FE analysis of the first four years of the 15th FC’s six-year award period showed that states have lost Rs 1.3 trillion or roughly 15% of the combined Central government grants.
While the Centre is soon expected to set up the 16th Finance Commission (FC) that will inter alia suggest the level of grants to promote national goals during FY27-FY31, an FE analysis of the first four years of the 15th FC’s six-year award period showed that states have lost Rs 1.3 trillion or roughly 15% of the combined Central government grants. This was mainly due to their inability to meet the eligibility conditions for the incentives. Half of the under-utilisation can be attributed to the non-compliance with the conditions by urban and rural local bodies.
To put this in perspective, the loss of grants in these four years is equivalent to size of the 50-year interest-free capital expenditure loans scheme extended by the Centre to states in the FY24 (Budget Estimate).
FC grants fall under five broad categories: those meant to address stubborn revenue deficits among some states, funds for local governments; disaster management; sector-specific and state-specific.
Except for the revenue deficit grants, the actual flow of funds on other heads of grants remained below the recommended amount during the award periods of earlier Commissions as well. This was mainly due to challenges faced in the release of conditional grants. Grants for local bodies, revenue deficit grants and disaster management grants constitute 83% of all grants in 15th FC.
Nearly half of this is accounted by urban and local bodies, reflecting the thrust of the Centre on improving services and infrastructure development at the local levels, with urban areas being seen as the centres of economic growth.
However, the lack of wholehearted efforts by the states in reforming these bodies or delays thereof has starved many local bodies. The uilisation level of grants among local bodies so far in 15th FC period has been less than 79%, compared with 94% in 12th FC, and been the lowest since 10th FC period. While 40% of the grants are unconditional, the rest are linked to reforms and eligibility conditions.
Both in FY22 and FY23, the Centre’s grants release for urban and rural bodies has been a third lower than the Finance Commission’s approved estimate. Sources said the reduction in outlay for municipalities and rural bodies was on account of non-compliance with conditions such as regular civic body elections and presentation of the balance sheet as per accrual accounting, among others.
Sudipto Mundle, who was a member of the 14th FC, said ways must be found to get states interested in fulfilling the conditions so that urban local bodies and panchayats fully utilise the grants. “The action has to be taken by the state governments, whereas the recipient of these grants would be the third-tier of the government. If states are also given some extra money for fulfilling the performance conditions, then they might take an active interest,” Mundle said.
Making the Centre’s stand clear, Finance Minister Nirmala Sitharaman said in Thiruvanthapuram on Saturday said Kerala would get the full grants under million-plus cities programmes and health grants only if it fulfils the eligibility conditions.
The 15th FC (FY21-FY26) has recommended grants aggregating to Rs 12.34 trillion, which is 19.5% of total recommended transfers to states that includes tax devolution. That’s a substantial jump in the share of grants from 12% in the 14th FC (FY16-FY20).
The compositional shift in the share of grants in total transfers under the 15th FC award was a balancing act after a sharp increase in general-purpose resource transfer through a 42% share in the Centre’s divisible tax pool since the 14th FC from 32%. The move was to ensure that sectors like health, education, rural roads and agricultural reforms get adequate attention. These programmes were largely funded through cess and surcharges which essentially reduced the Centre’s divisible tax pool. The rejig was also to ensure that states don’t go overboard and spend more on ‘freebies,’ while cutting back on asset creation programmes.
Of the Rs 3.69 trillion revenue deficit grants in FY21-FY26 for 17 states, the entire amount would be fully utilised as these are based on revenue deficit assessment and no specific conditions are attached. The idea was to taper the grants over a period. Nonetheless, many states are yet to have a revenue surplus as anticipated by the 15th FC. Tamil Nadu which was to come out of a revenue deficit after the first two years (FY21-FY22) of the six-year award period, ran a revenue deficit in FY23 and projected a deficit in FY24 as well. Haryana which got a revenue deficit grant for FY22 only, ran a deficit in FY23 as well.
One grant which did exceptionally well was health sector grants which outpaced the Finance Commission approvals for FY22-FY24, indicating the seriousness of the states in lapping up the funds for the sector which was found lacking after Covid broke out in 2020.
Among other major grants, disaster management grants have nearly been fully utilised. The states also have to make an effort to fully utilise grants related to agricultural reforms and those related to state-specific grants.
Source:financialexpress.com