Monitoring federal reforms through fiscal grants

As a union of diverse states, a federal polity is India’s innate socioeconomic strength. To draw an analogy, India is like a business conglomerate with diverse horizontal and vertical product lines.

I draw this analogy in light of the recent reforms that seek to redefine the borrowing limits of the states from the Centre.

With a set of reforms laid out for states to implement, we will see the emergence of innovative ideas, discovery of best practices and emergence of leadership. The economic challenges posed by novel Covid-19 virus are unavoidable.

After revenue from economic activities came to a grinding halt and expenses increased with states having to shore up public healthcare, provide rations and maintain strict law and order to contain the pandemic, several states reached out to the Centre.

Admittedly this is no time for fiscal austerity.However, this is certainly the time to start building a sturdy system that is equipped to face the forthcoming challenges.

Under the Aatma Nirbhar Bharat Mission, the borrowing limit for states has been increased from 3% to 5% for just the year 2020-21; Of this 2% increase, 0.5% is unconditional, 1% is linked to four reform areas equally i.e. 0.25% for each reform while the remaining 0.5% is linked to achieving milestones on at least three or four reforms.

Considering the financial position of most states has been collapsing, this is a good step taken by the Government where incentives reform and perform are being created; and therefore, this provision should certainly not be restricted to 2020-21,instead be expanded and developed into a comprehensive appraisal tool to measure the performance of states.

Broaden the spectrum of reforms

Currently, universalisation of ‘One Nation One Ration card’, Ease of Doing Business, power distribution and urban local body revenues are listed as the expected result areas.

In line with politics of development, the centre needs to assess performance of subjects on the State List and create incentives to alleviate the status of social indicators like health, education, law and order and employment.

There is room for criticism as this may be seen as political overreach dilution of autonomy of states; however, since this is a loan that the State can avail and not a defrayable grant, the argument of misgiving will not hold water.

For example, implementation of Ayushman Bharat, a step towards providing healthcare (initiated by the Centre) needs to be assessed beyond just the implementation phase. Audits to grade public healthcare facilities, infrastructure, technology etc will invigorate the federal competition and higher efficiency.

Similarly, police reforms have been in the waiting in certain States, despite the high perception value.

Monitoring will be critical in these exercises; but as we move towards next phase of growth driven by inclusive development, data collection has to be given foremost importance.

Conditional grants, not gift packages

Several attempts to narrow regional imbalances have left us wanting primarily. Despite several packages announced for states, poor monitoring of usage of those funds to deliver espoused results has been an undebatable shortcoming. To be eligible for grants, State proposals need to feasible, not just popular.

For every tranche of grant released, the State needs to fulfil minimum implementation milestones tagged with the previous tranche. The success story of connecting the Northeast with the rest of the country is an example of how goals need to be quantified scientifically for time-bound outcome.

For example, when a state submits a grant proposal for infrastructure, complete details of planned assets needs to be submitted to ensure the grant will not be utilised for development of politically significant regions, retaining the development deficit.

Freezing a formula for State level grants and applying that across board will not be the best suited approach, once again reminding us that that regional imbalance cannot be addressed by an aggregate approach.

Under NaMo 1.0 India multiple schemes for overall socio-economic well-being of citizens were launched and implemented. NaMo 2.0 needs to extend this intention to comprehensive development of regions.

Similar to the dashboard culture that this government has cultivated to ensure transparency and accountability, reporting of utilization of specific purpose transfers to states by the centre needs to begin.

To monitor the utilisation of grants and implementation of reforms that are needed to reduce regional imbalance, a dedicated institution is needed without disrupting the existing role of Ministry of Finance, which allocates the grants.

Invoking the Tinbergen’s assignment principle to (Kelkar 2019) it is suggested that an independent institution be established that suggests and monitors structural reforms. In addition, states also need to be equipped to raise funds for their development through municipal and district bonds.

If we are to grow bottom-up and leverage the depth of governance structures in India, we need to put top-down processes that will conjure trust of the common people.

As a Union of States, India needs to install a federal apparatus which grants autonomy to States but does not allow politics to conduct preferential development.