One of the more significant initiatives of the Union Budget for 2015-16 is the reprioritisation of the government's expenditure allocations for its major schemes. The central government's outlay for health, education and other social sector programmes has seen a decline, while that for infrastructure sector, like the railways and road projects, has seen a significant increase. Predictably, this has raised a hue and cry. Why has the Centre abandoned its responsibilities towards the social sector? Is the Bharatiya Janata Party-led government not bothered about the need to improve India's Human Development Index, which no doubt can get adversely affected if allocations for health and education are slashed? The debate, in fact, has been escalated to a level where it is being asked if the current government accords greater priority to economic infrastructure compared to what is commonly understood as social infrastructure. Read our full coverage on Union Budget It is, therefore, important to understand how the reprioritisation of the Union government's expenditure took place and what its implications could be. The fact is that the Union government had little choice in planning its expenditure for next year after what the Fourteenth Finance Commission had recommended. The increase in the states' share in the Centre's divisible pool of tax revenues from 32 per cent to 42 per cent and an elimination of discretion in the allocation of grants and stipulation of end-use norms for funds transferred by the Centre to the states were two key recommendations of the Commission that influenced expenditure planning for 2015-16. The outcome was that the Centre's fiscal space got reduced as a result and the states were to get more funds without discretionary strings attached to them. The finance ministry responded to this new reality in two ways. One, it used a large portion of the increased capital spend for next year on railways and roads. There was obviously a reprioritisation exercise. And this was driven by its assessment that the Centre, with limited resources and compulsions of fiscal consolidation, should spend more on such basic economic infrastructure projects. This obviously meant a corresponding containment in its outlay for social-sector schemes in the areas of health, education, sanitation and drinking water. The justification was that the states were now getting a larger share in the Centre's tax revenues and were also free to spend the total resources transferred to them to meet their specific development requirements. The second response of the Centre to the new fiscal situation was seen in the way some taxes and surcharges were modified.
There was a marked preference to levy or increase surcharges as was done in the case of the surcharge on income tax for those earning over Rs 1 crore taxable income a year. The excise duty on petrol and diesel was reduced, but at the same time, the cess on the two products was increased so that the Centre's revenues went up without their being subjected to any formula for revenue-sharing with the states. Surcharges and cess are not part of the divisible pool of central taxes that are shared with the states. Indeed, even the cess meant for education was reduced, while that for roads was raised. This change was again driven by the Centre's belief that it must allocate higher resources to roads, even if that meant lower allocation for social-sector schemes. The Centre's logic seems to be two-fold. One, its resources are limited and it should use them to create economic infrastructure that would be commonly used for all states. After all, better railways or a wider road network will also help the states and the people who live there. Two, the states are in a better position to use the larger resources they are now getting from the Centre to build facilities in sectors such as education, health, sanitation and drinking water. These projects need to address local needs and, therefore, the states can plan them with greater care to get the best results. It now appears that what began as an idea to promote cooperative federalism is transforming itself into a new understanding between the Centre and the states on who should spend where and on which projects. States that have a better capacity to plan and use these resources for social-sector schemes are likely to race ahead in the coming years and states that are not ready for the new order might suffer. The danger that the Centre must be wary of is that such cooperative federalism should not result in a rapid rise in social and economic inequality among states.