Unshackling the states from central schemes

A large number of central schemes end up curbing the autonomy of states

n some ways, the thunder of finance minister Arun Jaitley’s first full-year budget was stolen by the Fourteenth Finance Commission (FFC) report. Released just a few days before the budget speech was made, the FFC brought in significant changes in state-centre finances by increasing the devolution to states from 32% to 42% of the net Union tax receipts. With fewer funds to disburse, the Union budget delinked as many as eight centrally sponsored schemes (CSS) from the support of the Union government. Many others were now to be implemented with altered financing patterns.

A recent report of a sub-group of chief ministers offers the Union government an institutional framework to further consolidate the salutary trends in fiscal devolution under the new emblem of cooperative federalism. Over the years, proliferation of CSS has greatly curbed the autonomy of the state governments. The greater the devolution through these one-size-fits-all CSS, the lesser is the untied fund available to the state governments. The budget of 2014-15 made provisions for 66 CSS out of which 17 were declared ‘flagship schemes’. The non-flagship schemes received low budgetary provisions spread thin among sectors and between states. The states had to still implement these schemes in order to avail of the matching grant from the centre.

The sub-group constituted under the aegis of NITI Aayog “to examine the current CSS and recommend their suitable rationalization” has suggested a better and lighter framework. The sub-group has recommended pruning the number of CSS down to 30 from 50 in 2015-16 and 66 the year before. This step, if implemented, will be a welcome part of the next budget.

The sub-group has further asked the CSS to be divided into core schemes and optional schemes. The core schemes will require mandatory implementation by the states, and the centre will fund 100% share for the Union territories, 90% for the eight north-eastern (NE) and three Himalayan states, and 60% for the rest of the states. The corresponding figures for the optional schemes are 100%, 80% and 50%, respectively.

In the proposed structure, the states will have the flexibility of choosing the optional schemes they want to implement. The fund meant for the scheme opted out by any state can be used in other schemes. The states will be free to deselect some components of a scheme they are implementing. The sub-group also recommends increasing the flexi-funds—meant to provide greater flexibility to spend on diverse requirements under the overall objective of the scheme—from 10% to 25%. In short, the mantra is to unshackle the states from the firm grip of central schemes.

Interestingly, the use of the phrase “8 NE and 3 Himalayan states” instead of “special category states” has important implications if this report is accepted. One, it means the generous terms of funding from the Union government for central schemes in these states is likely to be retained. Two, the discontinuation of block grants undertaken in 2015-16 seems irreversible. The special category states were disproportionate beneficiaries of the block grants—including Normal Central Assistance, one-time Additional Central Assistance, Special Central Assistance and Special Plan Assistance—which have now been subsumed into the increased FFC devolutions.

Three, the phrase “special category” may eventually be phased out. The formulation of these states as “8 NE and 3 Himalayan states” is an inkling in that direction. Four, this will bring a much-needed end to the practice of states queuing up for special category status. Some sops extended to special category states do not do away with the need for these states to improve their state capacities and public finances. On 29 October, at a press conference in Patna in response to a question on Bihar’s demand for special category status, Jaitley remarked that the era of special category status to states is over. Unsurprisingly, the chief ministers of the special category states—both part of the sub-group and otherwise—are not very pleased.

The constitution of the sub-group was an excellent example of involving the states in the decision-making process. The next budget provides the central government to further empower the states by pruning the number of CSS. The eventual elimination of special category status will also do good to the very states which are the current beneficiaries.

Should the next Union budget further reduce the number of centrally sponsored schemes?