Most states are left with unspent balances in development schemes of different departments, which in turns impairs achievement of objectives of these schemes. Though, the extent and quality of fund utilization varies across states and across schemes, this is a rampant problem. This is ironic, as on one hand there is dismay about inadequate budgetary allocations to the related sectors, and on the other hand, poor utilization of these resources is an accepted reality.

The problem is two-fold- noticeable levels of underutilization of budget outlays for the schemes and the issue of poor quality of expenditure on a number of parameters. Underutilization of outlays for plan schemes can be attributed to some factors discussed here. First, deficiencies in decentralized planning carried out in the schemes.

Second, delay in steps through which fund flows down from the Centre to states finance departments, to implementing departments, and to implementing levels. The third factor relates to systemic weaknesses, manifested as shortage of trained and regular staff for various important roles.
Let us take a look at how well does the new fiscal architecture enable the states to address these problems underlying the trend of poor utilization of funds.

The recommendations of the Fourteenth Finance Commission for the next five years came into effect from 2015-16. The key recommendation about increasing devolution to states to 42 percent (from the existing 32%) has led to an increase in the fiscal autonomy of the states. With greater magnitude of untied funds at their disposal, the states are in a position to improve the process of planning at the sub-district level and district level. Their flexibility has further gone up in the new framework of Centre-State sharing of resources as evident from the report of the Sub-group of Chief ministers on rationalization of centrally-sponsored schemes (CSS).

This NITI Aayog panel recommended that in the 60:40 funding pattern between the Centre and states, every state would be getting 25 percent as flexible funds. That being the case, the states have a greater opportunity to improve the process of decentralized planning. However, unless the states strengthen the institutions of District Planning Committees (DPCs), they would not be able to achieve improved planning process.

Timely fund flow is an important feature for successful implementation of any scheme. However, the actual process of fund flow is faced with delays at multiple levels. These may be due to delays associated with raising demand for funds by the state to the Government of India, ministry delays regarding submission of utilization certificates (UCs) by the states for earlier releases and the next release conditional upon availability of these UCs; and the practice of sending the money in multiple tranches. Conceding to demand from a host of state governments that CSS releases should be transferred through their budgets and not directly to district level agencies, the Government of India accepted the B K Chaturvedi Committee recommendation on routing funds for CSS through the treasury.
Now the central funds in all CSS go through the state budgets instead of autonomous bank accounts of the societies. It is definitely a better practice than a system where the funds were scattered in a large number of accounts with multiple agencies over whom the ‘State’ had little control; however, this has reportedly aggravated the problem of delays in fund flow in various schemes.

The issue can be dealt with only if the State finance departments demonstrate a strong commitment for expediting fund flow in development schemes. As has been argued in a 2007 paper by Ashutosh Dikshit, Renuka Vishwanathan and T R Raghunandan in EPW, ‘it would be desirable to return to a system of routing government funds in treasuries alone from which expenditure can be clearly ascertained, controlled and monitored’.

The most contentious issue regarding fund utilization in the Central schemes is the issue of staff shortages. With higher quantum of untied resources in their hands, the states need to decide what to do in social sectors which are plagued with the problem of huge shortages of human resources and unskilled staff. However, the states expect the Centre to continue to provide for the staff salaries.

The NITI Aayog report clearly states that starting from the ongoing financial year itself, the Centre would reduce its commitments on expenditures on salaries of staff incurred at the State level in the different CSSs. It recommends that funding pattern for salary components should not be modified to the disadvantage of the States until the close of financial year which is about to begin. Any upward revision of remuneration or additional hiring may be made only with the states’ own resources. This is a tricky issue, as implementation of several schemes like National Health Mission, ICDS, Rashtriya Krishi Vikas Yojana and more are dependent on human resources and require large increases in trained staff. Hence, the government needs to resolve this within the period of the financial year 2016-17. Else, there would again be a phase of huge uncertainty as witnessed in the ongoing fiscal year.

The author works with Centre for Budget and Governance Accountability (CBGA India), and can be reached at happy@cbgaindia.org. Views are personal.