Power, infra, fertilsiers: How centre is incentivising states for reforms

Fund transfer linked to them meeting certain benchmarks in improving sectors

Co-operative federalism seems to be taking a new shape lately as the Narendra Modi government incentivises states to undertake specific reforms rather than do it itself.

While the central government earlier gave such tied funds to states and there are finance commissions' recommendations in this regard too, the process has accelerated under its second tenure.

It was during the coronavirus pandemic of 2020-21 that the government gave states flexibility to widen their fiscal deficit to five per cent of their gross domestic product (GSDP) from three per cent.

The move gave states extra resources of Rs 4.28 trillion and was partly linked to specific reforms.

While there was an unconditional increase of 0.5 per cent, one per cent in four tranches of 0.25 per cent was linked to reforms such as universalisation of one nation, one ration card, ease of doing business, power distribution, and urban local body revenues.

A further 0.5 per cent was available if milestones were achieved in at least three out of the four reforms.

Finance Minister Nirmala Sitharaman’s Budget for 2021-22 made power sector reforms a key point for incentives. An additional borrowing space of up to 0.5 per cent of GSDP is available to states annually for a four-year period from 2021-22 to 2024-25 for carrying out specific reforms in the sector.

Incentives for states

Over the last two financial years (2021-22 and 2022-23), states have been allowed to raise Rs 66,413 crore through additional borrowing.

States can avail the facility of additional borrowing linked to power sector reforms in 2023-24. An amount of Rs 1.4 trillion is available as an incentive to them.

The states that were unable to complete the reforms in 2021-22 and 2022-23 may also benefit from the additional borrowing earmarked for 2023-24 if they carry out the reforms in the current financial year.

The primary objectives of granting financial incentives for undertaking power sector reforms is to improve operational and economic efficiency in the sector and promote a sustained increase in paid-electricity consumption.

To be eligible for the incentives, state governments must undertake a set of mandatory reforms and meet performance benchmarks. The required reforms include progressive assumption of responsibility for losses of public sector power distribution companies (discoms), transparency in the reporting of financial affairs of the power sector including payment of subsidies and recording of liabilities of governments to discoms and of discoms to others, timely rendition of financial and energy accounts, and timely audit.

The Centre had initiated a scheme to give a 50-year loan to states for capital augmentation during the pandemic year. That scheme was carried forward with some tweaks.

It recently approved over Rs 55,000 crore to 16 states for capital investment under the Special Assistance to States for Capital Investment 2023-24 Scheme for boosting their capital expenditure.

Capital investment projects have been approved for diverse sectors including health, education, irrigation, water supply, power, roads, bridges and railways.

Funds for meeting the states' share of Jal Jeevan Mission and Pradhan Mantri Gram Sadak Yojana have been provided under this scheme to speed up projects in these sectors.

Under the scheme, special assistance is being provided to the state governments in the form of a 50-year interest free loan up to an overall sum of Rs. 1.3 trillion during the current financial year.

The scheme has several parts, part-I being the largest with allocation of Rs 1 trillion. This amount has been allocated amongst states in proportion to their share of central taxes and duties, according to the award of the 15th Finance Commission. Other parts of the scheme are either linked to reforms or are for sector-specific projects.

For instance, an amount of Rs 3,000 crore has been set aside under part II of the scheme for providing incentives to states for scrapping government vehicles and ambulances, waiver of liabilities on old vehicles, providing tax concessions to individuals for scrapping of old vehicles and setting up of automated vehicle testing facilities.

Parts III and IV of the scheme provide incentives to states for reforms in urban planning and finance. An amount of Rs 15,000 crore is earmarked for urban planning reforms, while additional Rs 5,000 crore is for incentivising the states for making urban local bodies creditworthy and improving their finances.

The scheme also aims at increasing the housing stock for the police personnel and their families within the police stations in urban areas. An amount of Rs. 2,000 crore is earmarked for this purpose under part V of the scheme.

Funding for non-chemical fertilisers

Another objective of the scheme is to promote national integration, carry forward the concept of “Make in India” and promote the concept of 'One District, One Product (ODOP)' through construction of Unity Mall in each state. An amount of Rs 5,000 crore has been set aside for this purpose under the Part VI of the scheme.

Part VII of the scheme is for providing financial assistance to states for setting up libraries with digital infrastructure at panchayat and ward level for children and adolescents. A sum of Rs 5,000 crore has been set aside for this purpose.

A scheme called PM-PRANAM, an acronym for Prime Minister’s Programme for Restoration, Awareness, Generation, Nourishment and Amelioration of Mother Earth, was approved by the Union Cabinet a few weeks back. The scheme is aimed at incentivizing states to use non-chemical fertilisers.

Suppose a state using 10 lakh tonne of conventional fertiliser reduces consumption by 3 lakh tonne, then the subsidy saving would be Rs 3,000 crore. The consumption drop would be calculated on the basis of the baseline average of the last three years.

Out of that subsidy savings, the Centre will give 50 per cent of it, or Rs 1,500 crore, to the state for promoting the use of alternative fertilizer and other development works.

PM-PRANAM was first announced in the 2023-24 Budget by the Union government.

What is unique here is the Centre won't be shelling out anything to boost consumption of non-chemical fertiliser but instead  financially incentivise states to move towards a more balanced use of plant nutrients.

The benefit for the states is that they can get some extra untied funds from the Centre which can be spent on anything, on playing salaries or building roads.