Planning Commission To Penalise States For Diverting Funds

The Planning Commission is devising a mechanism to check diversion of funds allocated for plan expenditure to non-plan expenditure on consumption and administrative heads by state governments.

The amount of money diverted to non-plan expenditure by a state will be deducted from its plan outlay next year. We will be meeting state chief ministers and representatives of state governments to discuss the ninth plan from June 1 onwards. We will use the opportunity to tell them that fund diversion in a given year will result in a reduction in the plan size for the next year, Planning Commission deputy chairman Madhu Dandavate told Business Standard.

 

The Planning Commission is, however, struggling to check temporary diversion of funds by state governments. Usually, states divert funds from development projects to meet administrative costs and then shift it back to the plan side in the last two months of the financial year.

As a result, they are able to show that the net diversion is either nil or very low. This tactics enabled most of the states to prove that there was very little diversion of funds during the eight plan period which ended last March.

But this form of temporary diversion holds up development projects for four to six month a year. This results in delays in project implementation and increase in project cost due to time and cost overruns.

Diversion of funds by central government departments became difficult during the eighth plan period as the release of funds for plan expenditure was reduced by Rs 10,000 crore. The reduction left little scope for diversion from the plan side.

Among states, a major exception was Bihar which resorted to large scale diversion because it failed to mobilise the kind of tax and non-tax resources it had promised for the eighth plan.

More than half the states have not been able to fulfil the targets for additional resource mobilisation in the eighth plan period. The lower than anticipated income is a major reason for diversion of funds from the plan side.

The non-plan expenditure budget is based on anticipated inflows by way of tax revenues of states which are meant for meeting administrative costs. Plan expenditure budget is meant for capital and development projects and is dependent on borrowings from the Centre and from the market by state governments.

The World Bank recently opined that borrowed money should be utilised for only those functions that generate a rate of return equal to the interest rates at which money has been borrowed.

But state governments complain that it is not possible to stick to such a norm because they have to often put in money to meet unexpected exigencies. The planning process usually does not leave enough cushion for the state governments to find the funds necessary to meet emergencies, the state governments feel.