Helping the states

State governments have three reasons to be delighted with the Union Budget: a handsome 25 per cent hike in devolution, an increase of 20 per cent in gross budgetary support to the Plan which will translate into higher Central assistance to state plans, and finally a 1.5 percentage point reduction in the interest on Central loans.

But while the last one will give some relief to the states and reduce their interest burden, the first two could cause problems if the Budget's revenue targets are missed.

The increase in the devolution to states is a consequence of the optimistic revenue estimates made by the finance minister.

The states will naturally factor these estimates into their own Budgets, and on that basis the surplus available for financing their Plan will be worked out by the Planning Commission.

If the finance minister fails to deliver the estimated growth in central tax revenues (as some fear), the states will bear a part of the shortfall and at the end of the year they will find a financing hole in their Plan which can only be financed through more borrowings.

This is so because by the time the revised numbers for the year come, all the states would have done their Plan spending. Had the estimates on devolution been conservative, states would have had access to grants from the Planning Commission to meet their non-Plan revenue deficits. But when it comes to March, that option won't be available.

The other problem is that, in the euphoria of a Rs 10,000-crore hike in the budgetary support to the Plan, the states will come up with demands for bigger Plan outlays.

This is a natural tendency and since the bulk of the spending has been earmarked for rural development, health, education and irrigation, there will be strong political pressure to increase spending.

Given that the Centre is looking at restructuring the existing 208 Centrally-sponsored schemes, what is likely to happen at the state level is that the expenditure committed to the old schemes will be carried forward and the expenditure on new schemes tagged on.

This will translate at the beginning of next year into higher non-Plan spending that the states have to finance. If things work out well, this can be managed. If not, it will prove to be a double whammy.

These potential problems flow from the way in which money is transferred from the Centre to the states, and it is this underlying problem that should be addressed.

The way in which increased Plan outlays can be used well is if the Planning Commission doesn't allow the increase in the gross budgetary support to the Plan to be translated into a similar hike in Central assistance to state plans. Instead, it should use the money to restore the non-Plan balance for the states.

This may sound regressive and imprudent, but the fact is that state expenditure in areas like health and education should not be broken up into artificial boxes of Plan and non-Plan; both are developmental in nature and therefore an investment in social capital.

What this proposed change would do is to give states greater leeway to finance and implement Plan schemes in these areas next year, instead of leaving them further strapped for cash.