Fiscal transfers risk becoming a game of competitive populism where leaders lose the ability to product-differentiate their offerings
East Asian economies that managed to transition from low income to high income status were successful due to a variety of reasons. Among these was critical spending on human capital development—primarily in the form of education and healthcare. These investments made workers more productive, fueling sustained economic growth that propelled these countries to prosperity.
A similar model was proposed for Delhi in 2013—a new start-up proposing to put greater attention on human capital development. However, the idea was seemingly rejected last Saturday with people of Delhi voting for change. The rejection was not for the desire to have good quality of public goods—but rather the inability to provide good quality institutions even after a decade.
Misplaced Focus
An interesting phenomenon has played out over the last decade where citizens increasingly demand performance and accountability. This is an outcome of the expansion of India’s educated and aspirational middle-class that seeks improvement in their living standards. The tragedy, however, is that the natural response from administrators has been the “projection” of performance by shifting towards vanity projects that deliver instant gratification rather than resolving more challenging problems.
An example of this would be putting up smog towers to respond to a worsening Air Quality Index rather than attempting to solve to problem of Delhi’s pollution. Pollution in Delhi is not a recent phenomenon and many moons ago, the Delhi Transport Corporation (DTC) was forced by judicial process to transition to compressed natural gas (CNG) buses in an effort to reduce pollution in Delhi. The transition was successful in reducing pollution for a while even as it came at a significant cost to the exchequer. Another example would be the education model where over one lakh students were held back in 9th grade to show improved performance of the Delhi government’s schools. These students were eventually pushed out of the formal schooling system, rather than be offered additional resources to help their learning outcomes.
Instant gratification has also meant limited interest in making long-term capital investments in infrastructure. Delhi’s own finances show that 80% of expenses are on revenue expenditure and only 20% towards capital investments in the form of roads or flyovers. And while substantial investments were made to upgrade the city’s infrastructure during the Commonwealth Games using grants from the Union government, a decade of limited investments has meant that the existing network of roads, sewage and other public infrastructure is woefully inadequate.
The Delhi government’s capex spending has been stagnant since 2021-22 (Rs 15,129.28 crore in 2021-122 to Rs 14,912 crores as per the revised estimates for 2024-25). Lack of investments in public infrastructure incidentally came during a period when Delhi benefited from the transition to a consumption-based indirect tax in the form of the Goods and Service Tax. Much of the benefit from this transition went into expanding the size of the overall budget, allowing more space to carve out welfare programmes.
Systemic Problems
These welfare programmes began with subsided power and water for all—irrespective of income status. This meant that a rich household with just two members that consumes minimal electricity benefits even as a poor household with six members that consumes more electricity is left out of the welfare scheme. This was later supplemented by a free bus ride programme targeted towards women. The programme to offer free bus service to women and ensure their greater presence in public spaces is an effective policy intervention with many spillover benefits. However, the rollout of the programme happened at a time when the overall bus fleet of DTC was at an all-time low. From 4,705 buses in 2014-15, the overall bus fleet of Delhi had reduced to 3,191 in Delhi with many CNG buses running for more than 10 years. A closer examination is warranted to study the extent of emissions from these old buses.
The welfare model worked during initial years as Delhi enjoyed significant capital outlays on infrastructure made during the late 2010s and substantial investments from the Union government in the form of National Highways, expressways and the metro. Over a decade, urban infrastructure requires upkeep and the absence of this meant broken roads, blocked sewers and a decline in overall quality of life. A natural response to this was to transition to more welfare measures—such as the new programme to transfer Rs 2,100 (which was initially announced in the previous budget as a programme that would transfer Rs 1,000). The programme has been implemented in several other states and presents another unique paradox as agricultural productivity continues to lag even as close to Rs 2trn has been spent in cash transfer programmes over the last few years. A consequence of this is higher inflation which erodes the purchasing power of the financial transfers.
Fiscal transfers may deliver instant gratification but will not resolve the deep and structural governance challenges faced by our states and particularly urban cities. More importantly, it risks becoming a game of competitive populism where leaders lose the ability to product-differentiate their offerings. Delhi’s 2025 campaign is a sign of the danger of competitive populism and the need to get back to actual governance.
The author is a New York-based economist. Views are personal.