By Devi Prasad, IES*
Worldwide the costs of governance are infinite. The opportunity to raise resources are finite. With the given poverty ratio and the inequalities on several counts including the digital divide, the challenge of balancing the same is more complex in the Indian Union. Consistent with Wagner’s Law, generally public expenditure keeps on increasing as GDP increases. Indian Union is no exception. The unintended consequences of patronizing uniformity in financing the schemes implemented in the sates, without seeking uniformity in the results, (i) implies that the Centre is disbursing financial resources without having ability to effectively influence the outcome in the states; (ii) reflects inefficiency in public financial management in the whole of the government; and (iii) runs the risk of triggering agitations for separate sub-national identity or autonomy at deprived regions. It makes a case of a weak Parito optimum allocation.
State wise output differential: Illustration through per student unit cost
Budget Briefs 2014-15, posted by Centre for Accountability** on their website bring out some interesting points about per capita allocation of funds under Sarva Shika Abhiyan, NRHM and MNREGA. In SSA, the state-wise differentials in annual funding of school education per student is striking. For instance, per student funding (by both the states & centre) has fluctuated from Rs. 2110 in 2009-10 to Rs. 5592 in 2012-13, further to Rs. 3818 in 2013-14. (linked to enrolment number of 2012). At the state level, in 2012 per student allocation in Andhra Pradesh was Rs. 7912 as against 3657 in 2010; in Haryana it was Rs. 5986 in 2012 as against 3975 in 2010; in Bihar it was Rs. 5638 in 2012 as against Rs. 3342 in 2010; in Kerala it was Rs. 5514 in 2012 as against Rs. 4291 in 2010; in Odisha it was Rs. 5079 in 2012 as against Rs. 3438 in 2010; in Maharashtra it was Rs. 3759 in 2012 as against Rs. 2841 in 2010. The budget briefs also present differentials in the average wage paid under MNREGA in different states. Similarly, there are several state specific performance audit reports by CAG raising red flags on inefficient use or underutilization of Rupees flowing from the Centre to the States.
Paradox in perceptions on reputation loss
In the political economy dynamics the reputation of Andhra Pradesh, with a high per student allocation, would rise, while Maharashtra would suffer a loss of its reputation. In contrast, had it been a case of private sector entity the Maharashtra state, with the lowest annual funding per student, could claim the honour of being the most efficient user of the funds! But paradoxically, the political economy considerations, generally anchored (a) to the logic of uniformity in treatment and (b) deprivation of entitlements as compared to other states, argue for more funds to Maharashtra.
Patronizing Asymmetry in outcome
Though there could be some methodological and data quality issues, the budget briefs throw up some clues to the effect that the Central government spending through the states is yielding asymmetrical outcome. In other words, if the result of Rupees reaching the states from the Centre under SSA, is measured as number of students passing out from a class at the end of the year, some states are spending more Rupees to educate one student, while some other states are doing so using few Rupees. So, prima-facie, the cost differentials can be used as a supplementary tool to recognize and react to efficiency in spending public money. If inefficiency goes unattended, on equity consideration, it also amounts to politics of budgeting at the cost of the pan-India tax payers, who are interalia made to pay education cess to patronize (a) inefficient expenditure management; and (b) a policy-mix and political dynamics that drive unit costs in some states. Hence, finding durable solutions to address inefficient PEM systems and policy-designs that drive public expenditure and the costs are in order. That is the apparent intention in some of the expenditure related ToRs for 13th and 14th Finance Commissions, amendment to FRBM Act seeking Medium term Expenditure Framework in 2013-14, and in setting up the Expenditure Reforms Commission in the Planning Commission in 2011.
Compensating the Diversity in the Indian Union
Generally, the advantages associated with geographical and geological endowment coupled with the administrative history impact the institutional efficiency at the states and the districts in varying degree. By default, the political constituencies responsible for spending public money respond differently for a variety of reasons. In the process, efficiency and equity stands compromised. India’s constitution recognized several state specific challenges that impact systemic efficiency and the costs of governance and public service delivery. Consequently, the constitution has provided for differential treatment to states or groups of the states or regions within a state in the context of sharing the burden of public expenditure and its benefits in conjunction with governance flexibility.
For more than 60 years the Union financial matters are managed by a relatively strong Centre with some weak constituent state units – be it J & K, Nagaland, Mizoram, Arunachal Pradesh or special category states including NE States or Hill councils or Hyderabad or Karnataka. Such arrangements, in fact and in perception have yielded uneven benefits with debatable political consequences as witnessed in the creation of Telangana state. Continued acceptance of asymmetrical outcome from the allocations to States also leads to inequitable and inadequate allocation of public funds raised from a pan-India tax payers’ base.
Expenditure Management Commission
The Finance Commission is justifiably devising equalization norms to compensate the states with due regard to the differences in their economic endowment and the complexity of institutional challenges to spend public funds. Besides, the Planning Commission also recommends concessions in cost sharing between the Centre and States. Therefore, the proposed Expenditure Management Commission (EMC) interalia, needs to go deeper into the state-specific expenditure management systems, budgetary controls impacting the unit costs in relation to the expected scheme-specific results in the near-term and the outcome to be realized in the medium-term. Pareto principle (or 80:20 rule) can be followed to select the schemes by EMC. The EMC has to standardize the methods for measuring the units costs in such a way that every student in India, every MNREGA beneficiary or every NRHM beneficiary or every beneficiary under any scheme rolled out in any state with central funds receives the same amount of money for achieving pre-defined results. If such tracking systems is in place , going forward, the Central government would be able to transform the present weak Pareto optimal allocations into Pareto improvements for effective implementation despite the challenges of multiple governance framework.
Disclosing Resources and Results at Districts
Going forward, the EMC which is expected to submit interim report by November 2014, despite inter-state diversity in implementation structures, needs to address the institutional arrangements and promote use of reliable but simple IT driven data-base for uniformly measuring the output against the unit costs and the quarterly monitoring systems at states and districts. Also needs to put in place a communication policy for public debate. With the per capita (net) government expenditure being equal to about one third of the per capita national income, every district Treasury office/DC office/ZP office should electronically display the information on the scheme-wise flow of funds (and also receipts relating to tax, non-tax and grants-in-aid) into the district on a weekly basis to encourage public scrutiny and debate.
Empowering the CAG
Parallelly, such data also needs to be audited randomly by the Comptroller and Auditor General (CAG) every quarter in a time bound manner, and deviations if found, the same be used to discount the future funding to the State. If necessary, a legal provision to disclose the reported unit costs of various schemes implemented through states vis-à-vis the unit cost as per design has to be reflected in the Medium Term Expenditure Strategy Statement to be presented to Parliament as per the amended FRBM Act. In case, the scope of Duties, Powers and Conditions of Service (DPC) Act, 1976 be expanded to empower the CAG to conduct such suo-motto random audit, let the DPC Act too be amended, while also raising the capacity of Auditors to present their Reports with defined time-lines.
* * Mr. Devi Prasad IES is, 1982 batch Indian Economics Service (IES) officer and former Advisor to Government of India. Presently he is a Research Fellow at the Civil Service Officers Training Center at Mussourie (LBSNAA), Uttarakhand. He served as the Chief Executive Officer / Director of three organizations during his tenure in GOI and also functioned as Advisor to the Executive Director, IMF. He also sits in the Advisory Board of CPPR.
The views of the Author are personal and do no represent the opinion of CPPR