Reforming the messy state of grants

The Centre provides grants to the states through myriad channels under a complex system that has outgrown constitutional provisions.

The Constitution envisaged "grants in aid to revenues of states in need" to be provided by way of a law passed by Parliament. If Parliament does not enact a law on the subject, the President can do so after considering Finance Commission recommendations.

The Finance Commissions make an assessment of revenues and expenditures of the states and determine the gap, which is then sought to be closed by granting states a share in central taxes and covering the remainder with non-plan revenue deficit grants.

In addition, Finance Commissions have also been recommending specific purpose grants. The Finance Commission grants are budgeted at Rs 25,874 crore (Rs 258.74 billion) for financial year (FY) 2005-06.

We started with grants, specific programmes and projects being provided by the government, which soon resulted in thousands of loan accounts in central books. This was "reformed" in 1969 and a system of block grants was introduced to provide lump-sum grants to states for their plan schemes.

To ensure this, the National Development Committee further determined that not more than one-seventh or one-sixth of the block assistance would be provided as centrally-sponsored schemes.

However, as time went by, several variants of state plan assistance grants came into existence and there is no good count of the centrally-sponsored schemes in existence. State plan grants are now being provided in addition to block assistance as additional central assistance for specific programmes such as Accelerated Irrigation Benefit Programme, National Social Assistance Programme and so on, and externally-aided projects.

Special central assistance is being provided for area programmes for hills, border areas and ghats development. Special plan assistance, additional central assistance for "other projects" and special central assistance have came into existence to provide selective discretionary avenues. The budget provision for state plans grants is little over Rs 30,000 crore (Rs 300 billion) for FY 2005-06.

The government runs over 200 centrally sponsored/central plan schemes -- funds for which are either released as grants-in-aid to states, or under programme heads to state governments or their agencies such as zila parishads, municipalities, district rural development agencies and so on.

The budget for centrally-sponsored schemes to be transferred as grants-in-aid to states is Rs 15,486 crore (Rs 154.86 billion) for FY 2005-06, but the budget of centrally-sponsored schemes/ central plan schemes under a programme head is not available.

Before the outcome budget was released by the ministry of finance this year, all central-plan schemes (including centrally-sponsored schemes) were not even listed at one place with their outlays.

The outcome budget, however, also does not reveal which of the listed schemes are centrally-sponsored schemes or central plan schemes for states. The outlay of these schemes is estimated to be over Rs 25,000 crore (Rs 250 billion) for FY 20005-06.

Finally, there are grants for non-plan schemes (over Rs 7,000 crore for FY 2005-06, inclusive of a proposed compensation for VAT) and grants under the various cess this is collected. Non-plan grants are provided through ministries considered to be non-developmental.

The total grants budget for states exceeds Rs 100,000 crore (Rs 1000 billion), which is more than 22 per cent of the government's revenue expenditure budget of Rs 4,46,000 crore (Rs 4460 billion), thus exceeding the transfer by way of states' share in central taxes budgeted at Rs 94,000 crore (Rs 940 billion) for FY 2005-06.

Central grants to states can be divided into two groups -- block or general purpose, or unconditional grants; and specific purpose or conditional grants. There are two major general purpose grants in operation -- block grants for state plan assistance and revenue deficit grants.

Together, these two grants would provide Rs 30,000 crore (Rs 300 billion) to the states during FY 2005-06. The revenue deficit grant is determined by the Finance Commission, where as the state plan block grants are allocated to states on the basis of the Gadgil formula.

Revenue deficit grants are supposed to bring the non-plan revenue account of states in balance, and block plan grants are there to provide resource for revenue expenditure requirements of state plan schemes.

However, the grants far exceed block grants provided under the Gadgil formula. Consequently, the Gadgil formula-based resource transfers have lost their relevance.

The states' share of block assistance under the Gadgil formula has not been updated for many years now. It's better to junk this formula and distribute the resource through the Finance Commission as block grants to bring together the entire non-schematic revenue account of states.

Specific purpose schemes have different channels, formulae, bases, counter-part funding requirements, eligibility and methods of allocation. The underlying objective of all these schemes is to provide states or their agencies grant assistance to cover full or a part of the cost of programme/project as encouragement for them to spend funds thereon.

Most of these schemes are for subjects that are a part of the state list. However, the proclivity of ministries to expand their domain, the inability of many states to undertake these expenditures and the availability of easy grants from the Centre on a standing basis have made these schemes multiply despite the NDC's decision to limit the expenditure.

The National Common Minimum Programme mentions it, too, but no headway has been made in this matter. It will be better if all these schemes are brought together under the discipline of the Planning Commission. It would help the states if all these schemes are categorised in two broad groups.

The Centre can choose to identify 10 to 15 major schemes keeping in mind major national priorities. All remaining schemes (after weeding out redundant schemes) cab be clubbed together with state-wise allocation determined for the entire pool of funds under a cafeteria approach. The states can then choose to use allocated funds for whichever schemes they consider appropriate.

This will also make the CSS demand-driven. The schemes, which do not find takers, can then be dropped from the menu card.