Distribution of Funds between the Centre & the States

The financial federalism in India works mainly in favor of the Central Government and ensures central government collects heavily than its spending. The government collection is transferred to various states under the head of financial assistance/resource from Central Government. The union budget has huge implications for the states. The year 2012-13 saw poor performance on the part of central government, be it collection, spending, or the fiscal deficit, the government fared badly. As a result the state government suffered a dual disadvantage because they received a lower amount as their share in central taxes and duties and also the transfers under central assistance for state plans, direct release to state/district level went down severely.

Central Government’s Discretionary Role

If we see the statistical data, we find that the central government has cut its expenditure in all the heads including rural development, transport, healthcare, etc. in the year 2012-13. A reduction of over 25% was seen under the heads of rural development, transport, infrastructure, healthcare etc. In case of taxes, a reduction of 2.6% from the budgeted amount was seen. In addition, the total shortfall (including the grants, centrally sponsored schemes, central assistance to states, etc.) of Rs. 24,049 Crore was seen at 10.6% of the budgeted amount. The shortfall was even higher at 20.4% of the budgeted amount for the direct transfer to state-/district-level autonomous bodies and was valued at Rs 27,297 Crore.

Not only with the states, the central government was unable to mobilize adequate resources and thus reduced its own total expenditure to an extent of 4%, which was smaller when compared to the states. This shows central government’s discretionary role in the transfer of funds to the state.

If we look at the budget estimates of 2013-14 released recently by the Finance Minister, we see a reduction in central assistance to states for development purpose. As a matter of fact it was seen that the finance ministry reduced the Budget Estimate (BE) of 2012-13 to Revised Estimate (RE) of 2012-13, and compared the BE of 2013-14 which hardly indicates any reduction. However, to understand the reduction proposed in 2013-14, it should be compared with the BE of 2012-13 only to understand FMs development priorities being the last in the priority list.

Also if we take into consideration the real expenditure (taking into account the double digit inflation) we see an increase of only 4.6% in the total central assistance for the plans of all the states valued at Rs. 1,29,930 Crore in 2013-14, which would do no good to the states as far as development and security is concerned. Indira Awas Yojana is the only scheme which showed a double digit increase of 37.1% where as for the other schemes, the budgeted increases are either nil, negative or marginal.

Read on GWI Key highlights of India’s Budget for the year 2013-14.

It is unfortunate to note the reduction in budget in three of the most important projects (highlighted above) in the budget 2013-14. Also in the middle of the loud, repeated discussion regarding higher rate of growth along with improved fiscal deficit/CAD, a clear indifference towards some of the critical components is seen which leaves the states in dire straits.

The reduction in the transfer of resources from the Center to the states affects all the states; the degree of which can be measured based on the dependence level. Talking of Uttar Pradesh and Bihar we find a combined 30% of share in the taxes for the two states and a reduction in transfer would hamper them more as compared to other states.

Thus to conclude we should note, the budget allocations announced in the Union Budget are numbers budgeted of which the actual would may be much lower (going by the previous trend) thus seriously affecting the development efforts of the state governments.