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  1. Union Budget: Pulling the rug under states’ feet?

Union Budget: Pulling the rug under states’ feet?

Now that instant reactions and discussions about the Union Budget are over, the time is opportune to take a more considered view.

By: | Updated: April 5, 2016 9:13 AM
FM Arun Jaitley said areas of focus for the government was agriculture and infrastructure.(PTI) As expected, the Budget for 2015-16 significantly reduced the outlay on centrally-sponsored schemes (CSS). There was considerable speculation that while the Union government cut the funds for the much needed social services, the states with their additional space given by higher devolution may not increase the spending on these essential services to compensate for the loss of grants on these items. (PTI)

Now that instant reactions and discussions about the Union Budget are over, the time is opportune to take a more considered view. A close examination of the Union Budget shows that the ghost of the Fourteenth Finance Commission has continued to haunt and the government has been searching for ways and means to find fiscal space for its pet schemes and programmes as it has to part with 42% of the divisible pool of taxes to the states. Every government has its pet schemes, particularly on functions specified in the State List, with direct impact on the lives of the people and they have to find resources even if they have to starve much needed funds for the functions specified in the Union List.

The Fourteenth Finance Commission reported that, between 2002-05 and 2005-11, the Union government spending on State subjects increased from 14% to 20%, and that on Concurrent subjects increased from 13% to 17%. The states saw it as a surplus fiscal space at the Union level and desired that the Commission should recommend higher tax devolution to enable them to spend more on their functions according to their priorities rather than being dictated by the Union government. That and the fact that the Commission included the requirements of plan revenue expenditure in its assessment was the rationale behind increasing the tax devolution to the states from the divisible pool from 32% to 42%.

Even so, the Commission realised the importance of specific purpose transfers to ensure minimum standards of meritorious public services even if they fell in the State List and left adequate fiscal space to the Union government for the purpose. With tax devolution and grants from the Finance Commission accounting for 47.7% of the divisible pool, the space for specific purpose grants from the Union government in the Commission’s projections was left increasing from 14.3% in 2015-16 to 16.5% in 2019-20. As a ratio of gross tax revenues, the total current transfers were expected to increase from 47.5% in 2014-15 to 49.4% in 2019-20. Of course, given the overall indicative ceiling, higher tax devolution would constrain the fiscal space available for centrally-sponsored schemes (CSS). Therefore, the Commission recommended that the number of such schemes should be limited and the design and implementation issues should be decided in a committee comprising of representatives from Union and state governments and domain experts.

As expected, the Budget for 2015-16 significantly reduced the outlay on CSS. There was considerable speculation that while the Union government cut the funds for the much needed social services, the states with their additional space given by higher devolution may not increase the spending on these essential services to compensate for the loss of grants on these items. Of course, the states, in their budgets last year, did not have adequate time to respond to the recommendations of the Finance Commission in a considered manner, nor could they react to changes made in the Union Budget. Much has changed since, and the revised estimates for 2015-16 do vary substantially from the budget estimate in many of the states. More importantly, the allocations made in the states’ budget for 2016-17 are on a firmer footing and these need to be analysed carefully.

In the meantime, it would be useful to examine how the Union government has adjusted to the new situation. In this context, it is important to note two important developments. The first is the approach of the Union government in raising additional resources and, second, its approach on giving grants for CSS. While there has been much talk about cooperative federalism and it was stated that the Finance Commission’s recommendations were accepted in that spirit, a notable feature seen is the resort to the age old practice of levying cesses and surcharges rather than changing the rates in mobilising additional resources. The revised estimate of gross tax revenue of the Union government in 2015-16 was higher than the budget estimate by

R10,121 crore. However, while the Union government’s share went up by R27,666 crore, the states lost about R17,765 crore. Combined with the fact that the non-Finance Commission grants too were lower by R3,539 crore in the revised estimate, the states’ share of current transfers was lower than the budget estimate by R21,304 crore. Thus, in the revised estimate, the share of the states in gross tax revenue shrunk to 34.6% from 36.2% in the budget estimate. In 2016-17 too, with additional half a per cent surcharge in service tax, the practice of mopping up resources for the exclusive appropriation by the Union government has continued. Such earmarked taxes deny the states their legitimate share in additional revenues mobilised and, to that extent, negate the award of the Finance Commission.

The second major issue relates to the Union government’s approach to CSS. It is proposed to rationalise the schemes by reducing their number from 66 to 28, which is very welcome. However, a close perusal of the restructured schemes shows that most of these have been retained as sub-schemes. The rationalisation exercise follows the recommendations of the Committee of Chief Ministers chaired by Madhya Pradesh CM. Of the 28, six are classified as “core of the core” schemes, 19 are classified as “core” schemes and three “optional” schemes, and the matching contribution required from the states for the three categories is 30%, 40% and 50%. A back-of-the-envelop calculation shows that the states will be required to contribute R85,274 crore from their revenues to avail these schemes.

The allocation to various schemes too does not seem to have changed much. Although the reclassification of the schemes makes comparisons difficult, the analysis shows that the only schemes which have got a significant increase is the rural roads programme (PMGSY) from R10,100 crore in 2015-16 (RE) to R19,000 crore in 2016-17 (BE) . Interestingly, there is only a marginal increase over the revised estimate in the case of education and health, and in the case of the former the revised estimate for 2015-16 was lower than the budget estimate of 2015-16 by almost 10%. Other schemes which have seen significant increase over the revised estimate are on agriculture (Krishonnati and RKVY) , ICDS and Swachh Bharat. Although there are significant increases in the allocation over the revised estimate of 2015-16, the increase is only marginal when compared to the budget estimate. In other words, there has been not much change or rationalisation in the CSS.

The author is emeritus professor, NIPFP and chief economic advisor, Brickwork Ratings

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