Curiously, although the report of the sub-group of chief ministers to rationalise the centrally-sponsored schemes was submitted quite some time ago, it has not received the attention and has not been subjected to critical analysis. This is a bit surprising because, it has important bearing on the provision of essential public services. The committee was appointed in March in the aftermath of increase in tax devolution by the 14th Finance Commission (FFC) and reduced fiscal space for the Union government and the consequent reduction in the central assistance for state plans, from R2.78 lakh crore in FY15 (RE) to R2.04 lakh crore in FY16 (BE).
The analysis by the FFC showed that Union government’s expenditures on state subjects increased from 14% in 2002-05 to 20% during 2005-11 and that on the Concurrent subjects increased from 13% to 17% during the same period (Para 6.17). This, and considering the fact that the terms of reference did not require the Commission to confine itself to non-plan revenue expenditure requirements of the states, led the Commission to recommend increase in the states’ share in the divisible pool of taxes from 32% to 42% so that the states are enabled better to provide public services in their domain in a more satisfactory manner rather than depending on the transfers tied narrowly to specific schemes. Consequently, the fiscal space available for the central schemes got reduced and therefore, it was recommended that the schemes should be redesigned to limit them to essential merit goods such as elementary education, healthcare, drinking water supply and sanitation with adequate funding to achieve the desired outcomes rather than spreading the resources thinly across several schemes. The Commission recommended that design and implementation mechanism should be decided in the spirit of cooperative federalism by a committee comprising of representatives of the Union, the states and domain experts.
The principles of the transfer system requires that the general-purpose transfers should be designed to enable the states to provide comparable levels of services at comparable tax rates on the functions assigned to them, and specific-purpose transfers are required to ensure minimum standards in respect of highly meritorious services with very high degree of externalities. It is necessary to provide adequate funding to these to achieve the prescribed minimum standards across the country. This implies that the number of schemes for assistance should be very few, the service level in respect of those should be benchmarked, the cost of providing them should be estimated, and the shares of the Union and different states should be worked out such that the prescribed minimum is ensured throughout the country. Given that it is virtually impossible to fully offset the fiscal disabilities of the states with low revenue capacity, the ability to make matching contributions would be different across states and the incentive to make their own contributions vary. Therefore, to ensure minimum standards of these services, varying matching rations across states will have to be worked out. For example, the requirement to equalise elementary education or health standards in Bihar is much higher than in Kerala and therefore, to ensure that the citizens in Bihar get the prescribed minimum standards in these services, the matching requirements in Bihar will have to be much lower. In a situation where the standards of services vary widely, ensuring prescribed minimum standards of services in all the states would require significant equalisation and a more effective way to achieve this is to vary the incentives. Therefore, matching requirements from the states which already have achieved the prescribed standards could be much higher than for those where a significant catching up to do.
From this perspective, the report of the chief ministers’ committee is disappointing. Rather than choosing a handful of schemes and linking the transfers to the achievement of outcomes, it considers schemes in virtually every function assigned in the state List and even some of those in the concurrent List as core and seeks their continuation! The so-called core sector includes education, health, nutrition, women and children, Swachh Bharat, rural connectivity, agriculture, access roads and communication, fisheries, housing, urban transformation, law and order and justice delivery system. Apart from these ‘core’ sectors, the committee also recommends that the remaining schemes should be pooled into optional schemes. The committee further recommends that investments in the core sectors should be maintained at least at the present level. It is also recommended that the matching ratio should be uniform with the Union and state shares specified in the core sector at 90:10 in the case of northeastern and Himalayan states, and 60:40 in the case of the rest, and at 80:20 for the former group and 50:50 for the latter in the case of the optional sectors. There are confused signals from the recommendation as well: On the one hand, it recommends that states should be given flexibility in implementation. If so, what is the need for recommending that the support for the grass-root workers like ASHA, anganwadi, contract labour and teachers be maintained at the present level?
These recommendations cannot lead to rationalisation of centrally-sponsored schemes to improve their effectiveness in ensuring minimum standards of public services in respect of extremely important meritorious public services with significant inter-state externalities. The focus of the committee seems to have been to secure at least the level of past assistance and not improving the outcomes from the funds spent. Adopting multiple schemes could be politically appealing in terms of appeasing large numbers, but it cannot translate into ensuring public services across the country. It is necessary that, when the funds are limited, prioritisation be done, and the funds should be utilised to achieve equalisation in the most important public services such as elementary education, healthcare, water supply and sanitation and anti-poverty interventions by adequately funding them. That is the reason why the FFC wanted that the number of schemes should be kept to a minimum so that equalisation in outcomes can be achieved. Most of the so-called core sector schemes are in the state List and the objective of increasing tax devolution by the 14th Finance Commission is to enable the states with adequate resources so that they can make adequate allocations to public services falling in their domain. By coming up with an expanded list of core sectors and stipulating that the existing schemes in these sectors should continue, the committee has missed an opportunity to rationalise the schemes to ensure prescribed minimum standards of public services across the country.
The author is emeritus professor, NIPFP, and is a council member of Takshashila Institution. E-mail: firstname.lastname@example.org