This post is being written on sheer popular demand (as many
as, like, two people had urged me to write this).
It's a much more detailed version of
my article for Mint,
where I tried to decode the mystery surrounding Union-State transfers, but could
not include several critical points due to space constraint.
Under “bibliography” (pardon the dogged misalignment in paras). I have also pinpointed the sources
from within the budget documents which will help readers have a look at the
numbers for themselves and do further research. I am quite sure that such
clarity on budget documents, especially in relation to fund transfers, exists
nowhere in public domain. I’d like to express my heartfelt gratitude to Ms.
Indira Rajaraman (Member, 13th Finance Commission) and Dr. Abhijit
Sen (Member, 14th Finance Commission), who spent hours on the phone
with me, helping me zero in on the required information.
I wrote the Mint article in response to 14th FC's
recommendation to transfer 42% of funds to states as tax devolution. Following
questions in my mind were the trigger:
1.
42% of WHAT?
2.
Why is this being
hailed as a (heroin) shot in the arm for federalism?
3.
What have been the
past trends regarding fund transfers?
Finding answers to the above questions requires one to know
that the nature of transfers that happen from Union to states is either tied or
untied. As the name suggests, tied transfers indicate that the central
government exercises tight control over how these funds are used by the states,
whereas untied funds can be used by the state government at its whim. It is because the 14th Finance
Commission has recommended a sharp increase in the share of untied funds, that
its decision has been welcomed.
Tied or untied, the
transfers take place under three broad categories-
1.
Statutory transfers
(recommended by Finance Commission),
2.
Plan transfers
3.
Non-plan grants (not
recommended by Finance Commission).
However, a fourth kind
of transfer, called direct transfer, was in vogue between 2006-07 and 2013-14.
In a welcome move that helps reduce corruption, it was entirely scrapped by the
first budget of Modi government in 2014-15, and made part of plan transfers, which
means they’re now routed through the state government. More on this later.
Delving further, each of the above three categories has
subdivisions. The statutory transfers are further categorised under two heads-
tax devolution and grants. Plan transfers have several subcategories, and
explanation pertinent to the issue at hand will be made later. The share of the
non-plan grants (not recommended by Finance Commission) in total transfers is
tiny - generally between 1% and 2% - and involves compensation to states, such
as the kind promised for introduction of GST. The direct transfers used to go
to state and district-level implementing agencies, to aid Centrally Sponsored
Schemes (CSS), but have now been made part of plan transfers.
Besides the several
categories under which it happens, what makes funds transfers far more complex
is that certain funds lie between being
entirely tied and entirely untied. An example of this is Backward Region
Grants Fund (BRGF), which is a part of plan transfers. However, for the sake of
this analysis, the funds under different heads have been considered as either
wholly tied or wholly untied. This is not an entirely unfair assumption.
The statutory transfers have been considered untied. Plan
grants, except for two components – Normal Central Assistance (NCA) and Special
Central Assistance (SCA) – have been considered tied. The tiny share of
non-plan grants has been considered untied. The erstwhile direct transfers have
been considered tied. The table below summarises the above discussion.
Kind of transfer
|
Nature (tied/untied)
|
Further categorization
|
Statutory transfers
|
Untied
|
Tax devolution, grants
|
Plan transfers
|
Tied, except NCA and SCA
|
Several categories
|
Non-plan grants
|
Untied
|
Different kinds of compensation
|
Direct transfers (now discontinued)
|
Tied
|
Money under different CSS
|
Answering the
above three questions
The famous figure of
42% forms the tax devolution, a part of statutory transfers. It denotes the money
received by the states as proportion of the ‘divisible pool’ of central taxes. The divisible pool is the part of
central taxes that has to be shared with the states. The divisible pool has
hovered around 87% of total central taxes in the past 5 years, and excludes
certain kinds of surcharges levied by the centre. In absolute terms, in
2015-16, the states will get a total of Rs. 5.24 trillion, or 42% of the
divisible pool, which amounts to Rs. 12.47 trillion.
Besides this untied
transfer worth Rs. 5.24 lakh crore, other untied transfers take the total
quantum of untied transfers to Rs. 6.32 lakh crore. The total tied transfers
amount to Rs. 2.21 lakh crore, which means the net amount transferred to states
for 2015-16 is Rs. 8.53 lakh crore. This represents a paltry jump of 8% from
the previous year’s funds.
However, what matters
is that 74% of the funds are untied. This represents a leap of 12 percentage
points from the previous year. This number – highlighting the jump in share of
untied transfers – is the key to increased
fiscal autonomy of states.
However, as seen in the graph above, despite the big jump
in share of untied transfers this year, this move is only an attempt to restore things to how they were before 2006-07, the
year in which direct transfers started. In 2005-06, a much bigger 78% of total
transfers to states were untied. This number collapsed to 65% the following
year, on account of introduction of tied direct transfers. There was yet another
collapse in share of untied transfers to 57%, when UPA-II, emboldened by its
electoral victory, announced its first budget in 2009-10. This budget saw
near-doubling of funds under direct transfers, to Rs. 96000 crore, to aid some
of its flagship schemes such as MGNREGS.
As mentioned above, the
scrapping of direct transfers in 2014-15 provides a massive boost to the cause
of transparency. These funds, to the tune of Rs. 1.4 trillion in 2013-14, were
subject to poor regulatory oversight and lax standards of accounting. In
several reports tabled in Parliament, CAG had raised red flags about this
issue, even as the share of direct transfers kept growing rapidly. The infamous
NRHM scam in UP, during Mayawati’s tenure as CM, stands as an exemplar of the
peril of direct transfers.
In its bid to provide
more untied funds, the central government has had to inevitably reduce
allocations under other categories. As already highlighted by Abhijit Sen, the
sole dissenting member of 14th Finance Commission, giving the states such a
free hand all of a sudden might not have the desired impact. He points to
scrapping of critical schemes such as BRGF and RKVY, which had allegedly been
catalysts in rural development and agricultural growth, respectively. Till
2014-15, BRGF was meant to go exclusively to backward regions in different states,
which were free to spend it on their development. Now, the state governments
receiving this money are under no such obligation. Mr. Sen has also claimed
that the net amount transferred to Panchayats across the country will be lesser
than what it was during 2014-15. Thus, even as the second tier of governance -
state governments - stands to benefit, the third tier - local bodies - stands
to lose out, or be reliant on the benevolence of respective state governments. Frankly, I think this is a blessing in disguise for the nation. Massive unbridled funds for Panchayats,post 73rd amendment, have only given rise to political rivalry and added another thick layer to corruption. Blind advocacy of devolution of power and funds is mostly right-wing ballyhoo. I have had a good, albeit vicarious, experience of this while assisting my dad, who happens to be a district magistrate.
Besides BRGF, the other
untied parts of plan transfer – NCA and SCA – have also been scrapped and made
part of tax devolution. Earlier, most of these grants went to special-category
states, at least some of which now stand to lose out. Also, allocations to
major human development schemes such as ICDS have been less than halved.
Education suffers as well (that might be a blessing in disguise, considering who’s
is in control of those funds). Looking at the quality of most state governments
in the country, I am personally in favour of Mr. Sen’s recommendation of
transferring only 38% of divisible pool of taxes, instead of 42%. But that
doesn’t matter anymore.
Shashi Tharoor raised
similar concerns in a recent
piece, though he erroneously pointed out that the
states were getting only Rs. 64000 crore extra in tax devolution. The real
number is Rs. 1.41 lakh crore higher than last year’s.
Also, what everyone seems to be forgetting is that the states are set to get a
windfall from the coal auctions as well.
The huge devolution of taxes also means that the total
expenditure in union budget of 2015-16 is, in a long time, lesser than the
amount outlined by its predecessor. Clearly, with such mega funds at their
disposal, states are expected to be prudent, equal partners in growth.
Douglas Adams, in his much acclaimed novel ‘The
hitchhiker’s guide to the galaxy’, stated that 42 is the answer to the ultimate
question of life, the universe, and everything. Will it be the answer to
India’s woes of federalism as well, or will it turn out quixotic?
Bibliography
All data is present within budget documents (http://indiabudget.nic.in/).
There are two major problems: there's no annotation/lucidity, there are
sometimes huge contradictions in the data.
Data on statutory transfers:
In the above, statement 4.03 (Grants
under Article 275(1) of the Constitution) gives the desired number. In reality,
not all of these funds are totally untied, but I have nonetheless made this
assumption, since getting the precise breakup seemed impossible.
Data on Plan transfers: The total funds under plan transfers
are calculated by adding the two figures mentioned below
In the above, the row titled “Total
Central Assistance to State Plans (A to D)” gives the desired figure.
In the above, the row titled “Assistance
to states under central plan” gives
the desired figure.
In the above, subtract the funds
under statement 4.03 from Grand Total to get the desired number.
PS: All data concerns budgetary estimates.
