The structure of financial federalism in India is heavily loaded in favour of the central government. The central government collects more money than it spends, and transfers a part of its financial resources to various state governments. Thus, the Union Budget is not only a Budget for itself; it also has huge implications for the states. In the event of poor fiscal performance by the Centre, as was the case in 2012-13, the states suffer a dual disadvantage.
On one hand, they receive a lower amount as their share in central taxes and duties. On the other hand, the transfers under non-plan grants, central assistance for state plans, assistance for central and centrally sponsored schemes, and direct release under central plan to state/district level autonomous bodies goes down. While the devolution of central taxes to the states is guided by statutory norms, those under the remaining heads are largely discretionary, often hurting more the poorer states like Bihar.
In 2012-13, the reduction in all states' share in central taxes was Rs 7,874 crore - 2.6 per cent less than the budgeted amount. Taking the non-plan grants, central assistance to state plans, and central and centrally sponsored schemes together, the total shortfall of Rs 24,049 crore was 10.6 per cent of the budgeted amount. Finally, for the direct transfer to state-/district-level autonomous bodies, the shortfall of Rs 27,297 crore was even larger at 20.4 per cent of the budgeted amount. The reduction in central transfer to all states under these heads together was Rs 59,220 crore, no less than 8.9 per cent of the budgeted amount. Unable to mobilise adequate resources, the central government did reduce its own total expenditure; but this reduction was only four per cent, much lower than the reductions in transfers to the states. This clearly indicates how the central government uses the discretionary part of the transfer mechanism to cover up its own budgetary lapses.
In 2012-13, the central government squeezed its expenditure under nearly all heads, but the brunt was on rural development, road transport and highways, and health and family welfare. The expenditure cuts for these heads were 28.9 per cent, 28 per cent and 15.6 per cent, respectively. These are the very heads that cover a number of centrally sponsored schemes, implemented by the states.
From the budget estimates (BE) of 2013-14, it is again clear that the finance minister is committed to a reduction in central assistance to states for their development efforts. Since there has been substantial reduction in such assistance in 2012-13, a comparison between the revised estimates of 2012-13 and BE of 2013-14 does not indicate the finance minister's commitment to schemes funded by central assistance. Instead, one should compare here BE of 2012-13 and 2013-14 to understand the finance minister's development priorities.
For the total central assistance for plans of all the states, the budgeted amount in 2013-14 (Rs 1,29,930 crore) is only 4.6 per cent higher than the amount in 2012-13 (Rs 1,24,249 crore). In the face of an inflation rate that might even reach double-digits, an increase of 4.6 per cent actually implies a reduction in real expenditure. There is only one scheme for which central transfers to states is substantially higher in 2013-14 (BE) compared to 2012-13 - the Indira Awas Yojana (37.1 per cent). For other schemes, the budgeted increases are either nil or marginal or, in some schemes, even negative.
The two schemes for which budgeted increase is nil are externally aided projects, and roads and bridges. Among the schemes for which the budgeted increase is marginal are: the National Social Assistance Programme (13.8 per cent), the Jawaharlal Nehru National Urban Renewal Mission (11.8 per cent), the Rashtriya Krishi Vikas Yojana (7.8 per cent), and Sarva Shiksha Abhiyan (SSA) (6.8 per cent).
The most alarming aspect of the budgeted central transfer to states in 2013-14 relates to three schemes - the Accelerated Irrigation Benefit Programme (AIBP), the Backward Region Grant Fund (BRGF) and the Pradhan Mantri Grameen Sadak Yojana (PMGSY). For each of these schemes, BE for 2013-14 are less than BE for 2012-13. The reductions are nine per cent for AIBP, 4.5 per cent for BRGF and 29.3 per cent for PMGSY.
It is unfortunate that in the middle of loud, repeated discussions on a higher growth rate, containing the fiscal deficit or managing the current account deficit, this clear indifference of the union finance minister towards some critical components of the development agenda is lost, leaving the states in dire straits.
The reduction in the transfer of resources from the Centre to the states, whether it is through the latter's share in central taxes or through other grants, affects all the states, but certainly not equally. For example, in the case of states' share in central taxes, the combined share of Uttar Pradesh (19.7 per cent) and Bihar (10.9 per cent) is more than 30 per cent and a reduced transfer under this head affects them much more.
For other transfers, the share of the poor states are likely to vary; but, in all likelihood, they would also be substantial. For the poor states, the share of central transfers in their overall Budget is relatively larger and, as such, reduced transfers force them to curtail expenditure, hampering the development process. In the case of Bihar, the negative impact of reduced central transfer (other than share of taxes) is even more severe. First, Bihar is a major recipient of BRGF assistance, for which the allocation has been reduced in 2013-14; secondly, both AIBP and PMGSY are also extremely valuable for Bihar, but these two schemes, again, have been allocated a lower sum in 2013-14.
Finally, one should note that the Budget allocations for various schemes in 2013-14 are only budgeted. If previous trend is any indicator, the actual transfers in 2013-14 may be much lower than budgeted, seriously affecting the development efforts of the state governments, particularly of poor states like Bihar.