Spending Power Is Not Political Power, Earning Power Is.

The States may be spending more on paper, but how much freedom do adolescents have to spend their pocket money? Spending power is not really political power. Earning power is political power. If the States were to themselves collect the money they spend, I’d call that real political power.

In a recent article, Swaminathan Aiyar argues that “The most excessive concentration of power relates to state capitals, from which power must be devolved to cities and districts.” His point is that the States account for 62% of government spending, which means we must shift the focus of the decentralization debate to within the States.

I beg to differ.┬áThe States may be spending more on paper, but like adolescents, they have not much freedom in how they spend it.┬áSpending power is not really political power. Earning power is political power. If the States were to themselves collect the money they spend, I’d call that real political power. Let’s look at the data.

I’m not sure how Swaminathan Aiyar gets his numbers, but using 14th FC recommendations over FY 2015-16 to 2019-20, this is what I get (excluding aid, loans, etc):

Central revenue expenditure: 60,99,448 cr (32%)
State revenue expenditure: 1,29,80,292 cr (68%)

This means the Centre spends only 32% of the total public money in India. 68% of the money is spent by States. Swami’s numbers are 38% and 62%. Maybe he includes foreign aid to the Centre. Anyway, our numbers are quite close, so let me proceed to make my point.

My point is, while the Centre is spending only 32%, how much revenue is it pocketing in the first place? It’s a whopping 63%. Again, here are the numbers based on 14th FC recommendations for FY 2015-16 to 2019-20

Total revenue receipts: 1,91,04,281 cr
Central revenue receipts: 1,20,62,932 cr (63%)
State revenue receipts: 70,41,349 cr (37%)

What does this mean? The States have to spend 1,29,80,292 cr but they’re allowed to get revenue only of 70,41,349 cr. That is, the Centre is unnecessarily accumulating 59,38,943 cr. What does it do with this unnecessarily accumulated cash? It gives it away as tax devolution (roughly 66%) and grants (34%).

Although Swami makes the simple assumption that the spender wields power, the facts are more complicated. It’s actually the revenue collector who wields power. Since the Centre collects 63% of all revenue, it is possible to conclude that it wields its influence over all 63% of government spending in India.

In short, Swami’s conclusion, that the real decentralization that needs to take place is within the States, is not exactly supported by the facts presented above.