A huge rise in grants-in-aid as percentage of govt revenue expenditure means little role for gatekeepers
By the end of this week Parliament will have approved the central government plan to spend R6,10,000 crore this year, without an appreciation that nearly 80% of that money will be cash handouts with very little checks and balances.
After a year when the government will give its report card on how the money was spent, Parliament will be surprised that the rupees spent gave so little in return to the economy.
Yet there is no surprise in this. The central government has watered down its responsibility to manage public funds so drastically that this is the biggest transformation tale in Indian public finance in the last few years. The surrender of responsibility is possibly a worse problem than the persistence of a high fiscal deficit. And more than the finance ministry, it is the Planning Commission that is responsible for the change. To the rest of the world the deficit is the big story. But the abdication of responsibility by the government to manage its funds is more insidious.
The chief culprit in this abdication is the mechanism of grants-in-aid. As a percentage of government revenue expenditure, grants-in-aid now account for more than the interest payments. In the year 2010-11, grants-in-aid as a component of revenue expenditure were 30%. In the same year, interest payments were 20% of revenue expenditure.
To connect what?s happening, picture an employee taking a sum from the office she works in. In the case of a loan or a tied aid, she gives a detailed expenditure receipt of how she has spent the money or risks having to pay a penalty. A grant means she writes out a reason when taking the cash and it is the discretion of the department to believe it or not.
Until some years ago, the finance ministry, on the advice of the Planning Commission, used to give funds to other ministries, the states, local bodies and even those outside the government as a combination of loans or as tied aid. But as loans fell out of favour with the increased emphasis on decentralisation, the finance ministry has switched to grants as the preferred mode of allocating funds.
The rationale for grant-in-aids is they work better than loans and can be given more easily to user agencies. The agencies know better how to spend the money than the Planning Commission or the finance ministry. This is undisputable. But to put this in practice, the two have ensued there is no one in the Indian government who will know how the money is being spent. Along with the allocation on this gigantic scale often to agencies that have a barely nodding acquaintance with managing funds of this scale, the Planning Commission seems to have undertaken no training system to help improve the standard of records maintained by them.
By 2010-11 (the latest year for which detailed data is available, but the picture is unlikely to change in the one and a half years since then), grants-in-aid as a percentage of total plan spend have risen to 77%. This includes money flagged for capital creation too. Which means the Planning Commission is willing to buy the argument that downstream ministries and state governments will invest the allotted money without any monitoring requirements from those who are writing the cheques. In 2012-13, grants will form just less than 10% of non-plan expenditure.
The grants phenomena are worse for the money that goes to states. Most of the money spent by the Planning Commission for state-level projects is now not given to the respective governments. Since 2007-08, as the UPA government expanded its inclusive agenda, it has made out more cheques to district bodies and NGOs than the state administration, and all of these as grants.
By 2010-11, these direct transfers stood at 58% of the total plan grants. In other words, most of the plan spend has become grants. Within those grants too, more money is going to non-central or state government agencies. For instance, in the same year when state governments got about R1,20,000 crore as central government support for their plan and non-plan expenditure through grants, the support for other bodies was 33% more, at R1,60,000 crore. So, as successive Comptroller and Auditor General reports have pointed out, there is little, if any, monitoring possible by the Centre of those funds. No one will really know where the money has disappeared.
The aim of this decentralisation was to get the money to move faster out of the government pocket to reach those who need it. The money has moved out but that?s about all.
The result? In 2010-11 again, going by utilisation records, the capital assets or hard investment created by this level of spending was R1,81,312 crore. Apparently, a healthy 35% rise. But when this is broken down by departments, most of it turns out to be for defence capital expenditure. The central government has spent just R32,977 crore to build assets from its total expenditure of R11,08,479 crore, or a royal 3%. This is far worse than the government claims but that is inevitable since these numbers are based on actual usage so the froth is missing (see Table).
Take another example. The seven largest social sector ministries of this government have each earmarked more than 80% of their budget as grants-in-aid, or cash transfer. This includes agriculture too. No wonder, despite rising allotment public investment, there is zilch (see Table).
The overall thrust of this fantastic disbursement with little question asked of apportioning of government expenditure seems to have then achieved little. The money is gone, the bridges have not been built and the government is faced with another long year in which to raise taxes to do the same wastage over again.
subhomoy.bhattacharjee@expressindia.com