Delhi Budget: Disaster In The Long-Run

It does not address the demand-supply issue that will rise in education; CCTVs don’t check crime, and subsidies never helped transportation

One of the positive themes that have come to define the post-2014 political landscape of India is the recognition, by influential political parties, of the fact that cumbersome bureaucracy has been crippling national development. It must, therefore, be severely reduced if we are to realise any substantial change in the system.

Prime Minister Narendra Modi spearheaded the ‘ease of doing business’ campaign with his ‘minimum government, maximum governance’ slogan much before his rise to national leadership. Since his rise to power, however, there has been mixed results in this regard so far. Most recently, Arvind Kejriwal-led Aam Aadmi Party promised reforms that aim to end the ‘license raj’ that has come to characterise Delhi’s notoriously bureaucratic order. Judging from the party’s 70-point agenda and the recently delivered state Budget, however, its promise too looks far-fetched and faulty.

The truth that many politicians may inherently know but refuse to acknowledge in public is that any real reform in a system’s bureaucracy can only result from reducing and restricting the size of the State. The promise to end the license raj while, at the same time, increasing State involvement in the economy through delivering a largely populist Budget renders the promise superficial and propitiatory. And yet, that’s the line Kejriwal has toed by doling out huge taxpayer funds to government-sponsored social welfare schemes.

Delhi’s Deputy Chief Minister Manish Sisodia, on Thursday of last week, announced a massive allocation of funds to education, health and transport sectors. Together, they make up 72.38 per cent of the total Rs 41,129 crore Budget. It also announced subsidies on power and water tariffs. The expenditure on education was more than doubled compared to last year at Rs 9836 crores, while that on health was hiked by 45 per cent. This would not be bad, except for the fact that increased financial allocation in education without accompanying structural reforms in the sector does not lead to better outcomes. AAP is highly inclined towards expanding the scope of public education, and that is reflected in the Budget.

Under the Higher Education Credit Guarantee Scheme, for example, the AAP government will provide loans of up to Rs 10 lakh to students pursuing higher education. This, of course, without any collateral or third party guarantee and at interest rates lower than the market. To those among us who love studying the unintended effects of bad policies of governments across the world, this form of welfare is anything but new.

Frederic Bastiat, a 19^th century French classical theorist and political economist, had wisely enjoined,

It almost always happens that when the immediate consequence is favourable, the later consequences are disastrous, and vice versa.

Cheaper student loans may end up inflating higher education fees as the demand for education greatly outnumbers the supply of schools and colleges.

Besides, has the AAP calculated the supply of higher educational institutions that will be required to meet the increased demand fuelled by cheaper loans? Most certainly not, because it is beyond the scope of central planners to compute the demand-supply equilibrium. And given the numerous restrictions placed on private schools by the Right to Education Act, the supply-demand mismatch will only rise. Not to mention the possibility of more students graduating with higher debts and likely defaults, the consequence of which will ultimately have to be borne by the taxpayer.

The AAP government’s proposal to install CCTV in classrooms (to bring accountability) and DTC buses (to ensure women safety) is yet another example of ‘good intentions backed by bad economics’. Most private schools, including the unrecognised, low-cost ones in villages, deliver much better outcomes than government schools, but not because of installed CCTVs. They perform better owing to the existence of incentives. While State-owned schools provide subsidised education, private schools compete for limited household budgets. This prompts them to ensure superior quality lest they lose ‘customers’.

In proposing to use CCTV in DTC buses, the AAP seems to be following the United Kingdom, which has more than 6 lakh cameras installed in public spaces. Perhaps the most significant study on the effectiveness of CCTV in battling crimes in the U.K. comes from the Campbell Collaboration. This study involved a meta-analysis of 41 CCTV evaluations in city and town centres, public housing, public transport, and car parks. It reported that even though these cameras have been helpful in reducing vehicle crimes in car parks, the effectiveness was partly also because CCTVs were accompanied by other interventions such as improved lighting and security guards. In public transport and city and town centres, CCTVs “did not have a significant effect on crime.”

Even though we do not have similar evidence to support the case against CCTV in India, there is no reason why we should not expect a similar ineffectiveness of public surveillance in this country, given the monumental financial costs to the exchequer of installing the cameras, building the accompanying infrastructure and ensuring continued maintenance. In the UK, recent reports suggest that most civic councils are switching off the cameras in a bid to lower their expenses, which have been eroding their annual budgets. Is the Delhi government prepared to tackle such a situation in future?

Granted, Delhi’s fiscal position is much better compared to that of other states. In 2014-15, its fiscal deficit was recorded at 0.05 per cent of GSDP, much lower than that of all states (at 2.35 per cent) in the same year. Its revenue receipts have been consistently greater than revenue expenditures since 2007-2008. But tax collection in 2014-15 grew only 2.64 per cent compared to a growth of 10.60 per cent in the previous year.  To be sure, VAT collection grew the most, at 26 per cent, in the four months of AAP’s rule in Delhi. During President’s rule, it was a mere 2.03 per cent.

So, essentially, the AAP is relying on increased tax revenues to fund its multifarious social welfare schemes. Even though the government touted it as a “tax-free Budget”, it tabled a proposal on Monday — three days after the Budget — to increase the VAT ceiling from the current 20 per cent to 30 per cent. This amended cap will effectively enable the government of the half state to raise the tax rate in future in the event of a revenue constraint — which will most likely happen, given the profligate spending measures announced last week.

On the environmental front, the government has announced subsidies to the owners of newly purchased battery operated 4 wheelers and 2 wheelers. This would be in addition to the green subsidy announced by the Modi government in February. Both governments seem to want to direct the consumers to choose more environment-friendly vehicles, which is undoubtedly a noble intention.

But do subsidies help? After all, it’s not the first time a government has tried this approach. Under the National Electric Mobility Mission that was launched in 2013 by the UPA government, the ministry of heavy industries and public enterprises undertook subsidy-based initiatives to support the use of electric vehicles. This mission envisages a staggering 6-7 million sales of electric vehicles by 2020. But reports show that subsidies have failed to increase sales owing to a lack of awareness and the relatively higher cost of pure electric vehicles — the latter, despite the fact that the technology used in electric vehicles has been around for more than 180 years! Yet the industry has failed to upgrade to a low-cost one.

Even if we believe that subsidies would help, India — leave aside Delhi for a second — would still require major upgrades to its electricity infrastructure to support the charging requirements of those 7 million vehicles every year. The country, Delhi, in particular, is simply not prepared to manage such a massive challenge at this stage.

When we consider these implications of the AAP government’s rather absurd proposals, it becomes obvious that the Budget was delivered from a populist perspective without much deliberation on its long-term costs. A Budget is truly pro-aam aadmi when it’s based on sound economics, one that takes into account the unintended effects as well as long-term ramifications of its proposals, not just short-term benefits.