State budget: Time to set its priorities right

Today's state budget is the last opportunity for the government to decide and fund its focus areas.

In what can be counted as a momentous occasion in inde-pendent India’s economic history, the 14th Finance Commission (FFC) award in December 2014 restructured the balance of fiscal power away from the union, in favour of India’s states.

The Finance Commission, a constitutional body that decides on the distribution of revenues between the Union and the states, increased the share of the states from the divisible pool of taxes to 42%(a jump of 10% from previous years). Since the money coming from this stream is not tied to specific schemes, it dramatically increased the liberty of the states to choose their own priorities and fund them appropriately.

Karnataka benefitted immensely from this fiscal restructuring. An important reason was that FFC included forest cover as one of the criterion (with 7.5% weightage) for awarding the funds and Karnataka ranked sixth in the country on this criteria. The overall increase in the untied funds received by Karnataka therefore increased by a whopping 61%.

But that’s only one part of the story. The increase in untied funds without a corresponding increase in revenues of the Union government meant that it changed its approach of running a plethora of Central schemes. Thus, Karnataka saw a cut in tied funds allotted to Centrally Sponsored Schemes meant for specific purposes such as Integrated Child Development Services (ICDS), Rashtriya Krishi Vikas Yojana (RKVY). Overall, Karnataka received 50% lesser grants for such schemes from the Union.

The combined effect of a substantial increase in untied funds along with a cut in the grants given by the union was that the total transfers to Karnataka in 2015—16 were 3% lesser than last year. This decrease led the Chief minister and finance minister Siddaramaiah to remark in his budget speech that “...the net effect is that what has been given by the Central government on the one hand has been taken away by the other hand”.

This statement is only partially true because while the overall Union transfers have marginally decreased, it underplays the fact that Karnataka now enjoys more autonomy than ever over the funds that it has and it can therefore focus on its own priorities and growth agenda.

The Karnataka government responded to these changes in two ways. The first response came via increase in allocations on schemes where the Union government reduced its own commitments. For example, the Karnataka government increased its expenditure on Rashtriya Krishi Vikas Yojana (RKVY) by 300% and on drinking water provision schemes by 114% to offset substantial reductions from the Centre’s side.

The second response was to let the state’s own commitments in some schemes go down and instead concentrate allocations only on a few schemes in accordance with the Karnataka government’s priorities. Here, Karnataka chose to reduce the total money spent on elementary education and rural development schemes.

New schemes

In addition, a third response was also possible. Karnataka, and other states, could initiate significant new schemes at the state level instead of depending on the fund transfers from the Union government for centrally sponsored schemes. The feasibility of this option increased because the untied funds that the state has access to is substanti-ally higher after the FFC award.

While the FFC has given a golden opportunity to states like Karnataka to raise their game and be fiscally autonomous, the potential remained underutilised last year. This was partly because the 2015—16 Karnataka budget was announced only a few weeks after the FFC recommendations were released. Hence, there was very little time for the states to deal with the opportunities that the FFC recommendations provided.

But no such excuses can be made in this year’s budget as the state has had a full year to evaluate its options, and priorities. For a middle income state like Karnataka, elementary education and health care will play a critical role in determining its future growth trajectory and hence it is necessary for the state to increase its commitment on these fronts.

Further, being a power deficit state, Karnataka can also focus on this sector. In the last year’s budget, the power sector capital outlay(funds allotted to buy fix-ed assets or maintain them) was at a meagre Rs 22 lakh, perhaps indicating a desire to buy power from other producer states instead of sanctioning new power projects. Whether Karnataka reverses its policy and invests in its own production capacity remains to be seen in this budget.

Going ahead, it is likely that the Union government will further rationalise the centrally sponsored schemes. States like Karnataka would do well in decreasing their dependence on priorities handed down by the Union government and instead power ahead with their own priorities. Moreover, given that this is the last budget for the current government before populist demands of an election budget set in, missing the boat this time can prove to be costly.

(The writers are researchers with the Takshashila Institution, a think tank and school of public policy based in Bengaluru)