Experts split on expanding Niti's role to oversee financial allocations

Would the role of the Niti Aayog expand to include oversight of financial allocations to the states in the new NDA government? Experts have divided views on this.

The Niti Aayog shares one characteristic with the erstwhile Planning Commission: all members, including the deputy chairman, hold their offices concurrently with the term of the political executive at the Centre.

The Aayog could potentially find itself dealing with the financial demands of state governments, a role it has not played since its establishment in 2015, replacing the Planning Commission. This may become necessary as states like Bihar and Andhra Pradesh state governments which have often stridently demanded more untied aid for themselves find themselves happily with more say at the Centre. Both these states are now represented by JD(U) and TDP which are key alliance partners in the NDA government.

Currently, all financial negotiations with states are handled by the Department of Expenditure in the Finance Ministry. The Niti Aayog has a State Finances and Coordination Vertical, formed by merging the Financial Resources Vertical and the State Coordination Vertical in May 2020. This vertical aims to "strengthen coordination with states and serve as a single point of contact for all matters pertaining to state finances and multi-state issues."

Headed by a Senior Adviser, this vertical essentially serves as a back office for the Department of Expenditure. If the Niti Aayog's role is to be expanded under the new political configuration and leading up to the budget exercise due in early July, the vertical will need more authority.

One issue it would need to address is the treatment of market borrowings by the states. Pinaki Chakraborty, a distinguished professor at NIPFP, said the critical problem is that "there is no explicit mechanism to provide non-debt creating resources to the states for capital expenditure, which is particularly restrictive for poorer states.”

The Andhra Pradesh government raised off-budget borrowings of Rs 79,815 crore in FY22 and FY23. The Centre informed the state that since this bypassed the net borrowing ceiling (NBC), it would be treated as state government borrowing. The Bihar Chief Minister has repeatedly demanded special status in the allocation of funds from the Centre.

NR Bhanumurthy, vice chancellor of BR Ambedkar School of Economics University, Bengaluru, said issues like these are difficult to reconcile without a coordination mechanism. "The absence of an institution like the Planning Commission hurts both governments and, in my view, possibly the Centre more."

Chakraborty explained that the limits on market borrowings are determined by state-specific Fiscal Responsibility Legislations. "This restricts financing for capital investment at the state level, particularly for poorer states."

The new government will soon have to appoint a deputy chairman for Niti Aayog. The current incumbent, Suman Bery, might be reappointed, as Prime Minister Narendra Modi has shown a tendency to emphasise continuity in tenure.

Bhanumurthy said the Centre's handicap is due to the numerous centrally sponsored or supported schemes running in the states without clear guidance on implementation. The Finance Ministry lacks the capacity to monitor or set detailed rules, and Niti Aayog does not engage in this space. "So the quality of expenditure could vary across states," he added, recommending a more empowered state cell in the Niti Aayog.

To handle this issue, former Finance Secretary Ashok Chawla suggested that, just as the Finance Commission does not impose conditions on tax transfers to the states, capital grants should also be freed from any conditions. He argued that it is difficult to envision a role for the Niti Aayog similar to that of the Planning Commission.

"The states now have the administrative capacity and experience to handle development expenditure," Chawla said, adding, “It would not be fair to assume that only the Centre can better allocate between revenue and capital expenditure than the states can.”