Nine CMs say govt tying aid to them

Plan panel head Montek Singh Ahluwalia says practise fiscal federalism yourself.

"Tied aid", a term originally heard in the context of international lending to countries, has become a growing phenomenon in the context of central government assistance to states.

Money under the accelerated power development programme and the urban renewal programme (to take two instances) is available to only those states that undertake a reform agenda prescribed by the Centre. This is not a new development, but has reached proportions that many chief ministers have now protested to the Centre.

During the meeting of the National Development Council (NDC) meeting that approved the XIth Five-Year Plan, nine chief ministers wrote a letter to the prime minister asking that a committee be set up to go into the issue.

The nine chief ministers are from the NDA-ruled states: Naveen Patnaik of Orissa, Shivraj Singh Chouhan of Madhya Pradesh, Nitish Kumar of Bihar, Raman Singh of Chhattisgarh, Vasundhara Raje of Rajasthan, Madhu Kora of Jharkhand, Narendra Modi of Gujarat, Prakash Singh Badal of Punjab and BC Khanduri of Uttarakhand. 
 

MONEY MATTERS
	XIth Plan	Xth Plan
Central Plan Outlay	21,56,522	9,45,328
Gross Budgetary Support (GBS)	10,96,811	4,86,798
Own Resources (IEBR)	10,59,711	4,58,530
State Plan Outlay	14,88,147	7,07,737
Central Assistance (or GBS)	3,24,851*	2,48,677
Own Resources (IEBR)	11,63,296	4,59,060
* of this, only Rs 1,10,000 crore is not tied to any central programme  (figures in Rs crore)

These chief ministers point out that while the total central assistance for state plans has gone up, its share in the total Gross Budgetary Support (GBS) by the Centre has gone down.

And that the share of the assistance that is not tied to central schemes/rules has gone down even more dramatically. In effect, the Centre is deciding the states' development agenda.

In terms of the GBS to states, the figure has fallen from 33 per cent in the Xth Plan to 23 per cent in the XIth Plan. So, while the GBS is Rs 14,21,711 crore in the XIth Plan, the share of this devoted to the states is just Rs 3,24,851 crore or slightly under 23 per cent. The portion that comprises solely of grants has also fallen, from 26.5 per cent to under 23 per cent (all the XIth Plan assistance is in the form of grants).

The other issue is about the component of this assistance that is free and the proportion that is tied "" centrally sponsored schemes, for instance, do provide more funds to the state, but only for projects the Centre is interested in and is subject to central guidelines.

Indeed, even within the list of projects under the central assistance to state plans (Rs 3,24,851 crore in table), the Plan includes programmes such as the accelerated power development progamme (Rs 12,820 crore), the accelerated irrigation benefit programme (Rs 41,568 crore), the Jawaharlal Nehru Urban Renewal Mission (Rs 41,490 crore) and MP Local Area Development Scheme (Rs 6,985 crore) that are clearly driven by the central government. Indeed, even World Bank/ADB loans (Rs 14,273 crore) that the states are paying for directly and are bearing the exchange risk for are included in this.

As a result of this, the untied aid is only around Rs 1,11,000 crore in the XIth Plan, or just around 12 per cent of total assistance to states "" Rajasthan Chief Minister Vasundhara Raje says the NDC had decided this was supposed to be around 85 per cent according to a decision made during Indira Gandhi's prime ministership.

Indeed, several other governments have reiterated the need to give more freedom to states to manage their spending programmes "" even the National Common Minimum Programme which says the NDC will be made a more effective instrument of cooperative federalism says that all centrally sponsored schemes, except in national priority areas like family planning, will be transferred to states.

All this, Raje said, "seems to give an impression that states are irresponsible entities, incapable to even allocating their own resources properly."

In a firm reply to this at the NDC meet, Planning Commission Deputy Chairman Montek Singh Ahluwalia said that since these (tied) schemes provided funds in sectors that were important for the states, what really mattered was that they were getting more funds to help provide vital services for citizens.

Ahluwalia didn't say it in as many words, but the central government view is that, if the money is given to states as untied grants, to do as they please, it will be wasted "" in the case of central schemes, however, the central government has some ability to monitor the spending. Given the progress in various central schemes, this, however, is a questionable assumption.

As for Raje's criticism that the government was not practising fiscal federalism by giving tied grants to states, Ahluwalia accused the states of being equally guilty "" after all, they were not devolving funds to Panchayati Raj Institutions.

In sum, while the central government doesn't think the states are capable of spending money in a responsible manner, the states don't think the panchayats are capable of this either!

Interestingly, even these numbers are contingent upon the central government being able to transfer what it is committed to. In the Xth Plan, to ensure the Centre was able to meet its fiscal deficit targets, the total resources made available for the central plan were just Rs 7,60,327 crore as compared to the envisaged Rs 9,21,291 crore.

Improved state finances, of course, is also why states are funding more of their plans from their own resources "" while they financed 65 per cent of their plans in the Xth Plan period, this is up to 78 per cent in the XIth Plan.