The Shifting Political Economy of Centrally Sponsored Schemes

Action now shifts to the states which will have the first real opportunity to react to a new, and still evolving fiscal landscape

One of the most dynamic features over the last three budgets has been the apparent consolidation of centrally sponsored schemes (CSS) — schemes like MGNREGA and National Health Mission, which are formulated by the Union government on subjects from the State List to encourage states to prioritise on specific areas. Continuing this trend, the latest Union budget further consolidated the number of CSS to 30.

The changes in CSS started last financial year with a higher tax devolution recommended by the Fourteenth Finance Commission (FFC). This higher tax devolution without a corresponding increase in revenue receipts meant that the Union government restructured its approach of running a plethora of central schemes under state plans. Specifically, the Union government decreased its own support for some of them in last year’s budget. In a few cases, the government discontinued some centrally sponsored schemes altogether, bringing down the total number of CSS from 147 to 66.

On the other hand, the response of the states to the question of CSS restructuring was two-fold. Initially, states had submitted to the FFC that proliferation of CSS impinges upon their fiscal autonomy as they do not have any say in design of these schemes and face many restrictions in their implementation (Finance Commission 2015: 88). At the same time, states also clearly demonstrated an endowment effect — they continued to see CSS an important source of money that they weren’t willing to give up.

To resolve this paradox on CSS, a sub-group of chief ministers on the rationalisation of centrally sponsored schemes was constituted as part of NITI Aayog in March, 2015. The proposals in the recent Union budget on vertical distribution of specific purpose grants are entirely the handiwork of this sub-group. These proposals are summarised and critiqued below:

1) The number of CSS have gone down from 66 to 30: This figure is going to garner a lot of media attention. What will go unnoticed is that the consolidation does not mean that 36 schemes have been eliminated. Rather, there are hardly any schemes that have been discontinued. The reduction has come about as multiple schemes have been clubbed together into one umbrella scheme for each sector. This serves the states well, who will now have a greater say over implementation, even though their demand of flexibility in implementing the sub-schemes has not been agreed to. From the Central Government’s perspective, 30 schemes is still a large number. A better approach might have been to go all out on only on a handful of high-priority areas like health or rural development for a pre-defined time and subsequently moving on to other areas.

2) The allocation for these 30 schemes has increased in absolute terms: The allocation for CSS has increased from 2.08 lakh crores to 2.34 lakh crores (an increase of 12.5% in absolute terms). But states are unlikely to talk about this increase in their respective budgets. Chief ministers in their budget speeches will instead express disappointment over the decrease in the number of CSS.

3) Changes in funding pattern for CSS:  There has been a change in funding pattern for CSS for the second straight year. This year, CSS have been divided into three new categories. The first category — ‘Core of the Core schemes’— comprises of six umbrella schemes of utmost priority. This includes MGNREGA and other programmes for social protection. There’s no change in the funding pattern for such schemes.

The second category—19 ‘Core schemes‘ will be shared in 60:40 ratio between the Union and the states and in the ratio of 90:10 for the eight North Eastern and three Himalayan states. The schemes here comprise of essential interventions as the National Development Agenda for realizing VISION 2022 (Sub-group report, Niti Aayog: 24).

The third category comprises of three ‘optional schemes‘, which the states can implement if they choose to.

This changed pattern is likely to be featured in all state budgets. Chief ministers will claim that the state’s fiscal plans will be affected, mainly on account of  increasing contributions to those ‘Core schemes’ on which they otherwise spent less than 40%. A trick that this budget missed is shifting to a regime of specific purpose open-ended matching grants instead of a fixed 60:40 ratio. The fixed ratio will mean that states will be compelled to implement these schemes just to avail of the 60% assistance, even if they have done considerably well in a particular area. For instance, Kerala might be reluctant to shift its focus from primary education to other priority areas even though it has done considerably well in the former, just because of the political economy around the 60% assistance promised by the central government.

The three proposals above, on the balance, seem to present a pretty good deal for the states. But the question is: what is it that the Union government hopes to gain out of this restructuring? After all, it adopted the recommendations, without modifications, of a sub-group of nine CMs, six of whom were not from the ruling party at the Centre!

The Union government has essentially got the nod of states on just one issue—essentially a post-dated cheque from states that they will agree to shift from expenditure-based monitoring to outcome-based monitoring for these schemes.Ideally, the Union government should have opted to focus only on a few key priorities, but for now it appears that any major change has been put at abeyance until the end of the 12th plan. Come next fiscal,we might see a further restructuring of CSS.

For now, the action now shifts to the state budgets. Last year, states hardly had any time to react to the changes proposed by the FFC, and they went ahead with changes at the margin to their commitments. This year, they have a better idea of the fiscal space available to them and are in a better position to decide and shape their own priorities.

Pranay Kotasthane is a Research Fellow at The Takshashila Institution. He can be reached on Twitter at @pranaykotas.