M Govinda Rao: Fiscal federalism and management

An important development is the significant increase in the direct transfers to various autonomous bodies.

Recent economic and political developments have had significant impact on India's fiscal federalism with repercussions on fiscal management and service delivery. These have underlined the inadequacy of policies and institutions evolved in the context of planned development strategy and single-party rule. Indeed, a comprehensive analysis of reforms in policies and institutions to meet the challenges of market economy in an era of coalition politics requires a more considered analysis and this has not been undertaken in the short piece here. This article explores problems arising from the recent political and policy changes impacting on fiscal management and service delivery and recommends measures to improve efficiency and accountability.

Indian fiscal federalism has evolved within the framework of a Constitution with a high degree of centripetal bias, which was accentuated by the adoption of planned development strategy. Economic liberalisation has brought the fiscal decentralisation agenda to the forefront. The Constitutional (73rd and 74th) amendments have assigned important developmental and service delivery functions to local governments. On the political front, the emergence of coalition governments at the centre, regional parties in power in states, regional parties becoming pivotal members of central coalitions and shortening time horizons of the politicians and political parties have changed the political landscape. The single-party rule at both the Centre and states in the initial years of independence with its informal system of negotiations and settlement did not help to develop formal systems of checks and balances. The time is opportune to evolve systems and institutions for a settlement of contentious issues.

In all multilevel fiscal systems, transfers from higher to lower levels of government are given to resolve vertical and horizontal fiscal imbalances and to ensure minimum standards of meritorious public services. The Constitution allows for sharing central tax revenues under Article 270 and grants under Article 275, given on the recommendations of the Finance Commission. The grants for state plan schemes and central schemes, given under Article 282, have been controversial and yet, have continued. The central schemes have grown in both number and volume though in recent years, there have been attempts to consolidate them.

An important development in Indian fiscal federalism is the emergence of transfers not based on any formula. This phenomenon has a long history. After the plan assistance was streamlined under the Gadgil formula in 1969, central and centrally sponsored schemes have proliferated. As this was brought to the fore in discussions, a number of scheme-based grants were included in the state plan schemes itself. The normal central assistance for state plans, which is formula-based, was more than 90 per cent in 1991, but constituted less than one-third of the total plan assistance in 2006-07. Important among the grants not based on any formula within the state plan assistance are for schemes such as the Jawaharlal Nehru Urban Renewal Mission, backward regions grant fund, accelerated irrigation and power development programmes, MPLAD programmes and multilateral fiscal adjustment assistance to states. These scheme-based and discretionary grants are in addition to the centrally sponsored schemes. Thus, of the Rs 65,554 crore estimated plan grants to states in 2007-08, the formula grants account for Rs 15,408 crore or 23.5 per cent.

Another important development in Indian fiscal federalism is the significant increase in the direct transfers to various autonomous bodies and implementing agencies. In 2007-08, these direct transfers are estimated at Rs 49,607 crore. Important among the schemes for which funds are transferred directly to implementing agencies is the Sarva Shiksha Abhiyan (Rs 9,760 crore), National Integrated Disease Control Programme (Rs 4,408 crore), National Rural Employment Guarantee Scheme (Rs 10,738 crore), other rural poverty alleviation schemes (Rs 4,054 crore), rural roads programme (Rs 3,500 crore), Indira Awas Yojana (Rs 3,629 crore), and accelerated rural water supply programme (Rs 2,009 crore). Until 2002-03, the states had the responsibility to oversee the implementation and the transfers were routed through state budgets. However, subsequently, to ensure fast disbursal of funds to implementing agencies, these are directly given to them.

Although most of the schemes are predominantly in the domain of state and local governments, the ostensible rationale for central intervention arises from its concern at poor service delivery. It is also believed that routing the transfers through state budgets involves delays and transaction costs. The more important reason, however, is the ownership of these schemes. In a fragmented political environment, electoral gains lie in showcasing the ownership of the programmes and involving the states in implementation could take the credit away.

Whatever be the rationale, these developments have adverse repercussions. The first relates to erosion of states' fiscal autonomy. Most interventions are in areas where the states have a predominant role and simultaneous interventions cloud both planning and providing pubic services. Second, multiple agencies providing transfers and each pursuing its own agenda do not help to achieve the overall objectives of the transfer system. The Constitution envisages that Finance Commission should be the sole agency to recommend transfers and rather than strengthening the agency with a permanent research secretariat to channel both general-purpose and specific-purpose transfers, creating multiple agencies has caused chaotic developments in the system. Indeed, the relative roles of the Finance and Planning Commissions in the new environment would require a separate discussion.

Giving direct assistance to autonomous agencies has raised questions of accountability because it is not a part of legislative scrutiny or the CAG's audit. Also, the states tend to lose interest in these schemes. More importantly, the system has made it difficult to get comprehensive information on spending on different services at regional level. For example, to estimate public spending on primary education at state level, it is necessary to add central funds released for the Sarva Shiksha Abhiyan to state government spending. Taking simply the state spending could be misleading and even the Twelfth Finance Commission in its equalisation exercise missed this. Indeed, the subsidiarity principle requires grassroots level planning for public service provision. However, systems and institutions for ensuring accountability and information are important. In view of the large amount of direct transfers to autonomous bodies, this is extremely important and should be addressed without any loss of time.

The author is Director, NIPFP. Comments at mgr@nipfp.org.in