States have funds, don’t have a plan
Public investment by states continues to remain largely static, with many states worried of a cut in the Central transfers due to changes in the criteria for such transfers.
Centre parts with 42% of its resources, but states neither spend nor consolidate
States may have received the highest ever moneys from the Centre this year, but they failed to make the best use of it contrary to expectations. In a slowing economy, they could have used the extra funds for more productive capital expenditure to kick-start growth. Or, they could have used it to reduce their deficits and improve their finances. Most did neither.
The Finance Commission recommended the highest-ever devolution at 42 per cent of Centre’s total resources to state governments starting 2015-16, but this incremental transfer does not seem to reflect in most state Budgets for now. On the whole, public investment by states continues to remain largely static, with many states worried of a cut in the Central transfers due to changes in the criteria for such transfers. On the brighter side, most states have abstained from introducing new taxes, though some have hiked existing levies.
While nearly half a dozen states had presented their Budgets before the Union Budget 2015-16 that implemented the recommendation of the Finance Commission, other states that presented their Budgets later too have not reflected the impact of the award except for making the right noises about the focus on “decentralisation” — such as that made by Rajasthan or complaints about the unfairness of the award (Tamil Nadu, Orissa). Most states seem to have remained shy of taking any concrete steps on how to use the new funds.
Accordingly in the Union Budget 2015-16, the net resources transferred to states and Union territories (UT) by the Centre in 2015-16 is pegged at Rs 8,42,963 crore, marking a 23.2 per cent rise from last fiscal’s transfer of Rs 6,83,966 crore (in the revised estimate).
But while states’ share of taxes is estimated to rise to Rs 523958 crore in 2015-16 from Rs 3,82,216 crore last fiscal, central assistance to state and UT plans would actually be cut from Rs 3,29,712 crore in the Budget estimate of 2014-15 to Rs1,95,778 crore this fiscal.
A closer examination reveals that states like Uttar Pradesh, Bihar, West Bengal, Madhya Pradesh and Northeast states are likely to see a rise in transfers, others like Karnataka, Rajasthan and Kerala could see a cut in grants.
“Based on the changed formula and criterion for transfer of funds, it is clear that some states will get more while others could lose out. But what is clear is that at the aggregate level, the net transfers to states has increased,” said an analyst.
The Fourteenth Finance Commission’s award is simple based on the principle that states must have greater fiscal autonomy that in turn would lead to more decentralisation. It proposed devolution of 42 per cent of taxes to states, additional grants of Rs 2.87 lakh crore to local bodies, transfer of a number of centrally sponsored schemes to states, and a special Rs 1.94 lakh crore as a post devolution revenue deficit grant to a few states.
Jammu & Kashmir is, in fact, one of the few states who broke away from the norm and announced that it would do away with the distinction of plan and non-plan classification in its state Budget and even went a step further to assert that it would not seek financial assistance from the Centre.
“Following the replacement of Planning Commission by NITI Aayog and the acceptance of the 14th Finance Commission Award we have completely changed the structure of our state budget. J&K is perhaps the first state in the country to align its budget to the changes in the federal fiscal system,” said Haseeb A Drabu, finance minister, Jammu & Kashmir while presenting the state Budget on March 22, adding that the changed the framework of the state budget by letting go of plan and non-plan classification.
A recent report by JP Morgan that analysed state Budgets of nine of the largest states, including Uttar Pradesh, Bihar, Gujarat, West Bengal, Rajasthan, Madhya Pradesh, Tamil Nadu, Kerala and Karnataka, which together account for 54 per cent of the country’s GSDP and 62 per cent of the net transfers reveals that their Budgets are not aiming at fiscal consolidation in 2015-16.
More worryingly, the Budgeted capex allocation of some of these states has shown a marginal drop from 4 per cent of the GSDP in 2014-15 (budget estimate) to 3.9 per cent in 2015-16 (BE).
“Furthermore, in the sub-sample of 5 states that have clearly internalised the transfers, budgeted capex falls even more from 3.3 per cent to 3.1 per cent of state domestic product! So neither are the transfers being used to reduced the deficit, nor are they being used for higher capex, suggesting, prima facie, that they are being used for higher current expenditures,” said the report titled “India’s twin puzzles in 2015: What is potential growth? Is fiscal policy consolidating or expanding?”
What states have done
Plans to control revenue deficit, increase capital investment, enhances premium on additional FSI to raise more revenue
With a revenue surplus of Rs 7,308 crore and fiscal deficit at 2.24% of the GSDP in 2015-16, levies 5% VAT on technical textile, focus on infrastructure
State’s share in central taxes lesser by Rs 4,219.61 crore in 2014-15 due to lower crude oil prices and cut in Central spending in schemes, more loss expected this fiscal due to changes in sharing pattern
Projects a 25.74% rise in Central transfers but concerned about lowering plan transfers in the future. Also plans to
step up capital expenditure by 21%
Wants to borrow over the cap of 3% of the GSDP under the FRBM Act 2003 to invest in development projects
Source:: Indian Express