Monday, May 4, 2015
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States are better capable of administering their finances. Source: Aart van Bezooyen/Flickr
The Union budget doles out greater financial autonomy to states when it comes to social sector schemes. We look at the pros and cons
 
UNION BUDGET 2015-2016 came in with many announcements that intended to give a proper shape to the vision of NDA government in power at the Centre. Beginning with introduction of levies like Swacch Bharat Cess, tax exemptions for renewable energy products, widening of tax base and institution of Rural Infrastructure Development Fund (RIDF) besides other measures, it does come in as promising, given the difference each of these measures are capable of making.
 
Interestingly, this budget also saw the implementation of recommendations from the 14th Finance Commission, which had increased the share of states in the gross tax receipts (only the divisible pool; receipts under cesses are not shared with the states) from 32 to 42 per cent. While in actuals this might translate to an increase of a nominal 4 per cent in terms of tax revenue shared (from Rs 7.62 lakh crore in 2014-2015 to Rs 7.93 lakh crore in 2015-2016), it is the nature of these resources that add value to fiscal devolution. 
 
Resources that largely flew into states as assistance to plans or for implementation of Centrally- sponsored schemes, will now come in as share of tax revenues giving more autonomy to the states to decide on their priority spending. From the divisible pool, the tax share of states is stipulated to increase gradually from 2.97 per cent of GDP in 2015-2016 to 4.27 per cent in 2019-2020.
 
Resources that largely flew into states as assistance to plans or for implementation of Centrally- sponsored schemes, will now come in as share of tax revenues giving more autonomy to the states to decide on their priority spending. From the divisible pool, the tax share of states is stipulated to increase gradually from 2.97 per cent of GDP in 2015-2016 to 4.27 per cent in 2019-2020.
 
Yet, it is still not clear if we can celebrate this development in the fiscal architecture. In the context of resource sharing, states receive two kinds of funds from the Centre. One is the untied funds that flow in according to the sharing of resources from the Central taxes and grants in aid as proposed by the Finance Commission while the other is Central Assistance to States and UT Plans in line with the recommendations of the Planning Commission. This can further be classified to normal central assistance, special and additional central assistance.
 
Of these, only funds under normal central assistance are completely untied in nature, while the latter two have to be spent on conditions dictated by central guidelines. Given this premise, it becomes very crucial to see if the budget for any year provides an increase in the share of tied or untied funds, which thereby determines the extent of fiscal devolution and thence the devolution of power to states.
 
Fund transfer to states for implementation of Centrally-sponsored schemes meant most of the funds came with conditions. Figures for 2005-2006 to 2015-2016 reveal that the share of funds untied to conditions declined from about 78 per cent in 2005-2006 to 57.4 per cent in 2009-2010, after which it again saw a steady increase up to 74.1 per cent in 2015-2016. This could simply mean that we have come back to a fiscal scene that is similar to 2005-2006, leaving more to be desired in furtherance of these developments.
 
 
 
 
 
One encouraging development since the financial year 2014-2015 has been the practice of disbursing all Central¬scheme funds to the state finance departments, which can then allocate to the concerned departments or implementing agencies through the state budget. This is certainly a welcome measure, adding value to the institutions at the state level. 
 
One encouraging development since the financial year 2014-2015 has been the practice of disbursing all Central¬scheme funds to the state finance departments, which can then allocate to the concerned departments or implementing agencies through the state budget
However, all these developments are subject to caveats like fall in the share of Central allocation for Centrally-sponsored schemes that are justified on the grounds of increased devolution to states. For example Centre’s total allocation for agriculture sector has come down by about 10.4 per cent from 2014-2015. Outlay for important schemes like the National Food Security Mission and the Rashtriya Krishi Vikas Yojana, which were very critical to agriculture’s growth rate from 2004 and 2013, have been reduced by over Rs 5,500 crore. In the absence of a proper sharing formula between the Centre and States, there is very little scope for the States to meet the shortage in funds. 
 
Also to be noted in the budget for 2015-2016 is that the Central sector budgeted expenditure is significantly lower than that for 2014-2015 in many ministries and departments, notably within the plan expenditures. With the exception of Road Transport and Highways which saw an increase of 35.1 per cent, Agriculture & Cooperation, Women & Child Development saw a marginal increase of 0.2 per cent. Rural Development ministry saw the least amount of increase at 0.03 per cent. School education and literacy saw a decline of 1.7 per cent in its Central sector budgeted expenditure from 2014-2015, while the power ministry suffered a decline of 29.5 per cent. Much worse is the Central allocation for Housing & Urban Poverty Alleviation and New & Renewable Energy that have plummeted by 35.2 per cent and 68.3 per cent respectively. 
 
 
 
 
 
Significantly, the budget has categorically identified eight schemes that will be discontinued, including Backward Regions Grant Funds, Modernisation of Police Forces, scheme for setting up of 6,000 model schools, scheme for Central assistance to states for developing export infrastructure and others.
 
Along with this, there are 31 schemes, including Sarv Shiksha Abhiyan, Mid-Day Meal Scheme, National Programme for Persons with Disabilities, MGNREGA, Integrated Child Protection Scheme and National Nutrition Mission, that will continue with the existing cost sharing pattern between Centre and the states.
 
Lastly, there have been listed another 24 schemes, whose capital expenditure alone will be borne by the Centre. These include National Mission on Sustainable Agriculture, National Rural Drinking Water Programme, National Health Mission, National Urban Livelihoods Mission and Rashtriya Madhyamik Shiksha Abhiyan.
 
Increased resource base for states from the divisible pool of tax revenue must be read in conjunction with these trends to be able to effectively gauge the impact on fiscal architecture. Given that a majority of states’ capital expenditure goes towards infrastructure, power and irrigation projects, a bulk of the social sector expenditure has been hailed by the central shares. Therefore, it remains to be seen if states can adapt to the resource rearrangement immediately and plan for their priorities accordingly. Such rearrangements should in no way compromise investments in one priority sector over the other. 
 
Given that a majority of states’ capital expenditure goes towards infrastructure, power and irrigation projects, a bulk of the social sector expenditure has been hailed by the central shares. Therefore, it remains to be seen if states can adapt to the resource rearrangement immediately and plan for their priorities accordingly. 
 
Studies have indicated that states are better capable of administering their finances, while at the same time steadily increasing public investments, when compared to the Centre. While the Union government struggles to manage its fiscal deficit every year, states, except Punjab, Kerala and West Bengal, have been able to show a balanced revenue budget in the last nine years.
 
This cannot be attributed to increased transfers from the Centre because the ratio of central transfers to gross state domestic product in the last three years have been lower than it was in 1980s and 1990s. Thus, improvements in own revenue performance and expenditure management have led to this turnaround.
 
It can therefore be said that with greater flexibility to utilise their resources and a proven record to effectively improve their fiscal positions, states are in a better position. But will they be able to devise their own social welfare policies which cater to local needs and aspirations? How they traverse this phase in the next two years will help test the changes made this year. That will also answer if states have become more powerful or remain vulnerable to changes that can be instituted by the Centre.  
 

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