and ₹ 1,985 crore on 01-04-2013.

In other words, the Delhi government is spending more than it is collecting as revenue and using up savings. In fact, the draw down would have been faster but for the municipal elections in April 2012, which affected development works in two financial years. Similarly, the two rounds of assembly elections and 2014 Lok Sabha elections with large periods of code of conduct, and the absence of a popular government that would have launched many spending initiatives gave an artificial breather, but the situation on the public finance front is not sustainable. Though Delhi draws up an ambitious development agenda and has higher Plan budgets it lacks the resources to actually finance them, so is content with spending only 80% of its Plan budget.

State governments enjoy the advantage of land ownership that allows them to build public infrastructure relatively easily. Delhi does not. Other than for schools, the Delhi government pays ₹ 3 crore per acre to DDA for bus depots, higher education institutions and hospitals. To give a few specific examples, a National Institute of Technology is coming up in north-west Delhi. The Union government requires state governments to allot land for it free as its contribution. The Delhi government had to pay DDA ₹ 150 crore for the 50 acres required.

Similarly, for shifting the Millennium bus depot, the government would have to pay out ₹ 300 crore towards land costs itself. It is estimated that over a 10-year period (2013-23), costs of land for bus depots alone would be ₹ 1,500 crore at current prices. DDA can hardly be blamed entirely as it incurs the costs of land acquisition, development, etc. However, DDA has accumulated substantial cash reserves, which Delhi government could try and persuade the urban development ministry to put to use for Delhi’s development.

Where does Delhi go from here? VAT rates are already among the lowest in the country, so decreasing them further in order to improve compliance would be a limited exercise. Widening the tax base and preventing leakage would yield better returns.

Last year (2013-14), Delhi’s initial VAT target was ₹ 19,500 crore, which was later brought down to ₹ 18,200 crore. The actual collection was ₹ 17,925 crore, including ₹ 800 crore advance tax, which rightfully belongs to the next year. And VAT collections reflect the state of the economy, so some buoyancy can be expected in the near-term but no amount of tinkering with rates or better compliance can yield anything but incremental increases, certainly not by factors of two or three that would be required to fund the AAP’s initiatives. And market borrowing is a no-go—a UT, even one with a legislature, cannot legally borrow money. Mumbai has decided to install 6,000 CCTV cameras at a cost of ₹ 800 crore. If the AAP government intends installing 150,000 CCTV cameras, the amount required would be ₹ 20,000 crore. A thought should also go into understanding that merely installing CCTV cameras would serve little purpose unless somebody is there to monitor what is being captured by the cameras.

If Delhi lives within its means, it has unlimited fiscal autonomy, like states, but this state of affairs is dependant on its positive cash balance, which is fast drawing down. Once it tries to spend beyond its means, it loses that autonomy and becomes a subordinate office of the home ministry, like other UTs. If that were to happen, all financial decisions, effectively all decisions since you cannot even put security guards on buses without money, would be taken by the home ministry, and the full-time job of Delhi’s chief minister and his ministries would be to run up and down Raisina Hill as a supplicant. Kejriwal should be grateful that Delhi police is not under him. At present it, and Delhi’s pension liabilities, are borne on the home ministry’s budget. Any transfer to the Delhi government would immediately take away its fiscal autonomy, returning not just the police but the entire Delhi government to the home ministry. Not something for which the AAP fought and swept the polls.

Shakti Sinha, a former civil servant, director of South Asian Institute of Strategic Affairs, was finance and power secretary in Delhi government (2012-13).

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