1. Equity suffers Rs 75,000-crore blow: P Chidambaram

Equity suffers Rs 75,000-crore blow: P Chidambaram

The Finance minister listed 13 points for his Vision 2022. Among them were a roof for each family, clean drinking water...

By: | Published: March 22, 2015 12:18 AM
MGNREGA, Union Budget, Narendra Modi, Indian Economy, Arun Jaitley

As against the promised central assistance in 2014-15 of R3,14,814 crore, the government will actually transfer only R2,55,874 crore—a significant reduction of R58,940 crore. (Reuters)

The Finance minister listed 13 points for his Vision 2022. Among them were a roof for each family, clean drinking water, providing medical services, upgrading schools, and increase in agricultural productivity. Everyone agreed wholeheartedly.

He also listed five major challenges but promised that  “the government has decided to continue supporting important national priorities such as agriculture, education, health, MGNREGA, and rural infrastructure including roads. Programmes targeted for the poor and the under-privileged will be continued.” We were reassured.

He cautioned that there would be “reduced fiscal space for the Centre”. Several commentators, including Dr YV Reddy, chairman of the Fourteenth Finance Commission (FFC), politely corrected the finance minister. The total transfer to the states will be about 62%—which is the same as the average of the past several years and, hence, the fiscal space of the central government will be the same. The change is in the “untied” and “tied” proportions. Thanks to the FFC, the “untied” proportion of funds transferred to the states will increase from 32% to 42%.
The finance minister argued that the devolution of a 42% share of taxes is “an unprecedented increase which would empower states with more resources”, and deftly kicked the ball of ‘welfare’ into the states’ corner! I wish to examine his argument in this column.

According to the Budget documents, 23 schemes will be fully supported by the central government; 13 schemes will be run on a changed sharing pattern; and 12 schemes will be delinked from the Centre’s support. Among the delinked schemes are Normal Central Assistance, Special Central Assistance and Special Plan Assistance—three tools used by the erstwhile Planning Commission to address concerns of regional disparity and inequity.

The accompanying table speaks for itself. As against the promised central assistance in  2014-15 of R3,14,814 crore, the government will actually transfer only R2,55,874 crore—a significant reduction of R58,940 crore. And, for 2015-16, there will be a further reduction of R75,581 crore.

Equity-schemes

Now, go down the table. I have picked 14 heads of devolution of funds that support programmes that have contributed to the reduction of poverty and the enhancement of welfare. Under 13 of the 14 heads (the National Health Mission being the exception), the central government will give the states less money next fiscal than what will be spent in 2014-15. Even in the case of NHM, the ‘increase’ of R566 crore is an optical illusion because it had already suffered a cut of R4,216 crore in the revised estimate of 2014-15.

The government has argued that the shortfall will be more than made up by the increase in the states’ share of taxes collected by the central government. According to the Budget documents, the Centre will devolve upon the states R5,23,958 crore in 2015-16 as against R3,37,808 crore in 2014-15. But there is a catch: this will happen if the central government collects R14,49,490 crore or about 16% more of tax revenue than what was collected in 2014-15. Assume, reasonably, that the Centre will collect about 13% more in taxes, which was the average percentage during 2009-10 to 2014-15 (and not 16%). That will mean that states’ share will be only about R5,09,065 crore. If we assume, uncharitably, that tax revenues will grow at a rate lower than 13%, as it happened in 2013-14 and 2014-15, the share will be even lower.

What has Budget 2015-16 done? It has reduced the guaranteed component (CASP) by R75,000 crore and it may not be able to give the promised increase under the uncertain component (tax share). So, where are the additional resources that the states are presumed to have to fund crucial welfare programmes? Besides, in the absence of an institutional arrangement strongly recommended by the FFC, what is the guarantee that the states will use their “untied” resources to fund the gap in these programmes? Equity has suffered a cruel blow.

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