1 Financial Resources for the Social Sector As is well known, India is likely to miss achieving the Millennium Development

Goals in respect of health, nutrition, sanitation and gender. The problem has been compounded by the fact that GOI had adopted more ambitious targets than the MDGs, as the X and XI Plan document strive to achieve the same targets by 2012, that is, three years before other nations do it. Some of the targets to be achieved by March 2012 that were laid in the 11th Plan document but have still (January 2014) not been fulfilled are: Increasing the literacy rate for persons of age 7 years or more to 85% Reducing the gender gap in literacy to 10 percentage points Infant mortality rate (IMR) to be reduced to 28 and maternal mortality ratio (MMR) to 1 per 1000 live births Total Fertility Rate to be reduced to 2.1 Malnutrition among children of age group 03 to be reduced to half its present level Anaemia among women and girls to be reduced to half its present level Sex ratio for age group 06 to be raised to 935 by 2011 12 Clean drinking water to be available for all by 2009, ensuring that there are no slipbacks Ensure that at least 33% of the direct and indirect beneficiaries of all government schemes are women and girl children Ensure that all children enjoy a safe childhood, without any compulsion to work

It is a matter of concern that Indias pace of improving social indicators seems to be much slower than countries poorer than India, such as Bangladesh, Vietnam, Myanmar, and Bhutan as shown below: Some MDG indicators for India and other poor countries India Infant Mortality Rate 1990 2010 Underweight children under 5 Immunized against measles Rural population with adequate sanitation Attendance ratio of girls to boys in secondary school (net) (%) 81 48 43 71 38 83 Bangla desh 103 38 41 89 53 116 Myan mar 84 50 30 87 81 94 Viet nam 39 19 20 97 75 93 Bhutan 91 44 14 98 65 107

There are several factors responsible for poor performance on MDGs of which low allocations for social sector is an important one and is being discussed here. Other factors relating to poor governance and weak delivery have been dealt with elsewhere in the book. According to the Economic Survey 2013, the total expenditure (counting both plan and nonplan) by the Centre and the state governments combined as a percentage of GDP on education and health has only been around 3 and 1.2 per cent respectively, as against a global norm of 6 and 3 percent. Expenditure as proportion of GDP (central and state governments combined)

8
7 6 5 4 3 2 1 Health 2001-02 2002-03 2004-05 2009-10 2010-11 2011-12 2012-13 2007-8 Education Expenditure on social sector

0 2003-04
2008-9

Although GOI allocation for education, health and other sectors relevant to MDGs has increased significantly over the past few years, part of this increase is illusory because the Pay Commission Award has added to the salary burden. Thus the budget increase may not have resulted in significant increase in the number of teachers or doctors or para medical staff. Second, 70 to 80% of the total expenditure on social sector is borne by the states, but they have not been able to arrest the decline in social expenditure as a proportion of total expenditure, as shown below. Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Education 17.4 16.1 15.0 12.6 12.7 14.2 Health 4.7 4.4 4.1 3.5 3.5 3.9

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2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 14.0 13.8 14.3 15.3 16.6 16.6

3.9 3.8 3.9 4.2 4.2 4.3

There are several aspects of low social sector expenditure that need to be understood. First, overall tax collection as a proportion of GDP is extremely poor in India as compared to other low and middle income countries, as shown below. Tax-GDP for Selected Countries (for 2010-11) Developed Countries Developing Countries Sweden50.1 Brazil34.2 Denmark49.1 Turkey32.5 France44.7 Russia32.3 Netherlands- 39.5 South Africa- 31.2 UK37.4 Ghana22.4 USA27.3 India15.7 Source: IMF, Revenue Mobilization in Developing Countries, 2011; and Indian Public Finance Statistics 2010-11, GoI. Even a poor and badly governed country like Kenya is able to collect 18.3% of its GDP as tax. Of the total tax, central government in India collects about two-thirds, and the rest is done by the state governments. As show below, tax-GDP ratio for the central government did increase from 8.3 to 11.7 percent between 2002-07, but since then has been consistently falling and is roughly around 10% now. As the rate of economic growth too has fallen down to 5 percent from a high of 8 to 9 percent, it has further reduced availability of funds for development. Tax-GDP ratio of central government

12 11 10

9
8
1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2005-06 2007-08 2011-12

2003-04

2009-10

4 Second, GOI has been quite irresponsible in not containing its fiscal deficit, with the result that much of tax collection is used up in paying interest on internal debt, forcing the government to resort to heavy borrowing in order to meet its development commitments. Tax receipts and interest payment GOI (in billion Rs)
Year 1990-91 2001-02 2007-08 2012-13 Tax receipts 430 1,337 4,318 7,711 interest payment 215 (50%) 1,075 (80%) 1,710 (40%) 3,198 (42%)

During April-October 2013, fiscal deficit has risen by 24.5% to Rs 4,57,886 crore due to the mismatch in expenditure and revenue collections. At Rs 9,22,009 crore, total expenditure was up by 18%, while total revenue was higher by 12.8% to Rs 4,64,123 crore. As against 71.6% of Budget Estimates (BE) a year ago, the deficit was at 84% of the BE during the period under review. The revenue deficit galloped by 23.8% to Rs 3,53,010 crore, accounting for nearly 93% of the BE. Gross Fiscal Deficit % GDP 200708 200809 200910 201011 201112 Total Eleventh Plan Centre 2.54 5.99 6.48 4.87 5.89 5.29 States 1.49 2.26 3.02 2.15 2.21 2.25 Total 3.97 8.17 9.46 6.99 8.10 7.54

With revenue collections on a downswing, the central government would be required to cut expenditure in order to stick to deficit targets. The Ministry of Finance (MoF) has already issued a diktat to ministries and departments for a mandatory 10% cut in non-plan spending. Yet again, some of the non-plan spending, essentially subsidies, would be deferred to the next financial year. With the revenue expenditure on defence, interest payments and pensions offering near-zero flexibility to deviate from BEs, higher savings would result only by reducing Plan spending. The Ministry of Finance may again reduce plan expenditure by Rs 1.3 to 1.4 lakh crore in March 2014, as it did last year, which would make further reduce social sector expenditure, and at the same time throw a doubt on the credibility of BE figures that are presented at the time of annual budget. The changing centre-state fiscal relations Although implementation of social sector programmes is under the domain of the state governments as per the Constitutional arrangement, these are increasingly being funded by the Central government. Due to fiscal constraints faced by the poorer states, centrally sponsored schemes (CSS) are often the only schemes at the field level in the social sector that are under operation, as these states spend most of their own resources and borrowings on just meeting the essential non-plan expenditure (interest,

5 salaries, pensions, and subsidies). This has given rise to an impression amongst the common masses that development is the responsibility of the Centre, a view which is not supported by the Constitution. States receive plan funds from GOI through two routes, from Planning Commission as untied support to States plans (called Normal Central Assistance), and via the Centrally Sponsored Schemes of GOI Ministries, which are tied to a scheme. The proportion of tied funds in total plan transfers to the states has been increasing steadily over the last three decades, from one-sixth in the early 1980s to more than three-fourths1 of the total now leading to a criticism that the Centre has enlarged its turf at the cost of the states. One of the reasons for this increase is rooted in the changes that have taken place in the nature of central Ministries plan schemes that are funded by the budget over the last twenty years are shown in Table 3. Table 3: Percentage Distribution of Central plan Outlay Supported by the Budget through GOI Ministries by Heads of Development Head of Development Industry and minerals, Energy, and Communications Agriculture, Irrigation, RD & Social Sector VI Plan 1980-85 51 332 VII Plan 44 41 VIII Plan 25 63 IX Plan 1997-02 17 61 X Plan 2002-07 16 64

(compiled by the author on the basis of Plan and Budget documents) The Centre spends more money on State subjects than on the central subjects, perhaps as a consequence of liberalization as well as growth in profits of central parastatals (such as NTPC, oil companies), because of which Centres budgetary involvement in th e industry and energy sectors has vastly reduced, permitting the Centre to allocate more on subjects traditionally under the purview of the States. Centrally Sponsored Schemes were originally to be formulated only where an important national objective such as poverty alleviation was to be addressed, or the programme had a regional or inter-State character or was in the nature of pace setter, or for the purpose of survey or research. However, the CSS have proliferated enormously, and in the terminal year of the Eleventh plan (2007-12) there were approximately 300 CSS. These trends should also be seen in light of the changing political economy of the Centre-State relations in India. With the decline of the Congress Party, regional parties and those built on sectional interests have gained importance. While, as we noted above, States have become dependent on the Centre economically, they have become increasingly politically independent and indeed, powerful. As subjects under States jurisdiction are politically more important (land, water, law & order, education and health), the Centre has often used the funds for Centrally Sponsored Schemes as a tool to enhance its political visibility at the ground level. The Prime Ministers speech to the
Authors calculation from the 2012-13 budget shows that the untied plan transfers to the states are 41,165 crores only, whereas the CSS (which includes ACA schemes, such as JNNURM and BRGF, which are more or less like other CSS) account for Rs 210,897 crores.
1

The total of these columns is not 100, as there are many schemes, such as in forestry, Home, etc where clear division of the budgeted amount between central and state subjects is not possible.
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6 nation on the 15th August every year concentrates more on what the Central Government is doing on subjects under the States jurisdiction than on subjects with the Centre. GOI has increased its control over the State3 sector in three ways, firstly through substantial funding of CSS; secondly much of it goes straight to the districts, bypassing the States and thus placing district bureaucracy directly under the supervision of the GOI; and thirdly even externally funded projects on state subjects such as water and heath that are part of state plans and not CSS need GOI clearance. The enhanced control by the Centre on social sector through CSS should be seen in the context of sharp deterioration in the states capacity to design and efficiently implement programmes. There is enough evidence to show that the state governments capacity to deliver has declined over the years due to rising indiscipline and a growing belief widely shared among the political and bureaucratic elite that state is an arena where public office is to be used for private ends. Immediate political pressures are so intense that there is no time or inclination for the State level politicians and bureaucrats to do conceptual thinking to design good programmes, weed out those that are not functioning well, and monitor the programmes with a view to take remedial action to improve the effectiveness of delivery. Weak governance, manifesting itself in poor service delivery, excessive regulation, and uncoordinated and wasteful public expenditure, is one of the key factors impinging on development and social indicators. Problems with centralisation On the other hand, too much control by GOI dilutes the sense of ownership of states with the schemes, whereas it is difficult for the GOI to effectively monitor the progress in the 640 districts spread over 31 states. Most schemes follow a blue print and topdown approach, with little flexibility given to field staff. Any change in the scheme requires approval from GOI which is time consuming. Uniformity of schemes all over the country from Mizoram to Kerala, without sufficient delegation to States to change the schemes to suit local conditions, leads to a situation where the States even knowing that the scheme is not doing well become indifferent to its implementation. For instance, in the Indira Awaas Yojana, it is compulsory to build toilet with the house for which a grant of 35,000 Rs is given. In many villages there is no arrangement for water, and hence these toilets were never used. However, States have not been given any discretion to change the pattern of funding. Similarly, there are regions in India, where labour is scarce, such as the north-eastern and north-western States. However, public works under NREGA are carried out in these regions too, for which the field staff employs labour from other regions, but records are fudged to show employment of local labour. It would be much better if the States have discretion in deciding the mix of poverty alleviation programs. However, GOI guidelines are rigid and give no such flexibility to the States. Most government schemes are generally meant to continue till the end of the world, however the world may have changed in the meanwhile. Many CSSs have been in operation for more than 10, and some even for 30 years. This period has seen several political parties in power at the Centre and the States. The result is that the party in
Although police is a State subject, GOI employs more than 750,000 policemen under various paramilitary forces.
3

7 power has no sense of ownership with the existing schemes, although it also does not wind it up either because of bureaucratic resistance or sheer lethargy. Greater political advantage is seen in announcing new schemes on the 15th August or at the time of the budget, with the result that the number of schemes keeps on increasing. Often the old schemes are refurbished under a new name with some cosmetic changes to drive political mileage associated with the launch of a new scheme. Many States are ruled by a political party different from that at the Centre. These governments do not put their weight behind CSS formulated by the Union Government as they see no political advantage in successful implementation of such schemes. The successful implementation of social sector schemes requires a high degree of political commitment (mid-day meal scheme of Tamil Nadu, EGS in Maharashtra, Antyodaya in Rajasthan, and two rupee rice in Andhra are examples) and administrative coordination, which GOI cannot secure for want of control over the staff. The Planning Commission has observed that the implementation of State sponsored anti-poverty schemes in Rajasthan, Tamil Nadu, Gujarat, and Karnataka was far better than that of centrally sponsored programs in the same State. States do not release the counterpart funds in time, leading to uncertainty about the availability of funds at the field level. Even the release of GOI funds to the field is held up for several reasons. First, the States have to get legislative approval for GOI schemes, which takes time. Second, States do not attach importance to the spending on CSS, and thus are in no hurry to sanction expenditure. And third, fiscal problems4 at the State level force the States to divert GOI funds for paying salaries. States burgeoning fiscal problems thus exacerbate this trend. Is greater allocation for State plans the answer? Despite these problems, it must be admitted that reducing funds for CSS and devolving more untied resources to the States for State plans in the spirit of decentralisation will improve efficiency only, at least in the poorer and badly governed States, if it is accompanied with improving governance and accountability. In many States releases by the State Finance Departments to the districts for states own schemes are highly adhoc, uncertain, delayed, and subject to personal influences. Faced with the inordinate delays in releasing of money by the Finance Departments in the States, many Central Ministries, such as RD, education, and Health have opted for releases to district or State level societies for receipt of funds directly from the Central government bypassing the state governments. While this may improve the flow of fund position to the field, ignoring State legislatures has long-term implications and is at best a temporary solution. In the long run we must improve the fiscal discipline of the States, so that credibility and integrity of the budget process is preserved. As GOI would be reluctant to replace CSS by untied grants, a more practical suggestion would be to reduce the number of CSS and use time thus saved in capacity building, inter-sectoral coordination, and detailed monitoring by the central Ministries. CSS compare unfavourably with EAPs (externally aided projects) as far as the practice of frequent reviews and evaluations are concerned. Third party reviews should be periodically undertaken, such as in SSA and NRHM, which have the desired effect of
There has been improvement in the fiscal situation of the states after 2004-05, but there are still many states, such as the Punjab, Bihar, Kerala, and Assam, etc. where deficits run high.
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8 putting mild pressure on the states for improving implementation. We have further expanded this suggestion in section 4.3. Third party assessment of programmes combined with other civil service reforms will certainly improve bureaucratic accountability which is so far confined to only spending money with little concern for outcomes. Therefore, considering that the states would need external pressure on them to improve outcomes, certain control by GOI over schemes is necessary, till such time that the states show signs of improvement in governance. GOI should also consider how governance can be improved at the state level by using instruments of control available to the federal government, without needing any change in the Constitution to provide greater say to the Union over states.