Pradeep Kumar Panda
For states to derive optimal benefits of fiscal autonomy, they need direction in the form of norms and yardsticks on expenditure programmes
The Fourteenth Finance Commission (FFC), appointed January 2, 2013, under chairmanship of Dr YV Reddy, recommended transfer of 42 per cent of Union taxes to the states. It has been projected as a big boost to fiscal autonomy of states, and marks a historical shift in the financial relations between the Centre and states.
It was expected that with higher tax revenue devolution, states would not only expand overall public expenditures, but would also take care of their distributional issues, particularly the needs of priority areas such as social and physical infrastructure and agriculture.
However, the central government, which has faced a huge contraction in its share in taxes, has resorted to sharp reductions in grants-in aid to states by discontinuing several centrally-sponsored schemes (CSS). The overall expenditure of states, particularly for social and infrastructure projects would suffer a setback.
The impact of the new devolution scheme on development is debatable. The consolidated picture drawn from the responses states have given to the new scheme based on budget estimates (BEs) for 2015–16 shows that the impact is unambiguously negative.
Development components of revenue and capital expenditures have contracted either in relation to state incomes or in cases even in absolute terms. Budgetary data show that revised estimates (RE) or later actual outcomes turn out to be generally poorer than BEs.
A state has to concede space for those with lower-income to access the financial market for borrowing. Besides, when the central government and the Reserve Bank of India (RBI) prepare the annual borrowing budget for states, they have to take into account the limitations of domestic savings and, thus, set borrowing limits.
Notwithstanding such macro constraints, the state can still negotiate with the central authorities for somewhat higher borrowing limits. For any success in such negotiations, the state administration has to prove that it is capable of absorbing higher amounts in productive investments.
In such negotiation processes, the relatively low base of borrowing once set hinders the demands for higher borrowings in future. The state has to make concerted efforts to break this vicious circle, show the capacity to achieve higher levels of productive expenditures and seek commensurate levels of higher borrowing limits.
As cited earlier, the transformation that has taken place in the centre–state financial relations in the aftermath of the FFC recommendation is expected to be reflected in the expenditure programmes of states.
This should show in the levels of total expenditures and distribution among priority sectors such as education, health, agriculture and physical infrastructure. Social and infrastructural development has lagged far behind general levels of development in almost all states, and there have been serious disparities among states in such developments.
The central government instituted the CSS — 72 of them have been implemented with special-purpose grants to state governments — with the objective of correcting the imbalances. There have been academic and state-level concerns raised about the absence of flexibility and portability in the operations of these schemes.
The central government defended the latter on the grounds that the resources of the states have been considerably augmented with higher tax devolutions. It was expected that higher public expenditure programmes designed to achieve improved human development and physical infrastructure would get a boost on the initiatives of states, armed as they are with higher resources.
Viewed against this backdrop, the budgetary performance of the economy of Orissa has remained sluggish even after the new devolution. The total budgetary expenditure of the state as percentage of GSDP has fluctuated. Thus, despite larger flow of tax devolution, the state has failed to augment its total budgetary expenditure.
This has hurt capital receipts for the state and, hence, the required resources. It is not inferred here that the repayment of public debt is an avoidable expenditure; instead, what is sought to be conveyed is that larger revenue and capital account resources have to be mobilised and earmarked for development expenditures by the state for which there is significant scope.
Thus, notwithstanding the continuance of the centre’s grants-in aid and a substantial increase in devolution, budgetary allocations for social and economic services, taken together under revenue and capital expenditures, have shown considerably reduced growth during 2016–17.
Expanding the fiscal space and giving freedom to the states to take their lead in development programmes based on local needs and aspirations is a laudable objective.
But, to derive optimal benefits, some superior direction in the form of norms and yardsticks on the qualities of expenditure programmes, for instance, would be a necessary condition. In the absence of such direction, the state has failed to exploit its
fiscal potential.
The writer is a Delhi-based economist.