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#UnionBudget2015: Centre’s cash-spread to states lavish only on paper

Budget 2015: Centre’s cash-spread to states lavish only on paper
PM Narendra Modi in his speech in Parliament on Friday underlined how his government had decided to transfer a much larger share of resources to the states in line with Finance Commission recommendations, though it didn’t have to.
PM Narendra Modi in his speech in Parliament on Friday underlined how his government had decided to transfer a much larger share of resources to the states in line with Finance Commission recommendations, though it didn’t have to. The finance minister in his budget speech repeatedly referred to the issue and the reduced “fiscal space” he had. The budget numbers reveal, however, that the states won’t really get much more in 2015-16 than in 2014-15 and they may even be worse off.

How’s that possible when the states’ share of Central taxes is up to 42% from 32%? Here’s how: The list of existing Central schemes has been unbundled into three categories in the budget. In Category A are schemes the Centre continues funding fully. Category B consists of programmes that’ll have state and Central funding but the Centre’s share will go down. Category C schemes will no longer have central support.

On Category B, budget documents insist that “total finances won’t undergo change”. While no such stipulation exists for Category C, they can run at current levels only if states provide funding that the Centre was doing so far. The only way to keep Category B and C schemes going -without enhancing them – is for the states to make good the drop in Central funding.

How big is this decline? Comparing budget estimates of 2015-16 with those of 2014-15 shows the fall in Central funding to Category B and C schemes together is about Rs 66,000 crore. Comparing them with the revised current year estimates, it’s a more modest Rs 29,000-odd crore. These amounts are assuming no change in total outlay of schemes. The budget says the actual Centre-state sharing formula is yet to be worked out for Category-B schemes, so the state share could well be higher.

Compare this with how much states gained in net transfers from the Centre, including tax devolution. As the accompanying graphic shows, on a BE to BE comparison, states have gained little under Rs 64,000 crore, 1.5% of the Centre’s gross tax revenues. On a BE to BE comparison, what the states have to shell out for Category B and C schemes wipes out what they gain through fund transfer from the Centre.

The BE-to-RE comparison makes matters a little better for the states. Here the gain of about Rs 1.59 lakh crore in transfers is over the additional amount they must spend on schemes, so they’d be net gainers by about Rs 1.3 lakh crore. But does it make sense to compare a target (BE) with an estimate of what happened in course of the year (RE)? The BE to BE comparison is apples to apples.

Whichever comparison we take, the net gain/loss figures for state are based on the minimalist assumption that they’ll have to do no more than make up for the drop in Central funding.

Even a 5% increase in outlays to neutralize inflation would add to the amount they must spend and so could a sharing formula demanding more than this minimum.

This analysis doesn’t take account of things like the Backward Regions Grant Fund and smaller schemes for which the budget hasn’t provided funds. If the states are to sustain these, that’d add several thousand crores more to their spending.

So, do the state gain nothing from the finance commission award? They do, but the real gain isn’t monetary but greater control over schemes and perhaps more flexibility in determining priorities.

http://timesofindia.indiatimes.com/budget-2015/union-budget-2015/Budget-2015-Centres-cash-spread-to-states-lavish-only-on-paper/articleshow/46424852.cms

 

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