IBP: International Budget Partnership: Open Budgets. Transform Lives.

Launching a New Budget Project in India
by Vinod Vyasulu
February 22, 1999
Cape Town

MR VINOD VYASULU: The first point I want to make is that there may be a lot of different opinions about what I say, because I come from a rather large country, 1 billion people, 25 states, and 20 languages. It's a pretty massive kind of an operation, and this thing that I call the average about India, it probably hides more than it reveals!

There are three of us here from India at this conference. We speak three different languages at home. To talk to each other, we have to use either Hindi or English, neither of which is our own language. This simply illustrates the complexities we call India.

We have a long tradition of budget analysis in India. That tradition, by and large, applies to the national budget, the budget of the union government of India. It's presented every year in February, it's analysed from possibly every different point of view. The unions have their analysis, the different political parties have their analysis, teachers and restaurant owners, everybody has their own kind of analysis of the budget, and there is a lot of excitement for the month after the budget has been presented. Yet, it is possibly not every different point of view. This is because, as Mistry has pointed out at various times in this meeting, the point of view of the poor is one that they are not in a position to present. For example, after the new economic policy, the prices of food went up very sharply--the index shows it clearly. Yet, the poor can hardly talk or agitate about it--they merely suffer. It is profesors and NGOs who speak up. The good thing is that there are many who speak up--but we are a very small minority and we have no special mandate to speak for the"poor" except our own concerns and values. It is therefore necessary to find ways of enabling the "poor" to speak for themselves--and it is this kind of budget analysis that the three of us here from India would like to promote.

We have a reasonably elaborate parliamentary process. (Warren and Joachim have dealt with it very well in their paper.) After the budget is presented, the parliament breaks into committees which look at it. The system of making submissions to committees is not yet very well worked out, but it is open, there's nothing that stops any group from making their submissions to committees. It's about eight or nine weeks before the committees report back to government and the budget is then passed, often with amendments that the government itself often proposes.

So there is a reasonably open process. There might be a lot of weaknesses, but we are fortunate in that, by and large, there is an open process. It's made more exciting by the fact that before the finance minister presents a budget every year, different people write articles in the newspapers, telling him what he should do, so that there are, again, alternate models of the budget that are in the papers. So all this goes to make a rather exciting debate.

But what happens is that for such a large country, where discussions take place at the national level, the things that matter to people often get lost. We have 25 states and the responsibility for developmental matters rest with the states when it comes to education, health, drinking water, or roads. Now these are the things that matter and these things are at the level of the state governments.

And there is a rather complex process by which the union of India, which is empowered to collect a large number of taxes, spends some of it on its own responsibilities (which include defence and foreign affairs and so on) and passes on a certain amount to the states, which constitutionally is their right. They're not begging for it. The government collects this money and then there are formulas by which it is distributed across states. So the state governments then have two kinds of revenue. They have the revenue which is theirs by right, coming from the national government of India. And then they have money that they can raise from their powers to tax, which include local taxes, sales taxes, property taxes, motor vehicle taxes and things of this sort.

The states then present their own budgets. Very often what then happens is that the state presents a projection of what they will spend; they have so much money and they'll spend this on education, this, that and the other. The problem comes after that. States consist of a large number of districts. How does something that is approved by a state for education, then get divided according to districts? It's not very clear to me. And if an economist like me is confused on this, we are not very well off! This is an area we propose to research in our Center for Budget and Policy Studies.

We discovered in the course of this work a document called the link document, which is really the one that links up the budget as approved by a state government into the allocations that go to the lower levels, the districts, the cities and what not. But what is yet not clear to me is the system by which this happens. It's done somehow in the state cabinet. The state government meets together and then makes decisions about which district gets what allocation.

There are several problems with this, because some of the money that comes down from the government of India, often comes with schemes which are very rigidly defined. For example, they will say that you should give children immunizations and then if you happen to have a district where all the children do not need immunizations because they were already immunized for one reason or the other, they don't get the money. It's not important that that district doesn't get money for immunization but they have many other needs, and they feel that they lost out on something. This is the problem with the "average" district, as with "average India". We have to find ways around this straight-jacket approach the civil services loves.

If you looked at the number of schemes such as this, it would go into the hundreds. So it becomes very, very difficult to trace what is happening to allocated money at the local level.

Secondly, when the government of India designs some of these schemes sitting in the capital in New Delhi, they design something that is rather rigid and very often when you're trying to implement them at local levels, you cannot spend the money on a given scheme, because the particular conditions set are hard to meet at the local level.

We have employment assurance schemes at the local level, which dictate that only a certain percentage of funds can be spent on minimum wages and a certain percentage can be spent on equipment. These percentages have to be adhered to if the money is to come from the higher level of government. It's not very easy to do that, because the local conditions vary so much. In some places you have to spend more on wages and some places more on equipment, for example--deviating from the norm is a requirement to get the work done properly, but in this sytem it is treated as corruption or worse.

Now all this was very exciting for a while, but then we went through a constitutional amendment in 1991 and 1992, by which a third level of government was formally introduced. I've talked of the union of India and I've talked of the states. By this constitutional amendment, we now have an elected local government, what we call the district level. Elections are held, people are represented. They stick together. They are, in every sense, like a local level cabinet.

But what is not very clear in the particular process is that while we now have a local level of government, what exactly is the role they play in budget making? What exactly is the role they play in setting local priorities?

This becomes an issue, because the budgetary processes that were in place before the constitutional amendment have the advantage of already being accepted over a long period of time. The Amendment changed the constitution and introduced local governments. Then local governments asserted their authority, their independence, that they want to do things. But the budgetary process leads to certain tussles between the bureaucracy and the local governments. This is the phase we are at right now.

I can give you a couple of examples of how this works. When a certain amount of money reaches a district, the district should spend it, supervise its spending and make sure it is spent properly. This applies to a wide variety of schemes. A large number of people in the local governments then say: we are not local contractors or a vehicle for supervising the spending process; instead, we'd like to decide on what is important for us. In this particular district you have given some money for drought relief, but our problem is floods, so we want to change it. But the system does not let us do this.

There is an active debate that is going on over these issues, and we have to try and intervene in this process. This is the background in which I got into the whole question of budget analysis.

In the early 1990s, there was a balance of payment crisis, which led to the usual remedies, loans, stabilisation policy, structural adjustments and so on. The standard recipe is to say "I'll cut these expenditures." It's a well known package.

The question that I asked myself, and this while I was at a public policy NGO was: What is going to happen to social expenditure at the state level if the structural adjustment programme is implemented as it is supposed to be? I looked at primary education as a major example.

We were rather lucky. When we actually went down to try and search for the data, I found a time series for 30 years, I couldn't believe it myself. It's a reasonably good time series. We found that, if anything, after the introduction of the structural adjustment programme, in my home state, the expenditures on the social side, if anything, increased a little bit.

There was no way that I could show that they decreased. We started by asking what decreased. There was nothing I could do that would show a decrease, although whether it was a sustainable increase or not, is something that was unresolved.

This particular finding led to several questions. There had been analysis done which showed that for India as a whole, there had been a decrease. If that were true, it meant that some other states must have had tremendous decreases. There was a question then of identifying the states that were doing very badly, because if one state had not only protected social spending, but marginally increased its expenditure in the context of an overall decline, the regional patterns must be quite different.

Now it was not up to me to try and look at other states. The other question was, that if this is really happening, how has this been managed by a state which keeps saying it is short of money? We decided to ask this question at the local level. That led to a second project where we were trying to see how this local government gets money from the state government, how they spend it, what are the dynamics of the process. Then I made a second discovery and that is that at this particular level, data is not so easy to get.

I've been misled by the fact that I got an accurate time series for my state, but it was like discovering a rather interesting architecture, by which you have a second floor of a building, which is the national data source, and then the first floor, is the state level data resources, and then you try to get in at the ground floor and find there's hardly anything there. That is the kind of situation we found.

After about two years, I managed to piece together this information. This information is available, but it's scattered across a large number of departments at the local level government, it's scattered across different officials. Officials get transferred, it's collected for reporting to a higher level of government and, therefore, data that is collected for reporting purposes might not be of much use for analysis.

But after you sort out all this mess, you can still get something. I found a rather interesting outcome in one of the districts we researched. We managed to pull together a time series for elementary education and then I made a rather astounding discovery, that in eight of the ten years from which I had compiled the data, the money that was actually allocated for primary education had not been spent.

Now what does this imply? On the one hand, things like primary education are being neglected, we have a low literacy rate, all that is true. But at the district level, in the one district, which is not a large one, we find that the money that has actually been allocated has not been spent. It, again, leads to a series of questions of a different type altogether. These questions are of the kind Warren mentioned this morning, they are not about how much has been spent, but rather how effectively it is being spent.

The second thing is, when money is allocated but not spent; now obviously there are problems related to the capacity to spend and the capacity of the area to absorb the money. The basic education system probably needs to be strengthened at the local level.

In fact, when I shared this with some of the elected representatives at the local level, they were very surprised. They'd been so used to yelling that they don't get enough money. They thought that there was something wrong with the analysis or that I was being paid off by the opposition! (Everybody laughs). But this is the kind of thing that does happen.

So in the light of this, we made several interesting discoveries about budget analysis. One is that it is a good place from which to position oneself to take part in debates, because you do that with reasonably hard information. The second thing is that it positions us in the areas of our strength. Like Warren, I'm an economist and the budget is, hopefully, something that economists know something about. We are researchers and it's an area where we can enter. You have to work where it is possible for you to make an input.

The next thing is that this is an area where we would like to encourage more debate, and more discussion. Decisions really are for the local people to make. It is not for me to say that in a particular district they require more schools and hospitals. In such decisions, we must make sure that women's voices are heard. That is the kind of decision that has to be locally made through some kind of democratic process.

We found that this will require an organisation that would work full-time on issues surrounding the budget. Budget and budget policies are put together on an ongoing basis. One of the interesting things about budgets is that they keep coming, the process never ends. I was with an NGO which saw itself as some kind of public policy think tank on development issues. When I raised this question of working on the budget internally, of saying ‘look, we can continue this,’ they felt that it would be better to spin off and form another organisation that would look only at budgets rather than turn a public policy think-tank into a budget centre.

So that led to my setting up a separate organisation along with a number of friends. In this particular process, I was helped by having attended the last conference that was held in Washington, because there I came across a large number of people making different kinds of efforts, so that I had some kind of a base of knowledge about what people were doing elsewhere, on which to draw. Putting all this together, we decided to put up another small centre, which would work on budget issues at the local level in the State of Karnatika.

We would have to work on the state level budgets. The idea is to focus on the local level issues. Once we do this, the way we are thinking about it now and which I hope will grow, is to set up usable, user friendly information systems. The idea is to probably gather this information together on a floppy and make it available to anybody, local college students, elected members, NGO's, whoever asked for it. We will be training only to the extent that we will run a couple of workshops to help people use these floppies.

I'm not sure that we can do training on a very wide scale. If it was a different kind of organisation, a larger kind, we could do trainings. Instead we can disseminate the results of our research, we can answer questions and we can, perhaps, enable people to use this information. We would then be an information service. We would also put out position papers, based on some of the analysis that we do, which would start a discussion process, of which we will be one participant. It could be a larger process, but the end result, I think, is something that has to come from the local democratic process.

In particular, we would like to stay away from the positions of the major political parties. Today's opposition is tomorrow's government and we don't want to get caught. We want to keep our freedom in this matter, the freedom to talk to all of them and present papers, retaining the right to criticise tomorrow those who are in power today.

Apart from all this, there's one other thing that we were thinking we could do in the centre, which is a process of the new constitutional amendments. Much of India has been divided, vertically, into two. We talk of a rural India and we talk of an urban India. In urban areas we have the big cities and then the districts and it's always a structure in which decisions are made and reconciled at the top.

The constitutional amendment, for the first time, has made a provision for something we call a district planning committee, which will look at the rural and urban areas in that particular geographic region. This is something new. One of the things that we were thinking of doing in the centre, is to try and put our information together as an input to the newly created district planning committees. In some places they have not yet been constituted, and in some they have been constituted.

In my state they have not yet been formed, but I hope they will be formed very soon. The local laws provide for how they should be constituted. One of the things that we thought our centre could do, is to be an independent source of input and data analysis to the district planning centres.

Unfortunately these DPC's have no expertise of their own. They are political bodies. Whether they will build their expertise up, I do not know. In the beginning I was very clear in explaining that we are not a secretariat of the district, we are an independent body, giving input to them. It is then up to them to listen, to change, to do whatever they like. Our role is to create a base for local debate.

QUESTION: Do the central government and regional governments share taxes or are their tax bases completely separate? My second question is does the newly introduced local government level have a local tax base or does it receive funds from the higher levels?

MR VINOD VYASULU: The income tax, the corporate tax, customs excise duties, these are all taxes that the government of India is responsible for collecting. There are specific rules regarding their distribution. We have a mechanism called a finance commission which is a constitutional body, that makes recommendations about how much can be kept by the union of India and how the rest of it is to be distributed across the states.

The states themselves have certain powers to tax. The most important one is the sales tax. They have some other taxes as well, motor vehicle taxes and so on. Under the new legislation, the local governments have powers to tax which have not yet been used. They have powers to establish local property tax, as well as certain other taxes.

One of the local taxes we have are taxes on the markets. Taxes of this sort go to the local government. In the state in which I've been working, I can not think of any district that has actually used this power to levy local taxes to any significant extent. There is a dispute, because before these bodies came up, the property tax went to the state governments. I think the districts may prefer an arrangement in which the state government continues to collect these taxes and then works out a formula for distributing them.

These are open questions at the moment. I'm not even sure it will be constitutionally correct for the state government to continue collecting taxes which have been assigned to local government, but these are open questions at the moment. There is a strongly held view which says that local governments are too close to the taxpayer and they can't collect taxes. Now that's something that I would like to debate. I would have thought that if you're close to the taxpayer, you know how much they have and what you can get out of them, but it seems to work differently. .

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