By Avinash Celestine, ET Bureau | 4 Aug, 2013, 01.07PM IST
Quite apart from the political rationale, the economic case for smaller states seems clear-cut. Carving out Telangana from Andhra Pradesh, so the argument goes, can facilitate better economic governance.
New states may not necessarily mean fiscal independence.
States are now more dependent on the Centre than ever
before for resources
A smaller and more compact state will ease administration and improve the delivery of services. With reduced ethnic and regional tensions (such as those in Telangana), bureaucrats and politicians have more bandwidth to focus on growth and governance.
But ironically even as, in political and administrative terms, India has become more decentralised in recent decades with the creation of new states, all states have become more dependent on the Centre for funds. A big chunk of such funds is collected by the Centre and transferred to states under the provisions of the Constitution.
But a significant amount of funds are also transferred by the central government outside state budgets, directly to district-level institutions, under various schemes. "States have become increasingly dependent on the central government for funds," says DK Srivastava of the Madras School of Economics.
CENTRAL DOLE
Under the Constitution, states and the central government have the right to collect different types of taxes. The central government collects corporate and income taxes, but is required to share a part of such tax revenues with the states (currently slightly less than a third).
In addition to this, the central government transfers funds to states to support statelevel development programmes and schemes. And finally, the central government also transfers funds to the state government to enable it to implement specific plans and schemes developed by it.
Currently, the total volume of all such funds transferred by the Centre to the states comprises 74% of the revenue collected by all states put together, on their own. This is at its highest level since at least 1991.
During the 1990s, the states went through a serious fiscal crisis. In recent years, state finances have improved, but even this has been at the behest of the Centre. An annual Reserve Bank of India review of the finances of states pointed out that the improvement of state revenues in what it calls the 'consolidation phase' (2004-08, when state finances improved), "was largely attributable to an increase in central transfers, although the states' own revenues also increased over the same period".
And after the financial crisis of 2008, states' own revenues fell, but their budgets were propped up by an increased volume of central transfers.
"Over the past 10 years, the buoyancy [the extent to which tax revenues rise as economic growth improves] rose faster for the taxes collected by the central government than those collected by states," points out Srivastava. States vary widely in the extent to which they are dependent on central funds to prop up their budgets. States like Andhra Pradesh for instance are better off with central funds accounting for less than half of taxes or other revenues they themselves have mobilised.
At the other extreme is a state like Bihar, where central funds to the state are more than 2.5 times the size of taxes that the Bihar government itself manages to raise. Effectively, the state government, large and politically important that it is, is hugely dependent on central government funds for its survival.
Bihar ironically, is even worse off than Jharkhand, its 'daughter' state where central transfers are 1.5 times the size of the funds it is able to raise on its own. And Madhya Pradesh, where central transfers account for 96% of the resources it is able to raise on its own, is worse than its 'daughter' state, Chhattisgarh, where central transfers account for 80% of its own revenues.
Little wonder then, that states like Bihar and Odisha have demanded what is called special category status. Special category states, including those in the Northeast but also J&K, Himachal and Uttarakhand, are states which are entitled to preferential treatment in the distribution of central funds because of what are seen as inherent disadvantages that they have - difficult terrain, low population density, or because they have strategic importance and have international borders with unfriendly neighbours.
"Special category states are especially highly dependent on central transfers," says Srivastava.
TYPES OF TRANSFERS
While the size of central transfers to states may loom large in state budgets, not all such transfers can or should be seen as handouts or favours. The transfers under the Constitution for instance are resources that the states are entitled to, based on the level of their development and their size and are determined according to a formula which leaves the central government with little discretion on how much to give or who to give it to.
Quite apart from this, the Planning Commission too transfers funds to states to help them implement schemes or projects of their own. Together, these account for the bulk of such transfers. The problem here is, of course, the fact that richer states complain that they get less under the formula than poorer states despite the fact that the central government raises the bulk of its taxes and resources from them.
In recent years however, the biggest bone of contention has been socalled centrally sponsored schemes (CSS) like MNREGA or the Indira Awas Yojana. While other forms of transfers and assistance are not tied to specific schemes or sectors, leaving the states free to spend on the areas or sectors it thinks are important, funds under such centrally sponsored schemes must be spent only on those schemes, developed at the Centre, with the state only being the implementing body.
Under these schemes, funds are transferred from the Centre to the states, but states have little discretion on what to spend them on. They are essentially implementing agencies. At 10% of the overall funds (in net terms) offered to states by the Centre in 2012-13, the amount remains dwarfed by the large transfers under the Constitution.
But this is only half the story. A large chunk of central spending in states completely bypasses state government budgets altogether, and is sent directly to district-level implementing agencies to be spent. Huge schemes like the rural employment guarantee scheme and the Indira Awas Yojana fall into this category. And while centrally sponsored schemes transferred to state governments comprised Rs 55,200 crore in 2012-13 (budget estimates), funds transferred by the Centre directly to the district level, and leaving state governments out of the picture altogether, comprised around Rs 1,33,500 crore, more than double that amount.
"The number of CSS proliferated by including considerable areas of activity performed by the states. The important reasons for increased involvement of Centre on state subjects are: inability of the states to provide adequate resources for socially relevant programmes, lack of a clear strategy to implement social sector programme by the states and inadequate commitment of resources on priority programmes," says the RBI review of state finances.
The Comptroller and Auditor General routinely raises questions over the practice of the central government bypassing state budgets. In its audit report on the state finances of Tamil Nadu 2011-12, for instance, the CAG stated that, "...direct transfer of funds from government of India to state implementing agencies ran the risk of improper utilisation of funds by these agencies," pointing out that monitoring the funds of such agencies was "difficult".
In Tamil Nadu's case, funds transferred directly to state agencies were Rs 7,608 crore in 2011-12. Compared to that, grants from the central government to the state government were around Rs 7,286 crore.
In a submission made to the 13th Finance Commission, which decides what proportion of central taxes should be shared with states, the Ministry of Panchayati Raj pointed out the strange anomalies created by such a system. "The ministry also noted the relative incongruity of [panchayats] having substantial funds to implement these CSS on the one hand, and little by way of 'discretionary' funds for adequately meeting their administrative costs, performing their core functions, and leveraging the CSS releases to meet local needs on the other," the commission noted.
LESSER AUTONOMY?
"Spending in many activities, which are ostensibly under the ambit of the state, has been taken over by the Centre," points out NR Bhanumurthy, professor at the National Institute of Public Finance and Policy. He points to areas such as health, education and roads, where a major amount of funding now comes from the central government. "There are questions being raised over whether such spending and interventions weaken the federal set up."
And as he points out, with the Goods and Services Tax likely to become a reality over the next few years, state's autonomy in the areas of taxation will be further reduced. This is something that the RBI report points out as well. "The proposed shift to the Goods and Services Tax [GST] regime would reduce the states' flexibility in determining the rates for taxes that will get subsumed in the GST. Raising tax revenues then would depend more on improving efficiency and compliance by tightening vigilance and increasing the use of information technology for tax collections."
In recent years, clashes between the Centre and states over a range of issues, from terrorism — witness the controversy over the then home minister P Chidambaram's move to set up the National Counter Terrorism Centre (NCTC) — to taxation, have been widespread. Expect such fights to continue in future. And quite possibly, get worse.
Quite apart from the political rationale, the economic case for smaller states seems clear-cut. Carving out Telangana from Andhra Pradesh, so the argument goes, can facilitate better economic governance.
New states may not necessarily mean fiscal independence.
States are now more dependent on the Centre than ever
before for resources
A smaller and more compact state will ease administration and improve the delivery of services. With reduced ethnic and regional tensions (such as those in Telangana), bureaucrats and politicians have more bandwidth to focus on growth and governance.
But ironically even as, in political and administrative terms, India has become more decentralised in recent decades with the creation of new states, all states have become more dependent on the Centre for funds. A big chunk of such funds is collected by the Centre and transferred to states under the provisions of the Constitution.
But a significant amount of funds are also transferred by the central government outside state budgets, directly to district-level institutions, under various schemes. "States have become increasingly dependent on the central government for funds," says DK Srivastava of the Madras School of Economics.
 |
Under the Constitution, states and the central government have the right to collect different types of taxes. The central government collects corporate and income taxes, but is required to share a part of such tax revenues with the states (currently slightly less than a third).
In addition to this, the central government transfers funds to states to support statelevel development programmes and schemes. And finally, the central government also transfers funds to the state government to enable it to implement specific plans and schemes developed by it.
Currently, the total volume of all such funds transferred by the Centre to the states comprises 74% of the revenue collected by all states put together, on their own. This is at its highest level since at least 1991.
During the 1990s, the states went through a serious fiscal crisis. In recent years, state finances have improved, but even this has been at the behest of the Centre. An annual Reserve Bank of India review of the finances of states pointed out that the improvement of state revenues in what it calls the 'consolidation phase' (2004-08, when state finances improved), "was largely attributable to an increase in central transfers, although the states' own revenues also increased over the same period".
And after the financial crisis of 2008, states' own revenues fell, but their budgets were propped up by an increased volume of central transfers.
"Over the past 10 years, the buoyancy [the extent to which tax revenues rise as economic growth improves] rose faster for the taxes collected by the central government than those collected by states," points out Srivastava. States vary widely in the extent to which they are dependent on central funds to prop up their budgets. States like Andhra Pradesh for instance are better off with central funds accounting for less than half of taxes or other revenues they themselves have mobilised.
At the other extreme is a state like Bihar, where central funds to the state are more than 2.5 times the size of taxes that the Bihar government itself manages to raise. Effectively, the state government, large and politically important that it is, is hugely dependent on central government funds for its survival.
Bihar ironically, is even worse off than Jharkhand, its 'daughter' state where central transfers are 1.5 times the size of the funds it is able to raise on its own. And Madhya Pradesh, where central transfers account for 96% of the resources it is able to raise on its own, is worse than its 'daughter' state, Chhattisgarh, where central transfers account for 80% of its own revenues.
Little wonder then, that states like Bihar and Odisha have demanded what is called special category status. Special category states, including those in the Northeast but also J&K, Himachal and Uttarakhand, are states which are entitled to preferential treatment in the distribution of central funds because of what are seen as inherent disadvantages that they have - difficult terrain, low population density, or because they have strategic importance and have international borders with unfriendly neighbours.
"Special category states are especially highly dependent on central transfers," says Srivastava.
TYPES OF TRANSFERS
While the size of central transfers to states may loom large in state budgets, not all such transfers can or should be seen as handouts or favours. The transfers under the Constitution for instance are resources that the states are entitled to, based on the level of their development and their size and are determined according to a formula which leaves the central government with little discretion on how much to give or who to give it to.
Quite apart from this, the Planning Commission too transfers funds to states to help them implement schemes or projects of their own. Together, these account for the bulk of such transfers. The problem here is, of course, the fact that richer states complain that they get less under the formula than poorer states despite the fact that the central government raises the bulk of its taxes and resources from them.
In recent years however, the biggest bone of contention has been socalled centrally sponsored schemes (CSS) like MNREGA or the Indira Awas Yojana. While other forms of transfers and assistance are not tied to specific schemes or sectors, leaving the states free to spend on the areas or sectors it thinks are important, funds under such centrally sponsored schemes must be spent only on those schemes, developed at the Centre, with the state only being the implementing body.
Under these schemes, funds are transferred from the Centre to the states, but states have little discretion on what to spend them on. They are essentially implementing agencies. At 10% of the overall funds (in net terms) offered to states by the Centre in 2012-13, the amount remains dwarfed by the large transfers under the Constitution.
But this is only half the story. A large chunk of central spending in states completely bypasses state government budgets altogether, and is sent directly to district-level implementing agencies to be spent. Huge schemes like the rural employment guarantee scheme and the Indira Awas Yojana fall into this category. And while centrally sponsored schemes transferred to state governments comprised Rs 55,200 crore in 2012-13 (budget estimates), funds transferred by the Centre directly to the district level, and leaving state governments out of the picture altogether, comprised around Rs 1,33,500 crore, more than double that amount.
"The number of CSS proliferated by including considerable areas of activity performed by the states. The important reasons for increased involvement of Centre on state subjects are: inability of the states to provide adequate resources for socially relevant programmes, lack of a clear strategy to implement social sector programme by the states and inadequate commitment of resources on priority programmes," says the RBI review of state finances.
The Comptroller and Auditor General routinely raises questions over the practice of the central government bypassing state budgets. In its audit report on the state finances of Tamil Nadu 2011-12, for instance, the CAG stated that, "...direct transfer of funds from government of India to state implementing agencies ran the risk of improper utilisation of funds by these agencies," pointing out that monitoring the funds of such agencies was "difficult".
In Tamil Nadu's case, funds transferred directly to state agencies were Rs 7,608 crore in 2011-12. Compared to that, grants from the central government to the state government were around Rs 7,286 crore.
In a submission made to the 13th Finance Commission, which decides what proportion of central taxes should be shared with states, the Ministry of Panchayati Raj pointed out the strange anomalies created by such a system. "The ministry also noted the relative incongruity of [panchayats] having substantial funds to implement these CSS on the one hand, and little by way of 'discretionary' funds for adequately meeting their administrative costs, performing their core functions, and leveraging the CSS releases to meet local needs on the other," the commission noted.
LESSER AUTONOMY?
"Spending in many activities, which are ostensibly under the ambit of the state, has been taken over by the Centre," points out NR Bhanumurthy, professor at the National Institute of Public Finance and Policy. He points to areas such as health, education and roads, where a major amount of funding now comes from the central government. "There are questions being raised over whether such spending and interventions weaken the federal set up."
And as he points out, with the Goods and Services Tax likely to become a reality over the next few years, state's autonomy in the areas of taxation will be further reduced. This is something that the RBI report points out as well. "The proposed shift to the Goods and Services Tax [GST] regime would reduce the states' flexibility in determining the rates for taxes that will get subsumed in the GST. Raising tax revenues then would depend more on improving efficiency and compliance by tightening vigilance and increasing the use of information technology for tax collections."
In recent years, clashes between the Centre and states over a range of issues, from terrorism — witness the controversy over the then home minister P Chidambaram's move to set up the National Counter Terrorism Centre (NCTC) — to taxation, have been widespread. Expect such fights to continue in future. And quite possibly, get worse.
Excerpt from: The Economic Times
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