COVID-19: Are States Justified in Borrowing from Unspent Special Purpose Funds?

The Odisha government's plan to borrow from funds meant to mitigate the damage caused by illegal mining poses a few questions.

On the last day of monsoon session of the state assembly, the Odisha state government tabled four audit reports by the Comptroller and Auditor General (CAG) of India.  

While three of these reports pertained to the fiscal year 2017-18, there is one audit report which presented a look at state finances for the fiscal year 2018-19.

In particular, the report has once again raised concerns regarding the huge unspent balances lying in numerous ‘personal deposit accounts’ (PDA) in the state. While on March 31, 2017, Odisha had reported an unspent balance of Rs 1,097.36 crore lying in 827 PDAs , during the fiscal 2017-18 and 2018-19, unspent balance in the accounts recorded a high jump, touching the figure of Rs 13,509.35 crore as on March 31, 2018, and Rs 17,503.50 crore as on March 31, 2019.

Personal deposit accounts are maintained in the treasuries in the nature of banking accounts. 

Since certain special purpose funds created by levying a specific cess such as Building and Other Construction Workers’ Welfare Cess is ‘non-lapseable’ and are not part of consolidated fund (budget), we often find them lying in Public Accounts as cash balances of the state. Public Accounts are considered as committed liabilities of the state and may get invested in the Government of India treasury bonds with Reserve Bank of India. 

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Coming back to Odisha, a very high portion in these balances pertains to the Odisha Mineral Bearing Area Development Corporation, with Rs 11,568.18 crore (i.e. 85.63%) as on March 31, 2018 and Rs 14,328.50 crore (i.e. 81.86%) as on March 31, 2019.

The CAG’s remarks on these unspent balances assume particular importance because the current COVID-19 economic crisis has created an environment wherein state governments have resorted to borrowing from even a few special purpose funds that show up huge unspent balances. 

As Meera Mohanty’s news report for Economic Times indicated in April 2020, the Odisha state finance ministry was preparing paperwork for accessing the unspent cash balance lying in special purpose funds, such as Odisha Mineral Bearing Area Development Corporation (OMBADC) as well as Compensatory Afforestation Management and Planning Authority (CAMPA).

Citing Odisha’s finance secretary, Ashok Meena, the news article notes that the state was hoping to borrow around Rs 12,000 crore from OMBADC and CAMPA.

Quite similar to this thinking, Maharashtra’s finance secretary (expenditure), Rajiv Kumar Mittal, confirmed while speaking to Prasanta Sahu of the Financial Express that since the state was expecting a huge shortfall in revenue earnings in the first three months of 2020–21 fiscal, it may go for borrowing from cash surpluses of public sector undertakings (PSUs). However, Maharashtra’s finance secretary had not elaborated on the plans further, stated the news report.

Delays associated with spending special purpose funds  

In February 2020, Odisha’s planning and convergence minister Padmanabh Behera said in a written reply in Vidhan Sabha that “of the total collection of Rs 9,501.48 crore under District Mineral Foundation (DMF) contributions from mining lease holders, by January end only Rs 2,794.19 crore has been spent”. 

Credit: File photo

Thus, the snail-paced expenditure from DMF had left an unspent balance of Rs 6,707.29 crore by end of January. In his reply to assembly members, the minister also told that only Rs 1,143 crore had been utilised on local area development projects out of Rs 16,520 crore lying with illegal mining penalty fund, OMBADC.

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OMBADC was constituted in 2014 with contributions paid by mining lease holders on the diversion of forestland for mining purposes. Furthermore, the Supreme Court had directed the state government in its order dated 2nd August 2017 to collect the penalties on illegal mining and deposit the money into OMBADC. 

The District Mineral Foundation (DMF) was an outcome of an amendment to Mines and Mineral (Regulation and Development) Act (2015), which envisaged a specified percentage of royalty to be paid into decentralised fund which is solely used to finance local areas development projects to benefit mining-affected people in consultation with affected communities.

Protests emerge from mining-affected districts

On May 1, Rajendra K. Sahu reported in the English daily Pioneer that there is a strong reaction among different sections of the people in Keonjhar district over the proposed borrowing by the state government from the mining funds. The Pioneer report quoted BJP MLA Mohan Majhi stating that the state government had already taken 30% of DMF funds to fight COVID-19, and he would oppose any further move to withdraw more amount from the corpus of DMF/ OMBADC and write to the Centre to not allow the state Government to withdraw more. 

The media report also probed if the state government’s decision to borrow from OMBADC had been accompanied by wide consultations with political and social leaders and showed that “former minister and senior leader of the ruling party from Keonjhar, Shri Badri Narayan Patra said he was not aware of such a decision of the Government”.

On July 22, Sambad carried a news report which quoted Odisha chief secretary Asit Tripathy sharing the decision of a cabinet meeting chaired by the chief minister that voted for further borrowing from OMBADC and CAMPA. The report also included Tripathy’s claim that the state had already received approval to the proposal to borrow more from these two special purpose funds from the Supreme Court appointed observer, Justice Ananga Kumar Pattanaik, and the CAG of India.

This news report also underlined that the state government had already borrowed Rs 1,000 crore from these two funds till then.

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On September 27, Orissa Post reported that Keonjhar Vikasha Manch, an organisation fighting for mining-affected communities, had alleged that the state government had had taken Rs 16,526 crore out of a total Rs, 16,621 crore – meaning a whopping 99.6% of the total corpus – in the OMBADC as loan. 

The news report also claimed that Keonjhar Vikasha Manch had sent a letter to Justice Ananga Kumar Pattanaik pointing out this discrepancy, but Justice Pattanaik in his reply said that the OMBADC fund has been given to state government as per the guidelines of the Supreme Court and its interest will be collected every six months.

Odisha government’s volte-face 

During the fiscal year 2017–18, Odisha government had borrowed Rs 12,013 crore from the market at interest rates ranging from 6.94% to 8.24%, even as it had a cash balance of Rs 25,305 crore. In March 2019, when CAG of India had pointed out to the state why it did not follow the 13th Finance Commission recommendation that the states with large cash balances should make efforts to utilise their cash balances before resorting to fresh borrowings, the state government had filed a reply which argued that it could not tap into cash balance since these cash balances included tied up balances like OMBADC fund, State Disaster Response Fund, Consolidated Sinking Fund, Guarantee Redemption Fund, etc., which can not be used by the state for general purpose expenditure.

While taking this reply on record, CAG of India in its Audit Report on Odisha (State Finances) for the year 2017-18 (page 28) had also called out the smart avoidance of admitting financial imprudence by Odisha and stressed upon the fact that “cash relating to OMBADC fund was only Rs 11,568 crore” and “even after deducting the tied up balances like CSF, GRF, etc., the state was still left with an untied cash balance of more than Rs 13,000 crore”.

Thus, the bureaucracy of the finance ministry in Odisha also knows that by borrowing from special purpose funds like OMBADC and CAMPA to meet with the revenue gap arising from the economic crisis, it has staged a quick U-turn.

Even if this move may save the state government from the ignominy of the fiscal imprudence it had exhibited in fiscal 2017-18 — by resorting to borrowing from the market at higher interest rates — it may attract criticism and even probably legal challenges since this time the state government has borrowed a lion’s share from special purpose funds.

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Mining-affected communities did not cry foul initially when 30% of the unspent balance funds lying in District Mineral Foundation Trusts were channelised into fighting pandemic, but this move of channelising OMBADC and CAMPA funds may sound very paradoxical to them. Those who had indulged in illegal mining for almost a decade and had deprived the state of mining royalties and had to pay penalties (after Supreme Court direction) amounting to Rs 15,326.64 crore, also had ironically names like the mining PSU – Odisha Mining Corporation. For a full list of those who had violated the law and had to pay penalties during the year obtained under Right to Information, see this blogpost by Odisha Soochna Adhikar Abhijan. 

Social activists may argue that when the state borrows from OMBADC, those penalties that were paid by likes of OMC, ironically becomes available to pay salaries to government employees who had looked elsewhere when such a large scale illegal mining and unauthorised transportation or stocking of illegally mined minerals took place.  

Thus, this move may spark more discontent amongst mining-affected communities who have often complained how the funds meant for them and funds that had promised to involve them into planning and decision-making have turned out to be more like a mirage.

Himanshu Upadhyay is an Assistant Professor at Azim Premji University.