01 June 2017
The case for lengthy-time period finance banks

Fiscal federalism in India

Mukul Asher of the National University of Singapore writes on leveraging CSS To Obtain Better Outcomes an Imperative For The States in India

In the evolving dynamics of Co-operative (which also implies competitive), Federalism in India, it is imperative that the individual States undertake necessary governance, administrative, and fiscal management reforms design to leverage CSS (Centrally Sponsored Schemes) for maximum benefits in terms of delivering public services and amenities to the citizens. Implications of the CSS for the work plans of the State Finance Commissions (SFCs), several of whom are currently in the process of submitting Reports to their respective State governments are also briefly mentioned.

The SFC is a Constitutional body mandated every five years to recommend devolution of State resources to municipalities and rural bodies, and to recommend how delivery of public services and amenities to them could be improved within a State.

The Scope, Design, and Implementation Features of CSS

The CSS cover social sector services deemed to be of national importance, primarily rural employment provision, health, education, improving agriculture and horticultural sectors, urban amenities and management as exemplified by the Smart City and AMRUT (Atal Mission for Rejuvenation and Urban Transformation) initiatives, 0ld age pension, and support for population which is currently economically and socially in need for it.

Economic reasoning behind the CSS is as follows. Sharing of funds between the Centre and the States reduces relative price of activities involved in the CSS to the States. As demand curve is downward sloping, lower relative price increases the quantity demanded of the concerned activities by the State. This enables India as a country to provide at least the minimum level of public services and amenities throughout the country.

The extent to which the increase in public services and amenities is actually realized depends on the individual State’s capacity to leverage on the CSS.

Among the key characteristics of the CSS are co-funding by the Centre and States, and implementation of the Schemes by the States. In addition, most States have initiated their own schemes, some of which are consistent with the design and objective of the CSS, and some are not. The tendency of the both the Centre and of the states is to initiate plethora of schemes, but without adequate outcome assessment or periodic outcome based review.

The above characteristics thus require effective co-ordination and policy coherence between the Centre and the individual States, and among the Central government agencies, and agencies in individual States. They also require better governance and more result-based administrative structures and a change in bureaucratic process-oriented to outcome – oriented mindset. Effectively communicating intent and procedures for such large number of Schemes has also proved to be a major challenge.

The total budgetary expenditure by the Union government on the CSS was 2.26 lakh crore in 2016-17, equivalent to one- sixth of its Current (Routine)expenditure, and 1.5 percent of 2016-17 GDP. When the State’s sharing is added total expenditure on CSS could reach around 3.0 percent of GDP. If effectiveness of CSS is improved by 10 percent, this would provide public services and amenities equivalent to around 0.3 percent of GDP, not an insignificant addition to fiscal space.

In terms of the resource envelope, i.e. mix of financing from various sources, (excluding budgetary expenditure from the State on them), Urban and Local Bodies (ULBs), including Zila Parishads, Panchayat Samities, and Gram Panchayats in most States, depend nearly fully on the CSS, and on Central Finance Commission(CFC), and on State Finance Commission(SFC) grants. Their Own-Tax and Non-Tax Revenue on the whole account for only a small share of the total in predominant number of States. The mind-set of dependency on grants from higher levels among the urban and rural bodies will need to be addressed before improvements in resource generation at their own level are to be realized.

The implementation of the CSS is however at the State level. With few exceptions, such as for MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), the funds for the CSS do not include expenditure for additional staff, for maintenance of assets created, and for data gathering and outcome assessment.

Even when additional staff and improving data reporting and monitoring system are present as in MGNREGA, there has been limitations in providing desired benefits across the country. As Prime Minister in a speech (March 3,2016) in the Indian Parliament, quoting from the 2012 Report of India’s CAG (Comptroller and Auditor General), observed that the MGNREGA “…Scheme was implemented better in states where the population of the poor was less. But the states in which it was needed the most, the scheme was utilised the least. This means we could not target the poor through this scheme properly…He stressed that measures to address these limitations are being undertaken.” (This is an English translation by the Author of Prime minister’s speech in the Hindi language) (https://www.youtube.com/watch?v=e5O6R-92jFY )

Selected interviews with State and local officials in India’s selected States strongly suggest that the above omissions in the Scheme design and in fund allocation, in conjunction with too many schemes without overall integration by broad objectives to be achieved, and the absence of sunset clauses for the Schemes based on outcome assessment have led to substantially less than achievable improvements in quality of living and quality of life of the Indian households when compared with the society’s resources utilized by the CSS, and by the State initiated Schemes.

A Report of Subgroup of Chief Ministers (chaired by Mr. Shivraj Singh Chauhan, Chief Minister of Madhya Pradesh), formed by NITI (National Institution of Transforming India) Aayog, was submitted in October 2015 to reduce and rationalise CSS. (http://niti.gov.in/writereaddata/files/Final%20Report%20of%20the%20Sub-Group%20submitter%20to%20PM.pdf )

The reported proposals by NITI Aayog, and by the Central government to further the reduce number of CSS further and to subject them to outcome-based review with sunset clauses are to be welcomed. ( http://www.livemint.com/Politics/T9CkGMEfpjbnlpeml8AjyO/Govt-may-cut-down-social-schemes-to-improve-quality-Finance.html ).Indeed, all future schemes at the Centre and at the State levels should have outcome-based evaluation and sunset clauses as part of the design

Two Complementary Types of Analysis of CSS Needed

To analysis the potential avenues and specific measures to better leverage the CSS for obtaining greater benefits for its citizens, the states could consider two types of complementary analysis. These are Funds-Flow or Financial analysis and assessment of impact on actual delivery of services. This is a critical component of outcome analysis.

Funds-Flow (Financial) Analysis: For the initial diagnosis of the extent to which Funds-Flow could be improved, the following is suggested. In the CSS, funds flow from the Centre to the States based on the whether a State has fulfilled them. Any variation between the Centre’s Funds estimated in the state Budget, actual release of Funds by the centre, and the actual amount spent needs to be estimated, and the reasons for the variance ascertained. The reasons could be the Centre not releasing the promised funds, States not meeting conditions set for the release of funds by the Centre, or a combination of the two need to be ascertained, and limitations addressed.

Such as analysis needs to be undertaken for each major CSS, as considerable variations in funds-flow by each Scheme is the norm.

A Similar analysis between the budget estimate, amount released, and the actual amount spent should be undertaken, both at an aggregate and disaggregate levels by the Scheme, and the reasons for the variance ascertained.

Preliminary analysis along these lines suggests that there is large variance among schemes in the extent to which budgeted funds are released, and then actually spent.

As a result, actual fund sharing ratio by the Centre is less than the statutory or specified ratio. This suggests that fiscal space of the state, and of its ULBs and Central fund ratio to statutory or specified ratio. It also suggests the strong need to rely just on increased allocation from higher levels of governments to the ULBs and Panchayats, but to examine the funds flow performance.

Currently, State Finance Commission (SFCs) in many states (e.g. Haryana, Rajasthan, Madhya Pradesh) are working on their respective Reports for the allocation of State funds to ULBs and Panchayats. It is strongly urged that the SFCs consider undertaking the Funds –Flow analysis along the lines suggested above.

Impact of CSS on Delivery of services: A study of the CSS on actual delivery of services to the ULBs and Panchayats involves a more complex analysis. This would also involve improving their capacity to spend consistent with “Spend less” (obtaining a given quality of good, service, or asset as lowest possible cost over life cycle) “Spend well” (obtaining better outputs from given financial and physical inputs) and “Spend wisely” (given expenditure to meet citizen’s need and aspirations).

There are several key areas where service delivery for the ULBs and PRIs need to be substantially improved. These include sanitation, ensuring availability of drinking water, solid waste management; streets and their amenities, including cleaning and lighting; schooling; health care facilities; connectivity; and community safety.

This type of assessment would need to focus on whether there exists alignment between functions (services), funds provided, human resources needed, and technological preparedness. This in turn would require governance and administrative reforms, and a change in mind-set of officials and public. How to communicate appropriate messages to the stakeholders also acquires much greater importance. The digital economy provides considerable opportunities in this regard.

State Level Co-ordinating Task Force Needed

It is strongly recommended that each State consider setting up an Inter-Departmental task force, led by the Finance Department, with inclusion of independent experts in specific areas as required to obtain maximum leverage from the Centrally Sponsored Scheme(CSS) for the State. Clear signals from the top political leadership of the State, particularly the Chief Minister and the Finance Minister would be essential.

It would be essential to set accountability for enhancing this leverage, with benchmarks. The SFC urges that administrative reforms, including in human resource management (obtaining persons with requisite skills) and in enabling technology, be undertaken to achieve the above goal.

As suggested by Asher (2017), establishment of a State level Public Financial Management(PFM)Institute could provide continuing research and other support for the above task. https://www.myind.net/Home/opinions/economics

Suggestions for the State SFCs

The above analysis has following implications for the State Finance commissions (SFCs).

First, the challenges of delivery of public amenities and services to citizens of ULBs and PRIs are not primarily financial.

Second, enhancing capacity to spend less, well and wisely, and capacity and willingness to raise own resources so that the share of SFC and other grants become less prominent as the Indian Constitution (243 I) intends, are the areas which require much greater analysis and focus. These will require governance and administrative reforms.

Third, the SFC’s Reports should incorporate the substance of the above two messages. Arrangements are needed to ensure that the data gathering, analysis and other work undertaken by the SFCs at five year intervals should be continued in the interim.

Establishing effectively functioning PFIs at State level could help continue SFCs work, with substantial saving in terms of costs and time in undertaking SFCs work, while improving quality and policy-relevance of the Reports.
Tags: india, fiscal federalism

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