Modi govt tells ministries to be careful in releasing money to states for central schemes

Expenditure Secretary T.V. Somanathan tells ministries to first check if states have capacity to utilise money, and are not parking it and earning interest.

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New Delhi: Last month, the lockdown and the resulting fall in revenues forced the Narendra Modi government to tell ministries to curb expenditure for the first quarter of 2020-21. Now, it has told them to exercise “greater financial discipline and control over the expenditure” while releasing money to states for various central schemes.

In a letter addressed to secretaries of all central ministries on 4 May, Secretary, Expenditure, T.V. Somanathan said ministries should first check if states and union territories have the capacity to actually spend the balance from previous years, and releases made during the current year, before releasing funds to them for central schemes.

The letter also directs ministries and departments to release funds to states only on “need basis”.

States, which are at the forefront of India’s response against the Covid-19 crisis, are already reeling under a financial crunch, and could feel further squeezed if the central government caps the release of funds, which it hasn’t done yet.

The central government provides 100 per cent funding for central sector schemes such as crop insurance, Namami Gange and the Integrated Child Development Scheme, while the states and the Centre share funding for centrally-sponsored schemes like MGNREGA, Swachh Bharat, Pradhan Mantri Awas Yojana, etc.

Relief and incentive packages

The expenditure secretary has also hinted in the letter that more relief and economic packages could be on the way to tide over the economic distress caused by the coronavirus pandemic.

“Considering the loss of livelihood and the economic strain experienced by the industry, several relief measures have already been taken. As the economic impact of Covid-19 global pandemic unfolds, further relief and incentive package would need to be designed and implemented,” Somanathan wrote.

He added that the nationwide lockdown had significantly impacted economic activities, resulting in stress on the revenue mobilisation of the central government. “In this financial year, therefore, it is important that each ministry/department exercises greater financial discipline and control over the expenditure under the schemes and projects,” Somanathan wrote.

The letter added: “For the current year, therefore, we are faced with the twin challenges of not only substantially lower revenue mobilisation, but also higher expenditure demands on the exchequer to accommodate the extra funding requirements of the relief and incentive packages.”

States should not park funds

Somanathan has also flagged states’ practice of parking funds released by the Centre for schemes and earning interest on them. “While the strain on state exchequer on account of lockdown situation prevailing in the country is recognised, it is equally important that central releases to state treasury (in case of CSSs) and implementing agencies (in case of CSs and projects) do not remain parked,” the letter stated.

States parking funds meant for central schemes and earning interest is not a new phenomenon. Somanathan said information available with the finance ministry shows that substantial amount of surplus cash available with several of the states is parked in treasury bills.

“This means that, while on the one hand, the Union pays interest on the borrowings, which are released to the state, on the other, for lack of utilisation, states park these funds in Treasury Bills, earning interest,” he said.