Trends in fiscal federalism

One of the more heartening aspects of the Eleventh Five-Year Plan is the way it is to be financed. A little over 78 per cent of the states' Plan outlay of Rs 14,18,147 crore is to come from the resources raised by the states themselves, be it borrowings, resources of their state-owned undertakings or from their annual budgets. While this in itself is a sign of how much more self-sufficient the states have become in the past few years, thanks to buoyancy in tax revenues including the state-level VAT, the achievement gets magnified in comparison with previous Plans. In the Ninth Plan, for instance, the resources of various state governments funded a vastly lower 54 per cent of their total outlay of Rs 2,99,131 crore. In the Tenth Plan, this share was supposed to remain around the same (states were to fund Rs 3,70,744 crore of their total Plan of Rs 6,71,009 crore) but, as things happened, there was a shortfall in what the Centre could provide (only Rs 2,03,117 crore instead of Rs 3,00,265 crore) and so the states ended up funding over 70 per cent of their Plan. Of course, all this is at risk if the next Pay Commission award is along lines similar to the last one, as is widely expected, and plays havoc with state finances.

The other aspect of the Eleventh Plan, as reported in this newspaper last week, is that the share of grants is falling in terms of the overall Gross Budgetary Support (GBS) "" from 26.5 per cent in the last Plan to 23 per cent in the current one. Perhaps even more important than this is the issue on which the NDA-ruled states are protesting, that more and more of the money being given by the Centre is in the form of 'tied' aid. With each successive Plan, the Centre is focusing more on central schemes such as those pertaining to education, or those which it links to reforms such as the Jawaharlal Nehru Urban Renewal Mission, or the accelerated power development program. On the face of it, this should not matter since the states are getting a lot more funds for programmes that are after all important in themselves "" no one can argue that the JNURM and the Sarva Shiksha Abhiyan represent misplaced priorities. Yet, several NDA chief ministers protested against this trend during the National Development Council (NDC) meeting recently and said that the Centre was using its funding power to interfere in what was traditionally considered to be the states' domain. Indeed, as part of the National Common Minimum Programme, the UPA had promised that most centrally sponsored schemes would be transferred to the states! In the new Plan, untied aid is only 12 per cent of the total assistance to states.

The key argument in favour of central schemes (with central rules) is that this is one way in which the Centre can ensure that the spending is of a better quality, but there is little firm evidence to support this. The issue is likely to become more contentious, with important states deciding who will rule at the Centre. With the Thirteenth Finance Commission being asked to take into account the amount the central government has to spend in terms of gross budgetary support to the central and state plan, the issue will be properly joined before long.