A smooth flow of public expenditure is need of the hour

The increased provision for capital expenditure in the Union Budget for 2022-23 carries concerns about whether the ambitious target can be met. Large infrastructure projects face multiple obstructions, starting with land acquisition. However, finance minister Nirmala Sitharaman has held regular review meetings during the current fiscal year on project facilitation with the relevant ministries, and this monitoring is likely to continue next year.

There remains the nettle of ensuring that Central funding for expenditure by other spending entities flows on time, and is productively used without delay at the recipient end. In the current fiscal year 2021-22, there was a first-time carve-out for infrastructure expenditure of 0.5 % from the permissible state borrowing limit of 4% of state domestic product (GSDP). Both that, and the fifty-year bullet payment loans for capital expenditure to states of ₹15,000 crore in 2021-22 (enhanced to ₹1 trillion in 2022-23) required prior submission by states of capital expenditure plans. I have not seen the figures from those initiatives, but the process of submission and approval seems not to have taken too much time. We don’t know about execution.

I want to use the limited space here to examine Central grants to local bodies (called local grants), prescribed by the 15th Finance Commission (XVFC) and accepted by the Union government. By statute, these funds must flow to states, for onward transmission to local bodies within their respective jurisdictions. Earmarking these grants by type of use may appear desirable as a way of ensuring fruitful usage, but it introduces delays in fund flow and thereby paradoxically reduces effectiveness, as compared with unconditional grants.

Even if wholly unconditional, the local grant is a tranched flow where receipt of all tranches except the very first are subjected, at a minimum, to certification that the previous tranche was spent, or “utilised”. A simple enough requirement really, but the state government has to aggregate this certification from all its constituent local bodies, and that takes time. In the XVFC local grant, 60% was further earmarked for water and sanitation, calling for usage certification which is more complicated than mere utilization.

Has the local grant actually flowed this year as prescribed by the XVFC? Sadly, there is no portal where these flows are routinely recorded for all states. A Press Information Bureau (PIB) notification dated 25 February 2022 listed what urban local bodies (ULBs) with less than 1 million population have received (million-plus cities have a carve-out riddled with performance qualifiers on top of usage conditionalities). The total current year provision for sub-million population ULBs was ₹15,136 crore, which for the record is the “basic” urban grant (the term has been used wrongly in many contexts).

Nine of 28 states had received only half their entitlement a mere four weeks away from the end of this fiscal year. This means they got the first tranche, but not the second. Six states received more than half but less than the full entitlement, which means they got the second tranche of the unconditional portion, but not the second tranche of the usage restricted portion. Only eight states managed to get their full entitlement. This total was three states on 14 February, an indicator of the hasty end-of-year ramp-up which underlies the stop-go provision of public services we are all so familiar with. Five states got zero, which means they could not even satisfy the entry conditionalities for the first tranche (no space here to explain those). I don’t have figures for rural local bodies, but the problem there is usually worse.

These details are boring, but they point to a very real problem. We have just gone through a killer health crisis. People in the nearly 4,000 sub-million cities/towns can protect themselves from future pathogens only with easy access to water. Waterworks have to be thought through to remain sustainable in a climate-changed future. Stop-go funding does not encourage long-term thinking. It encourages the search for quick solutions like digging borewells.

The problem is that usage conditionalities retard fund flows, but there is sadly no evidence either that unconditional flows are used wisely or well. The 13th Finance Commission had a dominant unrestricted local grant to local bodies, and the 14th Commission expanded the unconditional component even more. But there is no evidence that these fund flows improved the provision of water and sanitation in the country’s smaller cities and towns, not to mention rural areas.

The XVFC, in addition to the basic local grant, provided for a separate health grant to local bodies, amounting to ₹13,192 crore in the current year, contingent on states submitting plans for improving the spatial spread of public health services. A single tranche grant, it had by mid-November been accessed by only 19 of 28 states. Nine states, including Haryana and Uttar Pradesh, had not submitted plans.

This remains an unsolved structural problem in the Indian fiscal federation. An active outreach window, perhaps nested in Niti Aayog, is needed to assist states unable to meet deadlines or process requirements to access funds, so that public services can be provided uniformly over the year. The funding exists, but the spigot gets periodically blocked.

Indira Rajaraman is an economist