PAISA 2016: A New Era in Fiscal Devolution in India?
By Accountability Initiative, 01 Aug 2016

Tracking fiscal devolution to State governments and Panchayats in India.

On June 3rd 2016, Accountability Initiative (AI) released two research papers on the dynamics of decentralisation between the union and state governments and from state government to local governments in India. One, State of Social Sector Expenditure 2015-16 and second, PAISA for Panchayats 2016, at the India International Centre, New Delhi.

The first report focused on analysing trends in state budgets in the context of the implementation of the recommendations of the Fourteenth Finance Commission (FFC) that mandated enhanced devolution of the divisible pool of taxes between the Union and state governments. The second report studied trends in devolution to local governments in Karnataka.

The event drew insight from an audience of policy practitioners, government officials and interested public, to further understand and debate India’s efforts at decentralising public expenditure and enhancing the role of state and local governments in the delivery of core public services.

Ms. Yamini Aiyar, Director of AI began the event by setting the context of the research papers by reflecting on the importance of the FFC and the changing architecture of spending public money for social sector programs. Ms. Aiyar also highlighted the importance of studying local government financing as a critical component of the decentralisation narrative in India.

This was followed with remarks by Mr. Arvind Subramanian, the Chief Economic Advisor to the Government of India. Mr. Subramanian spoke about the present scenario of social spending in India as well as reflected on the complexities of pursuing decentralization in a political and administrative context designed to privilege hierarchy and centralization.


State of Social Sector Expenditure in 2015-2016

This report looked closely at the effects of the FFC recommendations on state finances, with a particular focus on effects on social sector investments in 19 states in India. Dr Pinaki Chakraborty, Professor at the National Institute of Public Finance was invited to respond to the findings of this report and Mr. MK Venu, Founding Editor of played the role of the moderator.

This report asks two key questions:

  • Did increased tax devolution result in enhancing fiscal space for states?
  • Has the changed fiscal structure resulted in any visible shifts in social sector investments at the state level?

Through an analysis of 19 state budgets, the report found that there has been an increase of at least 20% in the overall pool of union government funds received by state governments in 2015-16 when compared with the previous financial year. Moreover, the overall pool of funds made available to centrally Sponsored Schemes (CSS) also increased despite budgetary cuts in the 2015-16 budget.

The key headline finding from this report is that social sector spending increased significantly in 2015-16, when compared with 2014-15. The overall share of expenditure on social services increased from 36.1% in 2014-15 to 38.2% in 2015-16.

ReportState of Social Sector Expenditure 2015-16

During the discussion, Dr Chakrobarty expanded on the key findings of the report by bringing attention to the study on CSSs in particular. He argued that devolution needs to be studied not only from the perspective of increasing central resources for state level implementation, but also from the lens of central intervention in improving the structure of CSSs.

During the Q&A Mr. Sumit Bose, former Secretary, Thirteenth Finance Commission, added to the conversation by connecting state investment on the social sector to infrastructure priorities. He speculated that state governments are increasingly prioritising infrastructure related expenditure over social sector financing. This is an area for further investigation.

PAISA for Panchayats 2016

The panel that discussed this report included Dr. Indira Rajaraman, retired professor of economics and member of the Thirteenth Finance Commission of India and Dr. Santosh Mathew, Joint Secretary in Ministry of Rural Development and it was moderated by Mr. MK Venu.

This study looked at trends in devolution to rural local governments through a case study of fund flows to 30 Gram Panchayats (GPs) in Kolar district in Karnataka.

The study asked two key questions:

  • What are the overall trends in fiscal devolution to Panchayati Raj Institutions (PRI) in Karnataka?
  • How much money do Gram Panchayats actually receive?.

Our research showed that despite the state’s pioneering efforts in improving intergovernmental fiscal transfers, the system clearly falls short of the state’s vision for effective devolution to Panchayats. The 30 GPs in Mulbagal spent only 3 percent of all the money spent in their jurisdiction and are unaware of the nature or extent of expenditure made by other entities (like state line departments, parastatals, District and Taluk panchayats) in their jurisdiction. Further, these other entities themselves do not track or maintain records of their fund flows at a GP level leading to inefficient non-transparent and non-accountable expenditures.

Policy BriefPAISA for Panchayats Policy Brief

Dr. Rajaraman begins her remarks by assessing the value of the study in informing the dialogue on devolution in the country. She also brings to focus the function of language in looking at the decentralisation process. Further, she dissects the methodology used, and suggests an alternate use of data collected as a result of the study.

The second panelist Mr. Santosh Mathew began his opening remarks by echoing Dr. Chakrabaorty’s concerns about the continued focus on CSSs and its impact on devolution of finances to state governments. He concluded with suggestions on how to build a transparent, real-time fund flow and tracking system within the government.

During the Q&A session, special invitee Mr. Arvind Srivastava, Secretary to the Government of Karnataka, spoke on his experience as a state government official with the present systems of decentralisation and devolution. His remarks offered an important window in to the practical experiences of devolution in the country.