A sorry state of affairs

Central funding will not be used optimally unless state finances are put in order

One of the reasons attributed for the National Democratic Alliance’s defeat is its neglect of rural India. The new, United Progressive Alliance government has promised to focus on neglected sectors and, among others, increase outlay on education from 3 to 6 per cent of GDP.
That means an additional expenditure of about Rs 90,000 crore a year, given nominal GDP for FY2004-05 is around Rs 29,943 billion (figures from Central Statistical Organisation, Reserve Bank of India, National Accounts Statistics and Business Standard Talk of the Town, March 2004).
Most of us believe that an increase in allocation is the solution to India’s problems. Two issues: from where will the central government get this money?
Second, in a federal framework like ours, the Constitution has laid the onus of providing education mainly on state governments.
In spite of being on the Concurrent List, education is essentially the responsibility of state governments. In fact, until the Constitutional Amendment of 1976, education was exclusively a subject for state (not parliamentary) legislation.
Public health, water supplies and minor irrigation facilities are also the responsibility of state governments.
This vital role of the states is spelt out in several Plan schemes of the government wherein the allocation of funds by New Delhi to a particular scheme is linked to a matching financial contribution from the state concerned.
But states are unable to provide adequate education, medical and rural infrastructure services because they face a severe resources crunch. Consider some key economic indicators:
The gross fiscal deficit as a percentage of GDP for states was 2.9 per cent in 1997-98, 4.7 per cent in 1999-2000 and 4.2 per cent in the 2003-04 Budget estimate (BE).
There has been a significant increase in the gross fiscal deficit. Among the main reasons are increase in the salary bill, pension liabilities, interest cost and free power. For instance, pension payments increased from Rs 3,593 crore in 1990-91 to Rs 27,849 crore in 2001-02.
Non-development expenditure is mainly towards interest, salaries and pensions. In the 2003-04 BE, non-development expenditure accounts for Rs 1,77,820 crore; reserves and interest account for Rs 85,541 crore of this amount, administrative services Rs 30,508 crore, and pensions Rs 35,876 crore.
Also, the share of development expenditure as a percentage of total expenditure has been coming down gradually. It was 69.5 per cent in 1990-91, 63.7 per cent in 1997-98, 59.7 per cent in 1999-2000, and 55.1 per cent in the 2003-04 BE.
Also, the percentage growth in non-development expenditure is much higher than development expenditure. Comparing 1999-2000 figures with 2001-02, development expenditure grew by 15.6 per cent while non-development expenditure grew by 25.3 per cent.
Social service spends as a percentage of total expenditure has come down from 33.2 per cent in 2001-02, to 31.9 per cent in BE 2003-04. Similarly, spends on education, arts, and culture as a percentage of total expenditure have come down from 17.7 per cent to 16.4 per cent for the same period.
Water supply spends as a percentage of total expenditure hover around 2.4 to 2.5 per cent in both periods. However, what is worrying is that agriculture and allied activities expenditure as a percentage of total expenditure has fallen to 4.8 per cent in BE 2003-04 from 5.4 per cent in 2001-02.
A welcome sign is the increase in expenditure on rural development as a percentage of total expenditure from 3.6 per cent in 2001-02 to BE 4.7 per cent.
Overall, there has been an increase in non-development expenditure, accompanied by a fall in expenditure on social services and agriculture, but an increase in rural development outlays.
What strikes one is the sheer magnitude of state spends. Medical and public health spends in 2003-04 have grown by only 6.5 per cent as compared to 13.7 per cent in the revised estimates (RE) for 2002-03.
Similarly, water supply spends in 2003-04 have grown by only 8.2 per cent compared to 22.4 per cent in 2002-03 RE. While rural development spends have increased substantially in absolute terms, there is only a 1.8 per cent increase in irrigation spends in 2003-04.
Because of their precarious financial condition, state spends are inadequate and need to be supplemented with central government grants/ loans.
The BE 2003-04 show total grants from the Centre to states as Rs 63,421 crore; of this, elementary education and literacy account for Rs 4,905 crore; secondary and higher education Rs 4,957 crore; rural development Rs 10,290 crore; and rural water supply and sanitation Rs 2,751 crore.
The gap between total expenditure (excluding loans and advances for non-development purposes) and revenue receipts increased from Rs 86,800 crore in 2001-02, to Rs 97,018 crore in BE 2003-04.
If it were not for grants from the Centre, the gap would have been Rs 1,60,439 crore, or roughly 37 per cent of total expenditure in BE 2003-04. A positive sign is that non-development expenditure, as a percentage of state revenue, has come down from 88 per cent in 2002-03 RE to 85 per cent in BE 2003-04.
Most central schemes require states to contribute a share of the total cost; when the states do not contribute their share, the central funds lie unused.
For instance, a report in The Asian Age (March 25, 2004) reads, “The Centre’s Sarva Shiksha Abhiyan this financial year shows a big gap between plans and their implementation. Only a fourth of the total amount approved for the nationwide education project was actually spent by the states. Under the Abhiyan, the Centre shells out 75 per cent of the plan outlay. And states are also responsible for the implementation of the plan sanctioned by the Centre. Usually, they get the next installment of the sanctioned amount only after they have made use of the first one. According to the ministry, 78 per cent of the funds released by the Centre (Rs 1,848 crore out of Rs 2,362 crore) have so far been used by the states.”
A similar case is the Mid-day Meal Scheme. According to the Expenditure Budget 2003-04 (volume 2, page 116), “During 2002-03, 28.26 lakh million tonnes (MTs) of food grains had been allocated to 10.25 crore children. As on November 2002, 12.97 lakh MTs of food grain has been lifted as reported by FCI. Based on the central support, eight states/ union territories (UTs) are currently serving cooked food. Rest of the states/UTs are distributing food grains instead of cooked food, despite a Supreme Court order on November 28, 2001. Financial constraint has been cited as the main reason by these states in this regard.”
Therefore, a reduction in state government spends on the social/economic services accompanied by underutilisation of funds made available under central schemes have resulted in the worsening of conditions in rural India. But what happens when states do not use the funds allocated to them under special programmes like Sarva Shiksha Abhiyan?
Do they lapse in the same year so as to reduce the actual fiscal deficit or are they carried forward for a fixed period before lapsing? Can the finance minister give us an annual statement of funds allocated to states versus actual utilisation? As of now, this data is not accessible to the public but is available with individual ministries.
The statement should form part of the Expenditure Budget and should be comprehensive and prepared statewise. For starters, it could be limited to spends on elementary education and literacy, rural development, agro and rural industries, and agriculture.
When introduced, the statement will bring about a degree of transparency in the allocation of funds. A state government whose party is a crucial ally at the Centre might not find it as easy to get away with undue largesse from the Centre.

Further, state governments, which could not claim allocated funds because of their inability to make matching contributions or their failure to submit utilisation certificates, will stand exposed.
Both state and central governments need to immediately review their processes and procedures to plug leakages and increase the pace of implementation. This would ensure that funds are used effectively.
Lastly, we need to focus on state Budgets. Every state Budget needs to be evaluated by experts, economists and the media with the same degree of seriousness as the central Budget.
Those who framed our Constitution put large responsibilities on state governments. State Budgets must necessarily provide data on central assistance for each Budget scheme of expenditure and its utilisation.
If India is to make rapid strides in education, health and rural infrastructure, the states need to improve their fiscal condition and ensure better delivery mechanisms so that the money spent actually benefits a larger number of people.

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