How Delhi went from surplus to deficit budget under AAP rule

In October 2024, economic commentators raised alarm bells over the financial state of Delhi’s government. For the first time, the capital’s budget was heading toward a deficit. Once hailed for its robust fiscal management under the Sheila Dikshit government, which left a surplus in 2013, Delhi’s financial health now appears to be in a precarious state.

Economists attribute this downturn to the Aam Aadmi Party (AAP) government’s heavy expenditure on freebies and advertising, while opposition parties have pointed fingers at Chief Minister Arvind Kejriwal’s alleged extravagance, including his lavish official residence.

Legacy of surplus

When Sheila Dikshit’s government handed over the reins in 2013, Delhi had a fiscal surplus of ₹3,231.19 crore. This achievement was the result of disciplined budget management and strategic investments in infrastructure and public services.

However, by 2024, the situation had flipped. Budget estimates for the fiscal year 2024-25 reveal a likely deficit of ₹1,495.48 crore, signalling a significant departure from the financial prudence of the past.

Decline begins

Arvind Kejriwal entered mainstream politics in 2012, claiming that the then-Congress-led Delhi government had ample resources but was failing to spend them on the poor. This narrative resonated with Delhi’s economically weaker sections, who gave his AAP government overwhelming mandates in 2015 and 2020. Over the years, however, the surplus left behind by the Dikshit administration evaporated under the weight of the AAP’s populist policies.

Major expenses include subsidies on electricity and water, which cost the state exchequer ₹512 crore annually. Additionally, a substantial portion of the budget is spent on advertising, which critics argue prioritizes the party’s image over essential developmental work.

Breaking down the 2024-25 budget of Delhi

The Delhi government’s anticipated receipts for FY 2024-25 were pegged at approximately ₹61,000 crore. These funds are primarily allocated for revenue expenditures, including operational costs, infrastructure maintenance, and welfare subsidies. However, demands from various departments have stretched the budget thin:

• Law Department: ₹141 crore required to align pensions with the 2nd National Judicial Pay Commission’s recommendations.

• Power Department: ₹512 crore needed to subsidize consumer electricity bills through DISCOMs.

• Transport Department: ₹941 crore required to support the viability of electric buses.

• Health Department: Funds directed toward hospital remodeling and acquiring the University College of Medical Science (₹250 crore).

• Irrigation and Flood Control Department: ₹447 crore required for de-silting and restoration work.

• Delhi Metro Rail Corporation (DMRC): A massive ₹3,271 crore needed to address operational losses and repay loans to the Japan International Cooperation Agency (JICA).

These additional demands amount to ₹7,362 crore, creating immense strain on the state’s financial resources. With a monthly expenditure on salaries, wages, and interest repayments pegged at ₹2,240 crore, Delhi’s cash reserves of ₹4,471 crore appear insufficient to sustain even two months of operational costs.

Welfare burden

Ignoring these financial challenges, the AAP government announced plans to double the cash dole under the Mukhyamantri Mahila Samman Yojana to ₹2,100 monthly for 3.8 million women. This welfare initiative, estimated to cost ₹9,576 crore annually, is expected to push the FY26 budget deficit even higher.

Delhi’s revenue surplus has already shrunk dramatically, from ₹14,457 crore in FY23 to ₹4,966 crore in FY24. With an additional ₹10,000 crore expenditure planned, the surplus could turn into a deficit by FY26. This would equate to 1.5 times the current budget deficit and nearly 13% of the state’s total budget.

Impact on key sectors

The financial strain is evident in cuts to essential sectors:

• Transport: The projected budget for FY24 matches the additional welfare expenditure, potentially stalling infrastructure projects.

• Health: Allocations for health and family welfare have dropped to ₹5,919 crore in FY24 from ₹8,338 crore in FY23.

• Education: Welfare spending now represents 62% of the capital’s ₹16,000 crore education budget.

• Capital Outlay: Spending on capital projects is set to decline from ₹8,338 crore in FY23 to ₹5,919 crore in FY24, raising concerns over future developmental initiatives.

Lessons from Centre

The AAP government’s fiscal trajectory bears a striking resemblance to the United Progressive Alliance (UPA) government at the Centre. During its first term, UPA 1 — supported by 60 communist MPs — prioritised welfare spending, benefiting from the lag effect of previous economic policies. 

However, by UPA 2, empty coffers forced the government to take drastic measures, such as opening the retail sector to foreign direct investment, which met with fierce resistance from local traders.

Road ahead

The current fiscal challenges demand urgent attention. Without strategic fiscal oversight, the government of the National Capital Territory of Delhi risks further exacerbating its financial woes. The government must explore avenues for additional revenue generation, such as revising taxes and curtailing non-essential expenditures. Failure to act could jeopardize the state’s ability to fund critical infrastructure and welfare programs.

Delhi’s fiscal journey from surplus to deficit serves as a cautionary tale for other states. The balance between welfare and fiscal responsibility is delicate and requires prudent management to ensure long-term sustainability.