Thursday, August 20, 2015

Money problem!

The state of the State’s Finances and the fate of major projects have has been imperiled by the Finance Commission


Chief Minister Pawan Chamling has already officially called on the Union Finance Minister Arun Jaitley thrice in the past year to explain the financial setback caused to Sikkim due to the budgetary allocations worked out by the Union Government which have saddled Sikkim with substantial shortfalls. For a resource-strapped State like Sikkim, even minor adjustments in funds allocations can severely disrupt implementation, and it must have been such considerations which convinced the CM to also take up the matter with the Prime Minister when he called on him earlier this year in April. Sikkim, of course, is not alone in having been left shell-shocked by the recommendations of the 14th Finance Commission and how the Union Government is now allocating funds and financial assistance. Several social sector interventions now face uncertain futures and smaller states, with their narrow resource capabilities, are yet to figure out how they are to sustain anything anymore now that the purse strings have suddenly tightened.
As per official claims, the Annual Plan for Sikkim 2014-15, fixed by Delhi without even an Annual Plan discussion, had created a liability of Rs. 270 crore. The shortfall resulted literally from Delhi pulling the rug from under the feet of states like Sikkim when it removed such funding as Additional Central Assistance, Special Plan Assistance, Special Component Plan etc from the state budgets. The Annual Plan for 2015-16 has not yet been finalised, but, if the award of the 14th Finance Commission is any indication, states like Sikkim can expect little joy. As per arguments raised with the PM and the Union Finance Minister, the 14th Finance Commission award for 2015-16 is Rs. 350 cr short of what Sikkim had wanted.
Sikkim, and probably several other northeastern states as well, have had a rather unfavourable run with finance commissions so the latest shocker from the 14th Finance Commission should probably not have come as such a, well, shock.
In his Budget Speech on 24 June, 2014, Chief Minister Pawan Chamling had said, “The Twelfth Finance Commission grossly under-estimated the committed liabilities of the State. The State resources have been adversely affected by this shortfall. Against the projection made to the Thirteenth Finance Commission of Rs. 9,131.45 crores, the State Government was granted an amount of Rs. 4,525.80 crores”.
He had then gone on to inform that when the 14th Finance Commission visited Sikkim in January 2014, “the State Government had submitted a detailed memorandum seeking grants of Rs. 20,511.98 crores as Non-Plan deficit grant, state specific grant, Local bodies grant, estimated amount on account of Pay Revision etc.”
Clearly, there is not going to be much to cheer about in this Finance Commission’s award either, especially since this one has taken the hatchet to funding for just about everything. As per official submissions made to the PM and the Union Finance Minister, for the financial year 2015-16 alone, Sikkim is staring at a Rs. 350 crore shortfall.
Finance Commissions are formed to define the financial relations between the Centre and the State. It is appointed every five years and consists of a chairman and four other members. It recommends distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes; determines factors governing Grants-in Aid to the states and the magnitude of the same; recommend measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state.
The Fourteenth Finance Commission (FC-XIV) was constituted on 02 January 2013 to make recommendations for the period 2015-20. Dr. Y. V. Reddy was appointed the Chairman of the Commission.
The Terms of Reference of the Commission mandated it to make recommendations on the distribution between the Union and the States of the net proceeds of taxes, the principles which should govern the grants-in-aid of the revenues of the States; and measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayat and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
The Commission was to also consider and recommend incentives and disincentives for States for observing the obligations laid down in the Fiscal Responsibility and Budget Management Acts.
Among the most significant recommendations of the FC-XIV is that tax devolution should be the primary route for transfer of resources to the States. Needless to add, this benefits the larger and more industrialised states and hobbles grants-in-aid dependent smaller states like Sikkim.
Experts have pointed out that in understanding the States’ needs, it has ignored the Plan and non-Plan distinctions, and this, coming after decades of lavish pay hikes for government servants, has further hamstrung state governments.
There are also technical problems. For instance, the Terms of Reference for the Commission specifies that “in making its recommendations on various matters, the Commission shall generally take the base of population figures as on 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid...”
While many already believe that keeping the base population more forty years in the past is confounding, it becomes even more incongruous when applied to Sikkim since Sikkim joined India only in 1975. Since the devolution of taxes and duties and grants in aid are mainly for infrastructure development for health, tourism, education and local bodies’ grant, taking population of pre-Merger times as the base for such calculations is ill-advised. But that is how the Commission worked its formula despite appeals calling for otherwise.
Interestingly, even an evaluation of the State’s finances, commissioned by the FC-XIV itself, had recommended as much.
The “Study on Evaluation of State Finances with respect to State of Sikkim”, a study report commissioned by the 14th Finance Commission and submitted by Ruma Kundu, Asst Prof, Department of Economics, Sikkim University, concludes: “Sikkim has carved out a special position in the Indian Union as one of the most progressive and rapidly developing State within a short period of 33 years. After joining the Union, the State has been able to overcome the disadvantages posed by its geographical and topographical situation by adopting ventures that are eco-friendly and sustainable. Given the above peculiar circumstances, in case it is not possible to make allocations as per the 2011 Census, the State Government would like to urge the Commission to reconsider the concessional measures and provide ad hoc additional assistance for compensating the loss the State would incur from the adoption of 1971 Census figures for the purpose of devolution of the State’s share of taxes and Grants-in-aid”.
States like Sikkim have also been severely hit by the Finance Commission recommendation to discontinue Normal Central Assistance, Special Plan Assistance, Special Central Assistance and Additional Central Assistance apart from the eight formerly centrally sponsored schemes which have now been delinked from support from the Union Government. The 14th Finance Commission having decided against recommending any grants under State-Specific projects this time will affect projects like the ambitious skywalk project in South Sikkim for instance. The Skywalk Project had been allocated Rs. 200 crores under the State specific projects head by the 13th Finance Commission, but has not received any allocation from the 14th Finance Commission. For completion, this project will need an additional Rs. 550 crores spread over the next four years. Also adversely affected by discontinuation of such assistance will be the under-construction 575-bedded multi-speciality hospital project in Gangtok and 29 other projects.
The discontinuation of these funds has clearly caught Sikkim off-guard, because as recently as in projecting its budget for 2014-15 in June 2014, the State was factoring in such assistance. The Governor’s Budget Address last year mentioned that under the Special Plan Assistance, Rs. 108 crores has been proposed excluding the spill over for the ongoing projects which include construction of 575 bedded Multispeciality hospital at Gangtok, the Bhaichung Stadium at Namchi, the Chengrezig, Statue at Gyalshing, including beautification works being carried out in various bazaars like the covered walkway at Namnang and construction of the head office cum training institute for Sikkim State Cooperative Union at Assam Lingzey.
Now, one is being informed that Special Plan Assistance itself has been discontinued.
Also given the axe is Additional Central Assistance under which, in 2014-15, the state had posted Rs. 366.27 crores excluding the spill over but including important flagship programmes of Government of India.
The CM has also urged the Union Government for the continuation of the funding pattern for central plan funds at the ratio of 90:10 especially for the Northeastern states. Special privileges given to Sikkim, it may be recalled, include financial assistance from the Government of India in the form of 90% grant and 10% loan unlike non-special category states which get Central Assistance in the ratio of 70 % grant and 30 % loan. The 90:10 ratio used to also be followed in implementation of centrally sponsored schemes with 90% central share and 10% being state share. The Finance Commission has recommended the continuation of the centrally sponsored schemes, if the states so desire, at 50:50 ratio. To continue schemes which Sikkim did not demand or even require but has now become used to but cannot afford at the changed equation is obviously unfair.
To get an idea of how the changing of 90:10 share to 50/50 will jeopardise projects in states like Sikkim, one needs to go back to the CM’s address to the first governing council meeting of the NITI Aayog in New Delhi on 08 Feb, 2015. While speaking on centrally sponsored schemes, special plan assistance and special central assistance, Mr. Chamling said: “As I conclude, I would like to flag that for implementation of the Central Sector Schemes, I propose that the overall allocation should be enhanced for the overall development of the State. Sometimes it is difficult to contribute the mandatory State Share resulting in non completion of projects. It is therefore, proposed to dispense with the requirement of State Share for the Special Category State or else adequate SCA provision be kept for meeting the State Share requirement. The NITI Aayog may keep the flow of funds under Special Plan Assistance (SPA) and Special Central Assistance (SCA) funding for the Special Category States with enhanced allocation. I say this as Sikkim has 29 major committed ongoing projects under SPA and you will appreciate that these projects need to be completed for which the Central Share due to the State of Sikkim is to the order of Rs. 268 crores”.
The gap between funds requirement projected by the State and actual release by the Centre has been growing over the recent years. By the State’s own admission, the outlay for 2014-15 was Rs. 270 crore short of requirement and this appears set to increase to a shortfall of Rs. 350 cr this fiscal. Needless to add, this upsets the State’s developmental course. As a senior official in the Finance Department pointed out, 90 percent of the budget is now being spent on salaries with only 10% available for development works. Sikkim has maintained smart growth clip, substantially higher than the national average, but if funds were to dry up for state-specific projects, as is already happening, the projected growth rate of 12% will start falling, substantially.

Admittedly, Sikkim is not alone is having been dealt a body-blow when it comes to financial assistance. Development Commissioner Suresh Chandra Gupta, when contacted to comment on this predicament, pointed out that Sikkim was not alone in being adversely affected by the recommendations of 14th Finance Commission and that all the Northeastern states and even Jammu & Kashmir have been similarly disadvantaged and have requested the Government of India to reconsider the financial aspects and grant Normal Central Assistance, Special Plan Assistance, Special Central Assistance and Additional Central Assistance to these underdeveloped states. There has been no progress on that end, but the States remain hopeful.
The size of the State’s annual plan outlay for 2015-16 has not been finalised yet by the Centre, but planning and finance officials are busy at work with budget preparations and hectic huddles are being convened to work solutions and plan courses of action to ease Sikkim out of the current quandary, a funds-strapped scenario it is not used to.
[with reporting by VISHNU NEOPANEY]

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