States now have greater flexibility in using central funds, fixing norms

Written by Raj Kumar Ray | Updated: Apr 7 2014, 08:51am hrs
While some states and regional parties have been demanding special category status and financial packages as a precondition for lending support to national parties in the forthcoming Lok Sabha elections, the Centre has now given states greater flexibility in using central funds. Planning Commission member BK Chaturvedi told Raj Kumar Ray that, along with this, the increase in state Plan sizes by 20-30% (inFY15) will go a long way in empowering state governments. Excerpts:

In line with the recommendations of the committee headed by you, the government has reduced the number of centrally sponsored schemes (CSS) to

66 in the interim budget from 138 at the start of UPA-II. How will it help the Union and state governments

I am happy that the number of CSS has been reduced to 66. More than that what I am happy about is the approach adopted to reduce it. While reducing the CSS, we amalgamated a number of schemes and put them in a sort of an umbrella scheme. This, I feel, has long-term implications for CSS because for anyone who wants to take up a scheme, the activity of his choice can be undertaken under the umbrella scheme. There will be flexibility in moving resources from one scheme to another under the umbrella.

The interim budget also shifted a lot of central resources directly to the state plans. How will it help in overall fiscal management

There were CSS for which funds were provided to various central ministries. Some CSS were going through additional central assistance (ACA). Some of the ACA was reflected in the state plans. Now, all of the ACA will be reflected in the state budgets. This will be a true reflection of how much a state

is getting.

Earlier, the size of the CSS was about R2.5 lakh crore. So to that extent, the state budgets will go up. During FY15, some of the state plan sizes will go up by as much as 20%-30%.

We were earlier providing money through various agencies directly from the central government and central organisations. This has given rise to criticism, especially from the CAG, because the accountability for this money was not there. States were unhappy because it was not routed directly through their budget and treasuries. Now, it will be routed through their budgets, so they can easily monitor the funds, and they will be responsible for utilisation. The government of India can ask them about the level of supervision in the use of funds.

Different states have different developmental needs. Your committee proposed flexibility in the use of 20% of the funds provided by the centre. Has it been implemented

We have now provided 10% flexibility in using central assistance it's across the board for all CSS. This is one thing they wanted as for each state the needs are different. The needs of Kerala are different from those of the north-eastern states, or Haryana. And that will now be taken care of.

Also, there will be flexibility in physical norms. They (states) can fix their own norms and get it approved by the government (by a committee here in Planning Commission). And, once approved, they will be the final norms. Earlier, there used to one norm with some flexibility. But, now, we have given each state the flexibility of fixing its own norms. This again will be a major development.

In a federal structure, it is important that we do take care of the needs of states, understand their difficulties and their own level of development. Each state has a different level of development. Take the example of roads some states would like to build more bridges depending on their geographies. Earlier, it was not possible. But now we are able to take care of their needs and provide the

flexibility to choose from the umbrella scheme.

What if states dont spend the entire money allocated under the state plans

ACA is given in instalments and more money flows in as states use up the allocated funds. For instance, certain funds are earmarked under JNNURM.

Initially, the first instalment is given which, of course, is the normal rule. Depending on the development, further instalments are transferred. If a state is not able to use the funds, they will be given to other states.

In the past few years, there has been a reduction in actual capital expenditure vis-a-vis the budgeted amount to reduce the fiscal deficit. Has this further slowed down GDP growth

The growth rates in any case were slower (in the past three years). However, the effect of reduction in capital expenditure on many of the schemes, especially in the health sector, may affect social sector development in the short run.

States such as Bihar are demanding special category status even though they get more in central assistance than other general category states. How will the special status help

In case of CSS, special category states get 90% of the funding from Centre, and they have to spend the remaining 10% from their own resources. In contrast, a general category state has to spend 25% from its own resources.

States like Bihar want the special category status so that they can lower their spending to 10% in CSS, and use the remaining 15% on other developmental work. Also, a special category state in the northeast gets excise concessions for new industrial units, which can help attract investment, create jobs and boost GDP.

The Planning Commission has been treating special category states more liberally. A special central assistance (budgeted at about R16,000 crore for FY14) is used at the discretion of the commission to help weaker states.

In case of Seemandhra, the government has announced a

5-year special category status as part of the package. But will the new government notify the package

It has been announced by the Prime Minister and approved by the cabinet. Based on this, the new government will take a decision and hopefully approve it.

The finance ministry has referred the Raghuram Rajan panel's report to the Planning Commission so that more funds could be allocated to weaker states. How important will be the Rajan report on the 14th Finance Commission and Planning Commission on the future devolution of central funds to states

A lot of work has been done by the Rajan panel, I agree. But we have several other such studies one was done recently by the lanning Commission regarding hill states. All such studies will only be inputs for the finance commission.

The finance commission is mandated to determine the devolution of taxes. Its recommendations will be based on discussions with states. As far as the Planning Commission is concerned, it is governed by a Mukherjee-Gadgil formula for normal central assistance. We will continue with it. Unless it is changed by the National Development Council, we will continue with it. We can't really change it without NDCs mandate.