Delhi Government’s Proposed Borrowing from NSSF

The Aam Aadmi Party (AAP) government in Delhi has proposed to borrow ₹10,000 crore from the National Small Savings Fund (NSSF) for the financial year 2024-25. This decision comes just months before state elections. The government aims to maintain free services like electricity and water despite the Model Code of Conduct (MCC) likely limiting new expenditures. This borrowing raises concerns about future financial liabilities.

About the NSSF

The National Small Savings Fund is a government fund that collects savings from small saving schemes. It provides loans to state governments and invests in state and central government securities. Currently, only four states, including Delhi, utilise this fund for borrowing. Most states prefer market borrowings due to lower costs.

Delhi Government’s Loan Proposal

The Delhi government has formally requested ₹10,000 crore from the NSSF. Despite pushback from the Finance Department, Chief Minister Atishi signed the proposal. The Finance Department cautioned against this borrowing, suggesting that Delhi should withdraw from the NSSF due to its high-interest rates.

Concerns Over Borrowing

Past issues with the NSSF have complicated Delhi’s borrowing capacity. The Union Ministry of Finance previously objected to Delhi prepaying older loans. This led to a halt in borrowing from the NSSF for the fiscal year 2023-24. The ministry indicated that future borrowing would be limited and tied to strict repayment scenarios.

Repayment Scenarios

Two scenarios for loan repayment have been outlined. Scenario I allows Delhi to exit the NSSF scheme by March 2039, incurring no further liabilities. Scenario II involves continuing the loan, leading to a massive interest burden of ₹57,661.68 crore by 2039, alongside a principal repayment of ₹1,26,697.47 crore.

Expenditure Estimates for FY25

As of July 2023, Delhi spent approximately 24.63% of its ₹76,000 crore budget for FY25. The government anticipates total expenditures to reach ₹68,300 crore, a record high. This expenditure includes ongoing schemes deemed “revdis” or freebies, which have garnered political debate.

Political Implications

The AAP continues to promote free services as part of its electoral strategy. Their campaign, “Revdi pe Charcha,” aims to highlight these initiatives, including free electricity and healthcare. The government’s spokesperson maintains that debt management is a routine administrative decision, emphasising that Delhi’s debt-to-GDP ratio has decreased .

Future Financial Challenges

The proposed borrowing raises concerns about long-term financial sustainability. Future governments may struggle with the repayment of loans and associated interest, especially under the constraints of the MCC.

Questions for UPSC:

1. Critically examine the role of the National Small Savings Fund in state financing.
2. Discuss in the light of the fiscal policy implications of the Aam Aadmi Party’s free service initiatives.
3. What are the potential consequences of high public debt on state governance and service delivery?
4. Explain the significance of the Model Code of Conduct in the context of electoral politics and state expenditure.

Answer Hints:

1. Critically examine the role of the National Small Savings Fund in state financing.

1. The NSSF provides loans to state governments, primarily for developmental projects.
2. It collects savings from small saving schemes, acting as funding source.
3. Most states prefer market borrowings due to lower interest rates compared to NSSF loans.
4. The fund also invests in government securities, supporting both state and central financial needs.
5. Only a few states, including Delhi, utilize NSSF, leading to concerns about its sustainability and cost-effectiveness.

2. Discuss in the light of the fiscal policy implications of the Aam Aadmi Party’s free service initiatives.

1. The AAP’s free services aim to enhance electoral appeal and social welfare, influencing fiscal policy .
2. Such initiatives can lead to increased public expenditure, impacting budget allocations and fiscal deficits.
3. Long-term sustainability of these services raises concerns about future financial liabilities and debt levels.
4. Political opposition criticizes these initiatives as “revdis,” questioning their economic viability.
5. Continued free services may necessitate borrowing, affecting the state’s fiscal health and credit ratings.

3. What are the potential consequences of high public debt on state governance and service delivery?

1. High public debt can limit a government’s ability to fund essential services and infrastructure projects.
2. Increased debt servicing costs may divert funds from critical public services, affecting governance quality.
3. Future governments may face challenges in managing repayments, leading to potential fiscal crises.
4. Public dissatisfaction may grow if services are compromised due to debt burdens, impacting political stability.
5. High debt levels can also deter investment and economic growth, further complicating governance issues.

4. Explain the significance of the Model Code of Conduct in the context of electoral politics and state expenditure.

1. The MCC is designed to ensure free and fair elections by regulating government actions during campaigns.
2. It restricts new schemes and expenditures, impacting state budgets and project announcements.
3. Governments must manage existing commitments without introducing new financial burdens during the MCC period.
4. The MCC helps prevent misuse of state resources for electoral gains, promoting political equity.
5. Compliance with the MCC can influence voter perception and trust in government integrity during elections.