Saturday, March 7, 2015

The Myth of Larger Devolution to States


Sona Mitra

The Union Budget 2015-16 is the first full-fledged budget placed by a government which was elected with a large majority a mere nine months ago. The direction of the Union budget remains fixed at fiscal consolidation with a renewed aggression translating into massive expenditure compression and several concessions announced around tax exemptions, particularly in the realm of direct taxes. The total expenditure of the Union government has declined from Rs.17,94,892 crore in 2014-15BE to Rs.17,77,477crore in 2015-16BE. In nominal terms, the decline in expenditure comes mostly on account of the reduced Plan expenditure of a magnitude of Rs. 1,09,723 crore.  However Plan, Non-plan and overall expenditures as percentage of GDP shows a decline, more so for Plan allocations.

The justification provided by the government for such reduction is on account of the 14th Finance Commission (FFC) recommendations for fiscal devolution to states. One of the major recommendations made in the FFC report which was tabled last week, and accepted by the centre, took a leap forward in terms of changing the nature of resource sharing between centre and states. The FFC recommended a transfer of 42 percent of the divisible central taxes to the states which amounted to an increase by 10 percent points from its predecessors. The increased tax devolution is projected by the government as a transfer of greater resources and increased autonomy to the states and has been claimed as a strong step towards ‘cooperative federalism’. It is important to however uncover the degree of truth associated with these large claims.

An examination of the amount of increased devolution provides a clearer picture of the status of overall resources being transferred to the states. Table 1 below shows that the Total Union resources, states’ share in central taxes and Non-plan grants as share of GDP does show an increase from 2013-14 revised estimates. However, while the states’ share in central taxes and Non-plan grants, as share of GDP has increased, the magnitude of overall Union resources transferred to states as percentage of GDP by the 2014-15 budgeted expenditure reveals a decline in 2015-16BE.

            Table 1: Composition of Transfer of Resources to States as Share of GDP (in %)


2014-15 BE
2014-15 RE
2015-16 BE
States share of taxes and duties
3.0
2.7
3.7
Non Plan grants and loans to states
0.6
0.6
0.8
Central Assistance to State Plan
2.6
2.1
1.4
Total Union Resources transferred to States
6.2
5.4
5.9
Note:*Total union resources comprise of states’ share in central taxes, non-plan grants, Central
Assistance to state plans, Total budget support for Central plan.
Source: Compiled by CBGA from Union Budget documents, 2015-16

These increases imply that while the states would definitely enjoy a greater degree of autonomy and flexibility in terms of deciding on their expenditure priorities, it does not necessarily imply an increased spending capacity for the states. Thus the Union government’s argument for reducing Plan assistance to states due to an increased transfer of resources to the states remains unqualified and cannot be an alibi to cut down on important expenditure commitments, specifically those on social sectors. The reduced Plan expenditures by the centre in fact reveal the lack of priority accorded to the social sector commitments of the Union government.
The government has divided some of the important schemes and programmes into three distinct categories. It is important to interpret these categories as a lot of it could be misleading in the way they have been announced by the Union budget. The Union budget 2015-16 categorically states that due to the higher devolution of taxes to the states, the Normal Central Assistance, Special Plan Assistance, Special Central Assistance and Additional Central Assistance for other purposes are subsumed in the Finance Commission award itself. The Centre has thus decided to discontinue eight schemes which include important programmes related to the capacity building of the local bodies such as the Rajiv Gandhi Panchayat Sashaktikaran Abhiyaan and Backward Regions Grant Funds. The list is provided in table 2a.
                                        Table 2a: Schemes to be Discontinued by the Centre 

Sl. No.
Name of Scheme
1
National e-Governance Plan
2
Backward Regions Grant Funds
3
Modernization of Police Forces
4
Rajiv Gandhi Panchayat Sashaktikaran Abhiyaan (RGPSA)
5
Scheme for Central Assistance to the States for developing export infrastructure
6
Scheme for setting up of 6000 Model Schools
7
National Mission on Food Processing
8
Tourist Infrastructure

Source: Compiled by CBGA from Union Budget documents, 2015-16


As a second category, the government has announced 31 schemes that would continue to be fully supported by the government (Table 2b). It needs to be clarified that full support does not imply 100 percent Union government support. Given the way they have been reported in the budget documents, it could be interpreted as schemes where the sharing pattern continues to remain same as in the previous years. These comprise of the schemes which represent national priorities especially those targeted at poverty alleviation, schemes mandated by legal obligations and those backed by Cess collection like the SSA and the MDM.The fourth criteria for this category relate to schemes which are targeted to benefit the socially disadvantaged group which includes SCs, STs, Muslims and physically challenged sections of the population. However, this list of 31 schemes does not include important programmes related to children and women, such as the ICDS or the National Health Mission or schemes related to the protection and prevention of violence against women.

 Table 2b: Schemes that Continue to be Fully Supported by Union Government
(Where the sharing pattern continue to remain as in the previous years)

Sl. No.
 Name of Scheme
1
Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA)
2
Multi Sectoral Development Programme for Minorities (MSDP)
3
Pre-Matric Scholarship for children of those engaged in unclean occupation
4
Scholarship schemes (Post and Pre Matric) for SC, ST and OBCs
5
Support for Machinery for implementation of Protection of Civil Rights Act, 1955 and Prevention of Atrocities Act 1989
6
National Programme for persons with Disabilities
7
Scheme for providing Education to Minorities
8
Umbrella scheme for education of ST Children
9
Indira Gandhi Matritva SahyogYojna (IGMSY)
10
Integrated Child Protection Scheme (ICPS)
11
Rajiv Gandhi Scheme for Empowerment of Adolescent Girls (RGSEAG)- SABLA
12
National Nutrition Mission (NNM)
13
Scheme for protection and development of women
14
Assistance for schemes under proviso(i) to Article 275(1) of the Constitution
15
Special Central Assistance to Tribal Sub-Plan
16
Sarva Shiksha Abhiyaan (Financed from Education Cess)
17
Mid-Day Meal
18
Schemes of North Eastern Council
19
Special Package for Bodoland Territorial Council
20
National Social Assistance Programme (NSAP) including Annapurna
21
Grants from Central Pool of Resources for North Eastern Region and Sikkim
22
Social Security for Unorganized Workers Scheme
23
Support to Educational Development including Teacher Training and Adult Education
24
Border Area Development Programme
25
Member of Parliament Local Area Development Scheme (MPLADS)
26
Cess backed allocation for Pradhan Mantri Gram SadakYojna (PMGSY)
27
Roads and Bridges financed from Central Road Fund
28
Project Tiger
29
Project Elephant
30
Additional Central Assistance for Externally Aided Projects (Loan Portion)
31
Additional Central Assistance for Externally Aided Projects (Grant Portion)

Source: Compiled by CBGA from Union Budget documents, 2015-16

Finally as a third category, the government has listed certain Centrally Sponsored Schemes to be implemented with a changed pattern of sharing of resources, with States to contribute higher share, details of which will be worked out by administration ministries. The number of such schemes is 24 and the list is provided in Table 2c. However, there remains a corollary to the explanation for the modified sharing patterns provided in the budget documents. It has been categorically added by the centre that:
The Centre-State funding pattern is being modified in view of the larger devolution of  tax resources to States as per the recommendations of 14th Finance Commission whereby in this scheme, the revenue expenditure is to be borne by the States.

This announcement implies that expenses on the capital account for the programmes at the state level would be borne by the Union government. Given the fact that capital expenditure by the states on most of these listed programmes are miniscule and they have a much larger revenue component it would then safely translate as states bearing greater shares of the expenditures. So a modified sharing pattern essentially marks an increase in the share of states for most of the schemes. Further it may be interpreted as a slow phase out of the schemes from the ambit of the Union government in coming years.

Table 2c: Schemes with Changed Pattern of Sharing Between Centre and States
(Centre to support only Capital Expenditure for these schemes)

Sl. No.
Name of Scheme
1
Cattle Development
2
Mission for Integrated Development of Horticulture
3
Rashtriya Krishi Vikas Yojana
4
National Livestock Mission
5
National Mission on Sustainable Agriculture
6
Dairy VikasAbhiyaan
7
Veterinary Services and Animal Health
8
National Rural Drinking Water Programme
9
Swaccha Bharat Abhiyaan (Rural and Urban)
10
National Afforestation Programme
11
National Plan for Conservation of Aquatic Eco-Systems (NPCA)
12
National AIDS and STD Control programme
13
National Health Mission
14
National Urban Livelihoods Mission (NULM)
15
Rashtriya Madhyamik Shiksha Abhiyaan (RMSA)
16
Strategic Assistance for State Higher Education – Rashtriya Uchcha Shiksha Abhiyan (RUSA)
17
For Development of Infrastructure Facilities for Judiciary
18
National Land Records Modernisation Programme
19
National Rural Livelihood Mission (NRLM)
20
Rural Housing- Housing for All (IAY)
21
Integrated Child Development Service
22
Rajiv Gandhi Khel Abhiyan (RGKA) (erstwhile Panchayat YuvaKridaaur Khel Abhiyan (PYKKA)
23
PMKSY(including Watershed programme and Micro irrigation)
24
Impact Assessment Studies of AIBFMP


Source: Compiled by CBGA from Union Budget documents, 2015-16

It is therefore amply clear that the states, under the changed fiscal arrangements, are ‘expected’ to play a larger role in supporting social sector expenditures. It thus implies that resources of the states need to increase commensurately, else all these important programmes would eventually wither away. Moreover, with reduced plan assistance to states and formula driven plan assistance being nil, the states would thus have no option but to have a zero plan revenue deficit and thus might not be able to spend as per their needs even after getting higher untied funds from Centre.
Therefore while the union government would successfully absolve itself from any kind of social sector commitments, as and when it transfers the 24 schemes listed in Table 2c to the states, it could be a valid apprehension that whether the states would be willing and prepared to take up such huge responsibilities in immediate future. This is not to question the step towards fiscal federalism, which is undoubtedly welcome, but to raise an apprehension based on the figures for social sector expenditures made by the states in the last fifteen years (Chart 1).
Chart 1 clearly shows that average social sector expenditures by all states in the last fifteen years have been 36 percent approximately[1]. Therefore, in order to realise the Centre’s expectations that the states would shoulder major responsibilities of provisioning for the social sectors, would only be possible under massive reprioritization of spending patterns in the states as well as flow of adequate resources to fund these expenditure priorities.

Chart 1: Social Sector Expenditure as Share of Total expenditures by States*
(2001-02 to 2013-14BE)


Notes:* Includes expenditure on social services, rural development and food storage and warehousing under revenue expenditure, capital outlay and loans and advances by the State Governments.
Source: Compiled by CBGA from State Finances: A Study of Budgets, 2013-14, RBI, Mumbai.

It also raises apprehensions about whether all states, specifically the poorer ones, are enough prepared to undergo the reprioritization and planning processes with an immediate effect. It is not to question the capacities of the states to undergo this exercise, but to raise apprehensions for the duration of the gestation period. It is of course a known fact that longer gestation periods would imply delays in planning, implementation and distortion in fund flow mechanisms, not to mention further deteriorated social conditions for the poor and marginalized. And in doing so it needs to be ensured that the states do not face any resource constraint. 

Hence, it follows from the above discussion that the step towards ‘cooperative federalism’, with increased autonomy and flexibility in spending abilities for the states would yield improved outcomes based on a singular question of whether the overall size of the pie improves for the better. This could be examined only in the subsequent years, as soon as greater details of overall tax revenue collections as well as state level expenditure estimates begin appearing in the public domain.

Notes


[1]It is obviously acknowledged that there have been changes in patterns of fund transfers from centre to states, following the recommendations of the different Finance Commissions, specifically from the 10th FC onwards, which has had its impact on the expenditure pattern of the states. In this analysis a broad social sector expenditure trends for all states have been depicted, taking into account all the necessary changes. 

[The author works with the Centre for Budget and Governance Accountability. Views are strictly personal.]

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