Utilization of public fund

Utilization of public fund

Intergovernmental transfers from the centre to the states takes place through three channels: statutory and other transfers mandated by the Finance Commission, formula-based transfers for State Plan Schemes through the Planning Commission, and other discretionary transfers by the Planning Commission/ various central Ministries. The entire tax sharing is a part of the Finance Commission transfers. In the rest of the transfers constituting of grants alone, grants other than those for State Plans now constitutes 69 percent.

These are generally not formula determined and for the bulk of the amount, are often conditional upon various actions at the state level including putting up the matching amounts. Thus, while the block grants (for State Plan and other block grants) by definition are unconditional transfers and therefore the issue of their utilisation is not a major concern, for the other grants the actual utilisation can be different from the allocations made; if the gap is large, then it can be a cause for concern.

In terms of facilitating utilisation, a grantor agency has limited tools in its hands. These include, inter alia, the design of the scheme (to eliminate disincentives for utilisation), the actual transfer mechanism, and the timing. In terms of design, when one is considering conditional transfers which all the schemes under examination are, it is almost tautological to observe that the more conditions there are, and the more difficult they are to meet, the less would be the utilisation. For example, a specificpurpose transfer without any matching requirement is likely to be utilised to a higher extent than one with such a requirement. Similarly, the transfer mechanism can also influence utilisation; in times of resource constraints, grants on a reimbursable basis have less chance of high utilisation than those provided at least partly on advance basis. The importance of timing of transfers hardly needs an explanation: it is sufficient to state that grants received at the fag end of the year have little chance of getting spent usefully within that year. In the selected special category states that this report separately covers, there is also a seasonal dimension to the issue of timing. All the special category states in India have the problem of extreme weather; in the northeastern states it is the monsoon season that is characterised by heavy rainfall and in the states of Jammu & Kashmir (excluding the relatively lower areas of Jammu), Sikkim and northern parts of Arunachal Pradesh, it is the winter with heavy snowfall. During these months of extreme weather, developmental work is substantially hampered, and funds received cannot be gainfully employed.

Factors constraining utilization of public fund

Under-utilization of Plan outlays by the States can be attributed 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. These factors listed below need to be addressed in order to strengthen States’ ability to better utilize higher magnitudes of allocations for the social sectors :

  • The deficiencies in decentralized planning being carried out in the schemes, resulting due to insufficient staff for undertaking planning activities, inadequate attention to their capacity building and minimal role for community participation in the planning process.
  • Bottlenecks in budgetary processes in the schemes, such as delay in the flow of funds, in releasing sanction orders for spending, decision-making in the States being centralized, insufficient delegation of financial powers to the district/ sub-district level authorities and uniform norms of Centrally Sponsored Schemes for all States. Further, lack of need based budgeting in the schemes, which is often carried out without proper analysis of unit costs on the ground, implied allocations for some of the schemes being decided in a top-down and unrealistic manner.
  • Systemic weaknesses, manifested as shortage of trained, regular staff for various important roles like programme management, finance/accounts and frontline service provision; this contributed to weaken the capacities of the government apparatus in the States for implementation of Plan schemes.
  • Regarding 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. It affects the capacity of the State Government apparatus in terms of the availability of regular qualified staff and adequacy of government infrastructure for implementing Plan schemes. However, over the past decade, Non-Plan expenditure in social sectors 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. Consequently, the capacity of the government apparatus to implement Plan programmes/schemes has been constrained.

Policy measures for improving fund utilization capacity

An assessment of functioning of different Plan schemes shows that efficient utilization of the available funds in the Central schemes is a concern and there is scope for improving the effectiveness of these schemes by way of revisiting some critical factors like the design of scheme, flow of funds etc. 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. The restructuring of the Centrally Sponsored Schemes (CSS) as being carried out now by the Union Government for the current Five Year Plan by following the roadmap suggested for this purpose by the B. K. Chaturvedi Committee can help take care of some of the deficiencies related to planning and budgetary processes. This includes bringing down the total number of CSS significantly, transferring some of the schemes to States, and doing away with the practice of Central funds being routed outside the State Budgets and State Treasury system. Moreover, there is also a need for imparting a lot of flexibility to the States vis-à-vis the norms, guidelines and unit costs in the Central schemes.

However, the underperformance regarding fund utilization in the Central schemes is also rooted in the fact that some aspects of the fiscal policy being followed over the last decade have resulted in systemic weaknesses in the government apparatus in social sectors across many States. The country’s fiscal policy needs to shift its focus in order to enable the State Governments to increase Non-Plan spending in the social sectors along with Plan spending on the same so that the problem of shortage of staff could be addressed effectively.


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