On the 1st of February 2017, the Finance Minister will present his 4th budget to the nation. Like every year, the budget speech will be followed by a slugfest as political parties and commentators argue over stated priorities and budget allocations. The debate is particularly shrill when it comes to social sector schemes as politicians and commentators can never quite agree whether allocations in a given year are too high or too low. But for the average bureaucrat and the aam junta—the actual beneficiaries of these contentious social schemes—these debates over budget estimates are meaningless.
The truth is that the Indian government finds it very difficult to move money speedily and efficiently through the administrative chain. As a result, neither the frontline administrator nor citizens have any guarantee of when and how much of these budget allocations will actually reach them. This may come as a surprise to most readers but the government's actual expenditure, reported a good two years after a budget is announced, is often far lower than the actual budget estimate. The slow movement of money is an important reason for this. To make matters worse, even when money does reach the ground, it tends to arrive in ways that make it difficult to spend money on locally identified needs and priorities.
The government's actual expenditure, reported a good two years after a budget is announced, is often far lower than the actual budget estimate.
These gaps in spending are particularly stark because on paper, the Indian state is deeply participatory. Citizens are routinely invited to participate, monitor and even audit government programs, all in an attempt to ensure that expenditure is aligned to needs and priorities. The 73rd and 74th constitutional amendments, for instance, institutionalised participation by devolving powers to prepare plans to local governments and enabling direct participation by the people. In addition, nearly every social sector scheme requires the setting up of committees where citizens can participate in planning and monitoring government. The reality however, is very different.
Let me explain. Having handed over responsibility for key components of the development agenda to local governments, the state and central governments have done everything in their power to withhold any real transfer of powers. Money for most development activities bypass local bodies and are instead transferred to a set of parallel institutions. Consequently, the administrative landscape on the ground is peopled with multiple institutions and overlapping responsibilities. To illustrate, a recent study by Accountability Initiative found that in Karnataka, as much as 11% of the 2014-15 budget that should have been allocated to panchayats was in fact allocated to state line departments. Moreover, of the money that was transferred to panchayats, 23% was tied to payment of salaries to government bureaucrats. Panchayats, however, do not have any administrative control over staff, most of whom are hired by and thus accountable to the state machinery. This leaves panchayats with very little discretion over monies handed over to them.
Even when money does reach the ground, it tends to arrive in ways that make it difficult to spend money on locally identified needs and priorities.
At the ground level, our surveys of panchayat finances in one district in the state revealed that of a total of ₹6 crore spent in the political jurisdiction of a gram panchayat, the gram panchayat was only responsible for 3% or ₹20 lakh of this expenditure! Not only does this render any kind of local planning by the gram panchayat meaningless—after all, how can you plan if you have no control over the bulk of expenditure taking place in your area; it also makes tracking money impossible. This is because to track how much money flows in to a gram panchayat, you literally need to trace the budgetary allocation and expenditure of every government facility and program in a village all the way through to the state government. And given that each scheme has a different reporting and financial management system this can be an impossible task. It took our team of experienced public finance detectives nearly a year and a half to arrive at these estimations! In this instance, even tools like the Right to Information don't help since the government doesn't have any mechanism to collect expenditure data across the political jurisdiction of a panchayat—even the most well-meaning information officer will find it difficult to provide this information.
The story is no different for schemes run by the state and central government. Take the case of education. In keeping with the principles of local participation, under the Sarva Shiksha Abhiyan (SSA), the central government's flagship education scheme, budget-making is expected to be in line with school plans. These plans travel through the district and state government and are finally presented to the Government of India's Ministry of Human Resource Development for approval.
Local administrators operate largely in a culture where they wait for instructions and for the rest, as one administrator described, its "complete rest in comfortable conditions!"
The practice of planning however, as Accountability Initiative's studies reveal, is vastly different. The SSA budget is deeply centralised. Schools have expenditure discretion over less than 1% of the total education budget, making school plans irrelevant to the planning and budgeting exercise. Districts prepare annual plans. However, they do this without key information such as resource availability in a given year. Consequently district plans, are no more than a wish-list and the eventual approved budget bears little resemblance to what districts plan for. For instance, our analysis of district plans in 2012-13 revealed that a mere 59% of the budget proposed by Nalanda district in Bihar was finally approved. Similarly in 2011-12, only 79% of the budget proposed by Kangra district in Himachal Pradesh was approved. Even the state faces similar problems and often final approved budgets reflect priorities set by the central government. The result: an annual budget that has remarkably little connect with local needs and priorities. Given this reality, local administrators operate largely in a culture where they wait for instructions and for the rest, as one administrator described, its "complete rest in comfortable conditions!"
Poor public finance management systems add to the problem. The current expenditure management system is designed as a "push" system with a hierarchical chain of command. Accordingly, every expenditure authority is charged with releasing lump sum installments to the next level of the administration. The release of these installments is based on multiple levels of authorisation and clearances. Delays at one level have a knock-on effect through the system. And most often, even when plans and budgets are approved, money rarely flows in a timely fashion. In a recent study on the National Health Mission in Uttar Pradesh, Accountability Initiative researchers found that only 10% of the states' annual budget had been released in November 2014. Since the financial year closes in March, this late release resulted in a chaotic last-minute rush to spend. We analysed spending in four districts to discover that as much as 56% of the total annual budget was spent between January and March 2015.
According to one estimate... approximately ₹1 lakh crores of development funds stay parked in banks... earning interest for the banks but doing precious little for the country.
Education doesn't fare much better. As we have discovered through our surveys of more than 50% schools in India, even small grants that schools are expected to receive annually for essential purchases make their way to school bank accounts somewhere between November and December – well over halfway in to the school year!
These delays cost India heavily. The slow movement of money results in significant underspending. These unspent balances are parked in banks—according to one estimate by Dr. Santosh Mathew, approximately ₹1 lakh crores of development funds stay parked in banks at various levels, earning interest for the banks but doing precious little for the country.
Worse, when money arrives toward the end of the financial year the pressures to spend and complete paper work in time to meet the end-of-year deadlines are enormous. This results in a last minute rush that divorces expenditure from needs on the ground. Over the years we've met enterprising headmasters who've used their money to buy fire extinguishers for schools that are yet to construct their buildings; for desks and chairs when they already have them; and to whitewash walls even when the walls look perfectly clean all in order to make sure they have their utilisation certificates ready for the auditors to inspect and the next year's installment to be released.
If [Modi] really wants to eliminate corruption... then he must ensure that government money reaches where it should. The tools exist—all he needs to do is roll the dice.
The sad truth is that the problem is well known and the solutions exist. Technology can easily be deployed to develop an expenditure system that allows for a real-time flow of money. There have been several committees, including most recently the Technology Advisory Group headed by Nandan Nilekani in 2011 that recommended the creation of an Expenditure Information Network to move money. But, none of these reports have translated into any real change on the ground.
Through demonetisation, Prime Minister Modi has sought to capture the public's imagination as the champion of anti-corruption. But if he really wants to eliminate corruption that the vast majority of Indians face in their daily lives then he must begin by ensuring that government money reaches where it should, transparently and on time. The tools exist—all he needs to do is roll the dice.