Even if all the states agree, the Centre might not go beyond what the Finance Commission has suggested
Rationalising specific-purpose transfers with or without matching requirements from the Union to the states has had a long history. Until 1969, Plan assistance was not formula-based. Both the volume of assistance and its grant-loan components were determined by the Planning Commission, according to its judgement on the extent of the revenue-capital mix. The dissatisfaction with such an arrangement led to the adoption of the Gadgil formula in 1969.
However, the Union government continued to alter the allocative priorities of the states by introducing specific purpose transfers with matching requirements under Central Sector and Centrally Sponsored Schemes (CSS) on the subjects under the state and concurrent lists in the Seventh Schedule to the Constitution. In 1969, the number of such schemes was 45, but by the beginning of the Fifth Plan in 1974, it had increased to 190.
The Narasimha Rao committee that went into the issue of rationalisation set the principles for the continuing the schemes as (i) those required ensuring minimum standards of services and poverty alleviation; (ii) the services with inter-state spillovers and (iii) the activities which are innovative and pace setting with demonstration effect. The Baijal Committee transferred as many as 113 schemes and even after this, there were 236 schemes left. That did not deter the Union ministries and departments from creating more schemes and by the Ninth Plan, there were 360 Central schemes.
During the 12th five-year Plan, there were 147 schemes which were consolidated by the BK Chaturvedi committee into 66. The rationalisation exercise provided 10% of the allocation under the scheme as flexi-fund. However, a closer look at the report shows that consolidation of most of the schemes was done merely by making them sub-schemes within the major schemes. In terms of the assistance, grants to these schemes constituted almost 37% of the total current transfers to the state in 2014-15.
The Fourteenth Finance Commission’s analysis showed that Union government’s spending on the subjects in the state list increased from 14% during 2002-05 to 20% during 2005-11 and that on the concurrent list increased from 13% to 17% during the same period. Taking into account the concerns expressed by the state governments on the growing intrusion of the Union government into the states’ domain through various Central schemes, and taking a consolidated view of the plan and non-plan requirements of the states, the Commission increased the tax devolution to 42% as compared to the 32% recommended by the Thirteenth Finance Commission.
In its assessment, the Commission also indicated that as a result of the its recommendations, the total transfers to the states in the divisible pool would increase from 61.9% in 2014-15 (BE) to 63.9% in 2019-20. Furthermore, the Commission made a recommendation that the design and implementation of the schemes should be reworked in the spirit of co-operative federalism in which the representatives of the Union ministry, the state governments and domain experts should participate.
The Union government has embarked on yet another exercise for rationalising and consolidating the Central schemes, and this time, the important difference is that the exercise has been undertaken under the aegis of the newly-instituted NITI Aayog, in which the States are involved. The sub-group of chief ministers under the chairmanship of the chief minister of Madhya Pradesh constituted by the NITI Aayog has been mandated to reduce the number of schemes from the prevailing 72 to about 30.
The Union government, in its budget for FY16, classified the Central schemes into three categories. It continued 34 schemes with the same pattern of assistance as in the past and another 20 schemes with a changed pattern of assistance requiring larger contribution from the States. If the sub-schemes under these 20 schemes are taken into account, they actually number 54. The budget delinked and dropped 39 schemes from support and since the Finance Commission’s assessment included the plan revenue expenditure, important items delinked from assistance include normal central assistance for plan, special central assistance for plan, special plan assistance and both state and district components of backward region grants fund.
In terms of the volume of assistance, the grants given for central schemes (excluding the normal central assistance for plan) as a ratio of GDP is proposed to be reduced from 1.94% in 2014-15 (RE) to 1.39% (BE) and as a ratio of total transfers the reduction is from 35.5% to 23.7%. The major items where significant reduction has been proposed are Rashtriya Krishi Vikas Yojana, programmes on drinking water and sanitation, Sarva Shiksha Abhiyan and mid-day meal schemes and Integrated Child Development Services (ICDS).
The analysis of the reallocation done in the budget in response to the Finance Commission’s recommendation shows that much more thinking needs to be done to avoid compressing grants for the provision of services with significant inter-state externalities or needed for merit good reasons. In respect of such services, it is important to ensure minimum service standards across the country. From this perspective, the NITI Aayog’s Committee has a clearly defined task. However, while it may be possible to reach consensus in reducing the number of schemes, reducing the volume of assistance may not be easy.
The analysis of schemes with unchanged pattern of assistance shows that just four schemes, MGNREGA, Prarambhik Shiksha Kosh, PMGSY, National Social Assistance Programme along with the assistance for externally aided projects constitute 75% of the grants given in this category. Similarly, a few schemes on agriculture and irrigation, drinking water, National Rural Health Mission, housing and ICDS constitute about 70% of the assistance in the category in which the pattern of assistance will be changed and consolidation of these schemes too should not be very difficult.
The problem will be in deciding the pattern of assistance in the case of second category of schemes. While the Union government would like to substantially reduce its share in funding these schemes, the state governments would like to ensure that the prevailing pattern of assistance should at least continue. Consensus is possible only when the states’ continue to get the same volume of financing and pattern of assistance. The question is whether the Union government would be willing to allocate additional resources to the states, beyond what has been indicated in the Finance Commission’s report.
Evolving a consensus over the pattern of funding will not be easy. Even if consensus is reached among the states, there are questions as to whether the Union government would be willing to go beyond the assistance for central schemes indicated in the Finance Commission’s report when it has already accepted its recommendations increasing the tax devolution from 32% to 42%. While the occasion provides an important opportunity to rationalise the transfer system, challenges are formidable. Surely, these are interesting times and restructuring the Centrally Sponsored Schemes is surely a vexing problem that needs to be tackled.
The author is emeritus professor, NIPFP, non-resident senior fellow, NCAER and adviser, Takshashila Institution. E-mail: email@example.com