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Resource centre on India's rural distress
 
 

Modi government cuts social sector allocations to states by half to promote cooperative federalism
-The Economic Times

BENGALURU: As the central government devolves more fiscal freedom to the states, they seem to be cutting allocations to social sectors, especially agriculture and allied areas in response, according to the initial findings of a study. The Narendra Modi administration wants to empower states further as part of a push toward cooperative federalism.

Finance Minister Arun Jaitley's February budget cut allocations to the states by more than half in 15 central agricultural schemes such as the Rashtriya Krishi Vikas Yojana (RKVY), National Mission for Sustainable Agriculture and irrigation and watershed management programmes. Jaitley said this wouldn't leave the schemes without money because the states would chip in from the additional funds they receive as recommended by the 14th Finance Commission —  42% from the divisible pool of central taxes instead of 32%.

A quick look at this year's state budgets, however, doesn't bear out this assumption. Most states, including Bharatiya Janata Partyled Madhya Pradesh and Congress-led Karnataka, have slashed allocations to farm and related sectors. Amid agrarian distress due to bad weather and last year's patchy monsoon, this could throw the food, fish, milk and allied sectors into greater crisis.

Researchers at Delhi-based think tank, the Centre for Budget and Governance Accountability (CBGA), compared this year's state budget estimates with those of the previous one and found that funding for agriculture, poultry, dairy, forestry, plantation, fisheries, crop insurance and farm education has been cut. ET was given a preview of the study, which is still in progress.

Karnataka reduced this by Rs 1,960 crore, Madhya Pradesh by Rs 1,396 crore, Bihar by Rs 274 crore and Andhra Pradesh by Rs 208 crore, it said. A few states that showed a marginal increase in outlay had already announced these before the Centre said it would be cutting its own spending.

"One reality is that a 10 percentage point increase (in the transfer of taxes) is not as substantial as the Centre makes it out to be," said CBGA senior researcher Nilachala Acharya.

The states will get an extra Rs 63,941 crore as their increased share of taxes, money that needs to be shared out among programmes on agriculture, education, housing, water sanitation and health. Also, the central grant to states in the budget only covers capital expenditure, which means states now have to bear revenue expenditure such as salaries that are the bulk of the cost of development programmes.

The Centre has cut its grant to the Rashtriya Krishi Vikas Yojana, for instance, to Rs 4,500 crore from Rs 9,864 crore last year. That scheme is targeted at boosting agricultural productivity. The total allocation for the scheme has dropped to Rs 2,958 crore from Rs 7,889 crore. The states have not filled the gap as the Centre expected them to. The biggest agricultural states such as Punjab, Orissa, Uttar Pradesh and Karnataka - although facing an acute drop in productivity - have substantially reduced their investment in the programme.

In FY14, the latest year for the Reserve Bank of India-computed information on state budgets, they spent 40.5% of the total budget on the social sector. Since the union budget has shrunk its social sector outlay to 1.68% of GDP this year (excluding the food subsidy) from 1.92% in FY14, states will now have to step up to keep these schemes running. But without a national benchmark for central development schemes, it appears the social sector is being given the short shrift.

The move toward effectively transferring key social sector programmes along with an increase in their autonomy over budgetary resources can work only if state governments have adequate overall spending capacity.

State budget spending for crucial development programmes may not increase enough to keep outlays at the previous year's level, said CBGA Executive Director Subrata Das. That's "primarily because of the stagnant tax-GDP ratio of the Centre and the fact that only 42% of the divisible pool of central taxes would be shared with the states."

He was referring to the Sarva Siksha Abhiyan, Mid Day Meal, Indira Awas Yojana, National Health Mission, Integrated Child Development Scheme, National Rural Drinking Water Programme and other programmes.

"While it is too early to comment on whether states had enough time to react to central changes in allocation, a cursory look at the relevant state budget figures indicates that even with increased, untied resources and adequate flexibility, states will not prioritise long-term central development schemes," Acharya said. Instead, they may prefer to invest in shortterm, vote-winning schemes.