India cannot afford to ignore states' public expenditure in 2016

As we enter 2016, I wish to focus on an area that is relatively ignored in the Indian economy: public expenditure. The term not only includes Union-level expenditure scrutinised in Union Budgets, but also state-level and local body expenditure, financed through own resources or through devolution. The year 2015 was a distorted year for this public expenditure.

The year 2016-17 will remove this uncertainty, at least so far as Union-State devolution is concerned. There are now core schemes (there is something called core of the core, but we can ignore that) and optional ones. Every state has to implement a core scheme, but can choose to opt out of an optional one. This is for centrally-sponsored schemes, where states have to provide a matching grant. Other schemes continue as central sector schemes. There are 30 such centrally-sponsored schemes.

But there are three reasons why 2016-17 will be difficult for states. First, there will be recommendations of existing, or new, state-level Finance Commissions to suggest what states should do with the untied funds they will now get, including devolution to local bodies. Second, state-level budgetary nomenclature and heads will have to be completely aligned with this new set of conditions. In many instances, state-level departments will have to be rationalised and harmonised. Third, all these new schemes are "umbrella" ones.

Historically, states have always complained, for valid reasons, about rigidity of templates devised in Delhi. By making them "umbrella", there is greater flexibility, but compliance requirements are also more, since there has to be a greater link to tangible improvement in outcomes.

Today, most states lack the capacity to immediately do all this. Therefore, I suspect few will immediately opt for optional schemes. In 2016-17, as a country, we will have to figure out ways of handling this overturning of an institutional mechanism that has lasted for more than six decades.

To complicate matters, let me now bring in Sustainable Development Goals (SDGs), to be achieved by 2030. There are 17 goals, with several targets under each goal. India has to figure out means of getting data (where targets are specific) and quantifying and means of getting data (where targets are more imprecise). This is especially true in social sectors, where we have a data problem.

Some of it is about a time-lag; the rest of it is about the quality of data per se. Take the phenomenon of GDP numbers. There is no denying that the new GDP series is better than the old one. Nevertheless, we still have a huge problem with unorganised sector data for national income accounts.

It's really satisfactory for organised manufacturing alone. There is discussion about whether we will end 2015-16 with seven per cent real GDP growth or eight per cent. These are real growth numbers.

Though I am simplifying a bit, in all probability, there will be little difference in nominal growth numbers between the two points of view, seven per cent versus eight per cent. In other words, we have a problem with the deflator used to go from nominal to real.

This again underlines the data problem. There is talk of removing tax exemptions, incentivising employment creation or start-ups and introducing satisfactory exit (bankruptcy) provisions. In each such instance, there is a problem with data, partly ascribed to the fact that India is still largely an informal/unorganised (not to be confused with illegal) economy.

While the transition to formality is a function of development and takes time, I think the data problem does need to be addressed in 2016. There was a statistical commission report in 2001.

Sadly, most gaps pointed out in 2001 still remain.

(Courtesy of Mail Today.)