Media Coverage

At The Margins: Is the devolution of national funds to states really worth the praise?


  • 4th April 2016

Narendra Modi’s frequently and proudly repeated declaration is that he has paved the way for higher economic growth led by states through greater devolution of funds to the states as recommended by the Fourteenth Finance Commission (FFC). Well, one year later, experts have had to reconsider whether the translation into larger flow of funds to the states and a bigger focus on social development sector has really happened. And so far, the answer is in the negative. At best it suggests stagnation. “It is not yet clear whether there is greater devolution of funds to the local bodies at all, as the transfer from the centre to the states as a percentage of GDP has actually declined slightly,” says economist ­Venkatesh B. Athreya.

Under the new formula, while the share of states in the divisible pool has risen to 42 per cent, the Centre has reduced the transfer through other channels like centrally sponsored schemes—which have been cut down from around 100 to 50. The net result, according to most experts is that as a percentage of GDP there has been a downward trend in the fund flow to the states.

Subrat Das, executive director of the Centre for Budget and Governance Accountability (CBGA), tells us there has only been a modest increase in the flow of funds to the states when the actual transfer in 2014-15 is compared to the revised estimates of 2015-16. “The higher magnitude of states’ share in central taxes has come partly at the cost of discontinuation of central assistance for state plans and reduced funding shares of the union government in centrally sponsored schemes in quite a few sectors. So, the changes in 2015-16 have only led to a modest increase in the total quantum of resources being transferred from the Union to the states,” he explains.

The change in the way federal funds are devolved to the states has also led to a change in the composition of state budgets. But a new CBGA study of 10 states that Outlook has seen shows that it does not necessarily mean higher focus in social development sectors.

The CBGA has found that except for Chhattisgarh, the total magnitude of the state budget as a proportion of the state’s GSDP has in fact shown a decline in 2015-16 (BE) as compared to 2014-15 (BE) or 2014-15 (RE). This applies for all the other selected states—Assam, Bihar, Rajasthan, Madhya Pradesh, Orissa, Maharashtra, Jharkhand, Tamil Nadu and Uttar Pradesh.

As most states appear inclined towards reducing the deficits in their budgets instead of increasing their overall budgetary expenditure, many of the social sector schemes have seen reduced allocation. State budget data for 2015-16 (BE) indicate a shift away from education, health, drinking water, public works and social welfare in many of the states, with a shift in favour of infrastructure expenditure like energy, urban development and housing.

Shivraj Singh Chauhan, chief minister of Madhya Pradesh and convenor of the NITI Aayog’s sub group admits that as per the latest data available, the BJP-ruled state got less allocation under the centrally sponsored schemes in 2015-16 (Rs 1495 crore) when compared with the previous fiscal year (Rs 4154 crore). But he ­argues to Outlook that “now the states can utilise funds according to their requirements. Every state has a different set of problems and priorities. By increasing the revenue to the states, they will have more freedom to utilise the money on schemes designed for their needs.”

Besides the termination of several central schemes—like Jawaharlal Nehru Urban Renewal Mission, Hostel for Girl Students of High School and Higher Secondary and Panchayat Yuva Krida Aur Khel Abhiyan, many of the major projects in 2015-16 also saw their budgets getting slashed. These included the Sarva Shiksha Abhiyaan, the National Social Assistance Programme, the Backward Region Grant Fund and the Accelerated Irrigation Benefit Programme.

The study of reveals that the cut in central funding for social sector programmes like Integrated Child Development Services, Mid-Day Meal, and the National Rural Drinking Water Programme resulted in a number of states also reducing their budgetary allocations even after the state governments presented supplementary budgets for 2015-16. “The figures for 2015-16 BE might be inflated, especially for UP, Bihar, Maharashtra and MP where supplementary grants were ­substantial in 2015-16,” points out Amar Chanchal, who led the CBGA research.

The underlying factor being that the changed fiscal architecture might affect social spending in poorer states which can in turn aggravate the existing regional disparities (visible from the existing per-capita spending), he says. Leading economist and member of the FFC, Dr Sudipto Mundle says that he is keenly awai­ting the revised budget of all the states to see how the new model of fiscal federalism plays out.

Mundle points out that while under the federal system there is a union list, a state list and a concurrent list, and also provision for the central intervention in exceptional circumstances, over the recent decades, the role of the centre had increasingly become an encroachment through the centrally sponsored schemes. This was true of the Sarva Siksha Abhiyan as well as the Integrated Child Development scheme, though both education and health are state subjects. “Under the new devol­ution model, while the untied money has gone up, the tied money has gone down. It remains to be seen how the states are using their financial muscle,” explains Mundle.

So far the states have been found to be fiscally more prudent and responsible than the Union government. A clearer picture will emerge when the expenditure data becomes available. Yamini Aiyar of the Accountability Initiative, the Centre for Policy Research, points out that despite the increase in ­untied funds, a significant portion of the expenditure in social sector continues to be tied to the centrally sponsored schemes due to the increases in the sharing ratios of states vis-a-vis central government.

For instance, in the case of 17 core schemes including the Swachh Bharat programme, the National Health Mission and the Integrated Child Development scheme, the sharing pattern has changed, with the Union government reducing its share from over 75 per cent to 60 per cent. In effect, social sector spending on key national priorities has been ring-fenced. “The FFC implementation was an opportunity to re-articulate the role of the Centre from its earlier headmaster role but for the moment we are seeing only change in the margins on fund sharing not optimal role change,” observes Aiyar. Experts also point out that there continue to be several grey areas in the implementation of centrally sponsored schemes under the new rules, which resulted in funds flowing only after October. With plans for a new committee outlined in the budget for pushing central schemes more clarity can be expected.

Jagadananda, the former information commissioner of Orissa and a social activist, blames the lack of research capacity and virtually no role for state planning boards in decision making for the dismal state of affairs. “I have not seen any improvement as the states are struggling to come out with innovative programmes and schemes to tackle structural issues of poverty and under development,” he states. What’s even more worrying is that unless the central funding for social sectors goes up, it is unlikely that the states will ever be able to take a lead.