In today's newsletter we talk about the centre's decision to scrap the MPLAD scheme and redirect the money to the Centre's Consolidated Fund.


The Story

The fact that the lockdown has already damaged the Indian economy is evident in the plight of small businesses, rising unemployment levels, and abysmal stock market performance. And to forestall the damage, the central government has announced a Rs 1.7-lakh-crore stimulus package — a promise to spend close to 1% of the country’s GDP to help people, businesses and those on the front-lines fighting this battle against the virus.

Unfortunately, there’s almost unanimous consensus that the 1.7 lakh crore isn’t nearly enough. So it’s time to think outside the box.

And on Monday, a cabinet chaired by Prime Minister Modi decided to cut salaries of all ministers, including himself, by 30% for a whole year. The President, Vice-president, and Governors have also agreed to take this cut. All the salary savings will go into the consolidated fund of India- which includes the government’s revenue generated through taxes, sale of assets, earnings from public sector companies, etc. And since the government bears most of its expenditure from resources mobilized through this consolidated fund, it’s safe to say that the salary cut is a laudable move, even if it’s a largely symbolic endeavour.

But the Government also simultaneously decided to suspend the Members of Parliament Local Area Development Scheme (MPLADS) for two years and not many people seem to be taking it too well.

But why?

Well, to answer this, we need some more context. So the MPLAD scheme began in December 1993 when the former Prime Minister, Narasimha Rao, spearheaded an initiative to offer Members of Parliament the power to execute local projects like building roads, drinking water facilities, primary education systems, etc. in order to meet the needs of their constituencies.

Under this scheme, each MP is entitled to Rs 5 crore per annum and they can redirect resources based on their discretion. With 543 MPs in Lok Sabha and 245 in Rajya Sabha, the MPLADS fund for the two suspended years will amount to around Rs 7,900 crore- money which will go into the government’s consolidated fund right now.

And the government's rationale for scrapping MPLADS here is simple. The country’s finances are a shambles. We’re borrowing way too much money. We don’t know how long the lockdown will last. Tax revenues will take a hit. And we need every penny that we can get.

One could even argue that funds in the MPLAD scheme are often misappropriated by greedy politicians and corrupt businessmen. So redirecting these funds to a centralized authority (at times of crisis) ought to do us a world of good, right?.

Let’s say the virus takes Mumbai by storm. Then the centre will have to step in and allocate disproportionate resources to the region. It wouldn’t be possible with a few MPs and 5 Crores. So you might as well as pool all the money and redirect the funds to where it’s needed the most.

But then the MPs are not happy about this. In fact, Thiruvananthapuram MP Shashi Tharoor spoke out against the move in a long Twitter thread. According to him, MPLADS is the only way for MP's to direct development resources to their constituencies. He spoke about how he used his funds to source the much-needed test and PPE kits for Thiruvananthapuram’s health workers. But now, with the money going into the consolidated fund, he claims he won’t be able to do as much.

And that may not bode well for states and local areas either.

To illustrate this point, Tharoor also said, “To take one example, the Centre has allocated ₹157 cr of Disaster Response Mitigation Funds to Kerala, which has 314 #COVID19 cases, while Gujarat, with only 122 cases, gets ₹662 cr. Will this kind of imbalance also affect the reallocation of MPLADS funds?”

Well, it’s certainly possible. Take state finances for instance.

You see, the centre collects a bulk of the nation’s tax revenue. However, states undertake most of the expenditure on education, health, law & order, etc. To plug this mismatch, the centre transfers a part of the taxes to the States and Union Territories. Now, they redistribute this revenue in a way that ensures all states have enough to spend.

And to do this, the Finance Commission employs a complicated formula to decide which state deserves how much money. Their parameters include population size, land area, differences between the state’s per capita income and that of the richest states, etc. But as you can imagine, it’s not an exact science. For instance, the 14th Finance Commission’s decision to use the 2011 population census data instead of the 1971 data gave rise to much controversy.

Now I know what you’re thinking. Why on earth would there be a controversy over a move that seems perfectly legitimate at first sight? Well, the problem is — several South Indian states argued that their population growth rates had declined between 1971 and 2011 due to investment in education and health schemes. And so they contest that the only reason they are receiving less money from the centre is because they did what they are supposed to do. How is that fair?

So the argument here is that using the MPLAD scheme to finance the consolidated fund will probably bring such disparities to the forefront again. But it doesn’t matter whether you agree with this or not.

Because the bottom line is this — While there’s one camp suggesting that suspending the MPLAD scheme is quintessential to the cause right now, there is another camp suggesting it’s best to leave MP’s to manage the funds themselves. And while it might be very hard to say for sure who’s right at this point, here’s hoping that the funds are deployed into productive avenues either way.

Until then…

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