In the context of Union Budget for 2013-14, to be presented on February 28, some of the reports in the print media have indicated that the finance ministry could reduce the budget outlay for some of the social sectors in 2013-14 as compared to the outlay in 2012-13. While this is raising a lot of concern among many observers, the finance ministry is most likely to defend such a decision (if indeed adopted for the next Budget) by referring to the inability of the states to utilize the full quantum of available Plan funds in social sectors in the current fiscal and previous years. The present article focuses on this issue and attempts to demystify a paradox in India’s budgetary policies at the current juncture.

We may note here that “social services” or “social sectors” include those sectors where government interventions are expected to have a direct influence on human development, such as, education, health and family welfare, water supply and sanitation, social security and welfare, and nutrition. Over the past few years, several policymakers and development policy analysts have commented that the Central government has increased the magnitude of budgetary support for social sectors considerably since 2004-05, and that the problem in social sectors now is not of shortage of resources but rather poor implementation or poor utilization of these resources. However, this is a misleading hypothesis, which does not take into account some of the key aspects of the federal fiscal architecture in India and the causal factors underlying the phenomenon of poor utilization of funds in social sector programmes and schemes.

What other countries spend

Over the past 15 years, the direct contribution of the Central government in total public spending on social sectors has been only around 30 per cent, which is less than 2 per cent of GDP every year. Hence, the gradual increase in social sector spending in the Union Budget witnessed over the past eight years (between 2004and 2005) has not translated into any visible increase in overall public spending on these sectors, as most of the state governments have not made any significant increase in their budgetary spending on these sectors. In 2012-13 (Budget Estimates), the Union Budget outlay for social sectors was around 1.9 per cent of GDP; India’s total public spending (combined budgetary spending by Centre and states) every year on social sectors continues to be less than 7 per cent of GDP.

Most of the developed countries have been investing much greater magnitudes of public resources on social welfare for decades now; the average level of budgetary spending on social sectors in the Organisation for Economic Cooperation and Development (OECD) countries in 2006 (excluding their social security payments) was 14 per cent of GDP, more than double the level of budgetary spending on social sectors in India.

Given that most of the developed countries and some of the developing countries have been spending much higher magnitudes of their public resources on social sectors for decades now, and that deficits in social sectors in India can be expected to have aggravated over time because of the persistence of the problem of resource shortage, the present level of public spending on social sectors in India cannot be considered adequate.

The poor quality of infrastructure in these sectors (schools, hospitals, healthcare centres and anganwadi centres, for example), the shortage of qualified and trained human resources for delivery of services (teachers, doctors, para-medical personnel and anganwadi workers included), the shortage of human resources for management of the programmes (staff for monitoring and supervision and finance and accounts staff) and the unacceptably low levels of unit costs for provisioning of various services in these sectors are all manifestation of the acute shortage of public resources in social sectors in India.

However, as observed earlier, the under-utilization of available budgetary resources in some of the states has been cited by many observers and policymakers as the key problem in social sectors in the country at present. We need to note in this context that the problem of under-utilization of available budgetary resources is prevalent mainly in the Central programmes/schemes in the social sectors and not in the general budgetary resources provided mostly by the state governments for these sectors.

Public expenditure in India is usually divided into two categories—Plan expenditure and Non-Plan expenditure. Plan expenditure refers to all kinds of government expenditure (expenditure on capital heads, like, school buildings, hospital buildings, roads and bridges as well as those on revenue heads, like, salaries of staff, wages of workers, textbooks and medicines) incurred on the programmes / schemes laid out in the ongoing Five Year Plan (such as Sarva Shiksha Abhiyan, Mid-day Meal scheme, and Integrated Child Development Services).

Non-Plan expenditure refers to all kinds of government expenditure that is outside the purview of the Five Year Plan (such as expenditure on defence services, interest payments, organs of the state, and those on the running of existing government institutions in different sectors). In the case of Non-Plan expenditure in social sectors, a very large part of this category of expenditure in the states is meant for the salaries of staff working for the government.

Since such payments are in the nature of entitlements, it would be a lot easier for the government departments to disburse the funds meant for such payments when the staff members concerned are already in place. Hence, there is hardly any concern noticed with regard to the ability of the state governments to utilize their Non-Plan budget outlays in social sectors. With regard to Plan expenditure, however, several states have shown noticeable levels of under-utilization of Plan budget outlays, especially in the social sectors.

Hurdles in the path of funds utilisation

The findings of a series of studies conducted by the Centre for Budget and Governance Accountability (CBGA), New Delhi (Budgeting for Change series of studies, carried out with support from UNICEF India) throws light on a set of institutional and procedural constraints, which need to be removed in order to enable the states to effectively utilize greater magnitudes of plan outlays in the social sectors. This study has analysed the implementation of major Plan schemes in social sectors, like, Sarva Shiksha Abhiyan, National Rural Health Mission, Integrated Child Development Services and Total Sanitation Campaign, at the district level in select states.

The study finds that a number of problems have been observed across various states, particularly in the backward states, over the past few years, which are:

(i) Low capacity of some of the states to increase spending in the Plan schemes; and
(ii) Poor quality of spending/fund utilization in the Plan schemes.

Some of the main reasons for such under-utilization of Plan outlays by the states in the social sector schemes can be traced to the institutional and procedural bottlenecks in the process of implementation of Plan schemes and deficiencies in the planning process being followed at the district level.

The said study by CBGA identifies a number of factors responsible for the above-mentioned problems in fund utilization in Plan schemes, which can be broadly divided into the following categories:

(a) The first set of factors pertains to the deficiencies in decentralized planning being carried out in most of the schemes, which is caused by a shortage of staff to carry out planning activities, lack of emphasis on training and capacity building of staff and community leaders for decentralized planning, and inadequate emphasis on community participation in the planning process.

(b) The second set of factors pertains to bottlenecks in budgetary processes in the schemes, such as delay in the flow of funds, delay in sending sanction orders for spending, decision-making being centralized within the states, low delegation of financial powers to the district and sub-district level authorities, uniform norms of Centrally-sponsored schemes for all states, very low unit costs that are unrealistic, and weak monitoring and supervision of programme implementation activities.

(c) The third set of factors relates to systemic weaknesses in the government apparatus in the states, particularly the backward states. A shortage of trained, regular staff for various important roles like management, finance/accounts and frontline service provision has weakened the capacity of the government apparatus to implement Plan schemes.

As regards the systemic weaknesses in the government apparatus in the states, it can be argued that Non-Plan expenditure by the state plays an important role in improving the overall capacity of the government apparatus. Non-Plan expenditure shapes, to a significant extent, the strength of the state government apparatus in terms of the availability of regular qualified staff and adequacy of government infrastructure, for implementing Plan programmes/schemes. However, over the past decade, Non-Plan expenditure in social services has been checked by many states due to the emphasis of the prevailing fiscal policy on the reduction of deficits through the curtailment of public expenditure. As a result, the overall capacity of the government apparatus to implement Plan programmes/schemes has been adversely affected.

Centre has to play enabling role

Thus, the overall budgetary spending on social sectors in India continues to be far below the desired levels, the availability of resources has improved only in specific programmes/schemes launched by the Central government ministries in some of the social sectors, and the problem of under-utilization of available budgetary resources too is prevalent mainly in such Central programmes/schemes. Also, the inability of the state governments to fully utilize the available funds in the Central schemes is rooted in the fact that some aspects of the fiscal policy adopted over the last decade have resulted in systemic weaknesses in the government apparatus in social sectors across many states—the rigidity in the norms, guidelines and unit costs governing the Central schemes and the lack of fiscal decentralization from Centre to state governments as well as from state government to local governments.

Hence, the country needs to have a fiscal policy that enables the state governments to increase Non-Plan spending in the development sectors. The institutional and procedural bottlenecks in planning, fund flow and fund utilization processes need to be removed through concerted efforts by both the Centre and the states. Moreover, there is also a need for imparting a lot of flexibility to the states vis-a-vis the norms, guidelines and unit costs in the Central schemes.

The author works with Centre for Budget and Governance Accountability (CBGA), New Delhi and can be reached at
subrat@cbgaindia.org