The vicious cycle of unspent balances - Part 1

Why is the money allocated to social sector schemes left unspent

Amidst debates of significant budget cuts in social sector spending, one is often confronted by a peculiar phenomenon – that of unspent balances. 

Take the case of health for instance. It is well-known that India’s public spending on health is amongst the lowest in the world. According to the World Bank, in 2013, whilst Brazil spent 4.7%, South Africa 4.3% and China 3.1% of their GDP on public health care. India, on the other hand spent an abysmal 1.2% even in 2014.

Despite low overall spending on health, what is even more puzzling are the large sum of monies that remain unspent, year on year.  Since the start of the National Health Mission (NRM, earlier NRHM) till 31st March 2015 – across India a staggering Rs. 5440 crores of unspent balances have accumulated with states.  State-wise data indicates that whilst Uttar Pradesh alone had an opening balance of Rs. 3245 crores, even a state like Kerala had an unspent balance of 50 crores. (See table below for more details)

State	Unspent balance available as on 01.04.2015 (including interest) in Rs crore
Uttar Pradesh	3245
Jharkhand	557
Madhya Pradesh	374
Rajasthan	273
Kerala	50
Source. Note numbers have been rounded off.

NRHM is not alone. According to data analysed by Accountability Initiative, as on 31st March 2014, unspent balances of Rs. 5,194 crores were available under the Rashtriya Madhyamik Shiksha Abhiyan (RMSA) – Government of India’s (GoIs) flagship scheme for secondary education. Similarly, under the Sarva Shiksha Abhiyan (SSA), Rs. 7,162 crores was the opening balance (i.e unspent from the previous years) at the start of financial year 2014-15.

But what explains these trends? While a significant part of the problem is of course state capacity, and administrative inefficiencies, a simplistic (though important) explanation also lies in the peculiarities of government planning, budgeting and fund flow cycles. This column is divided into two parts – the first lays out some of the difficulties in government planning cycles which play a role in unspent balances. The second part comments on the consequences of this and discuses some solutions.

From Planning to Approvals

Most Centrally Sponsored schemes (NRHM, SSA, and RMSA included) have an element of decentralised planning. Plans (usually made at the district level), are aggregated upwards to states who consolidate, collate and finally submit to the relevant ministry. This is then followed by a round of negotiations and discussions between the state department and central government ministry. As per design, the planning and approval process for next year usually begins around October-November of the previous year and can continue till as late as June (after the financial  year has already begun). 

The timing of the planning cycle also means that plans are based on an estimation of expenditure rather than complete information of actual expenditure. This is of course a problem with our public finance management systems. Lack of real time information on existing unspent balances at the last mile means that decisions are based on releases rather than actual expenditures. Consequently, at times more funds are proposed despite large unspent balances. 

Allocations and Funds Available

The situation is exacerbated by lack of coordination and transparency across departments. Information on the likely budget available is not given to states and as a consequence, plans are made which are significantly different from monies available. For instance, whilst according to norms (at least till 2014-15), Ministry of Human Resource Development (MHRD) was responsible for financing 65% of the total approved SSA budget, there is a significant mismatch between plans approved and actual allocations for SSA. In 2012-13 for instance, only 34% of the total approved plan was allocated for SSA under MHRD.  Releases probably were even lower!

Source: Accountability Initiative, Budget Brief 2015, Sarva Shiksha Abhiyan. Available here

Releases

Since a bulk of the releases are contingent on approved plans - any delay in the planning process results in delays in release of funds. This year for instance, in Uttar Pradesh, the discussion meeting on NHM was held in June and final approval came only in mid-August. This means that by the time funds start flowing to the state, half the financial year is already over! Delays in fund release to states obviously has consequences on releases to districts and below. At the last mile in particular, receipt of large sums of money on the last week or last day of the financial year is a common complaint. 

Added to this is the problem of uncertainties of released funds. Releases are contingent on both – the size of the budget envelope available as well as submission of utilisation certificates and other documentation. As a result, states do not know the exact amount that they will receive till after the financial year is over!!

All these factors contribute to a viscous cycle of unspent balances and “coping” mechanisms adopted by states and districts, which further result in inefficient planning. In the next part of the blog, I will explain and highlight some of these methods, their consequences and finally, a few simple (and not so simple) solutions. Watch the space!

Avani Kapur works as Senior Researcher: Lead Public Finance, Accountability Initiative at Centre for Policy Research, New Delhi. Her work is focused on public finance & accountability in the social sector.

She writes about developments in the social & educational policy landscape on her blog, Social Specs, a part of Business Standard's platform, Punditry.

Avani tweets as @avani_kapur