This pandemic could provide perfect political cover to try a decentralised approach for the coming year, such as using untied grants. This could, in turn, offer crucial lessons for the long-term evolution of India’s fiscal architecture.
By Sharmadha Srinivasan & Prakhar Misra
With India headed for a recession due to Covid-19, there will be more pressure on the already strained fiscal capacity. The federal nature of India’s fiscal framework—particularly when it comes to centrally sponsored schemes (CSS)—exacerbates the issue. This pandemic could provide perfect political cover to try a decentralised approach for the coming year, such as using untied grants. This could, in turn, offer crucial lessons for the long-term evolution of India’s fiscal architecture.
The Centre controls welfare funding to states through many instruments, one of which is CSS. These are partly funded by the Centre but implemented by states. However, they are becoming a hurdle in the fight against Covid-19. Their simple structure is rather deceiving. While there are only 30 CSS, many are umbrella schemes encompassing numerous sub-schemes. The Centre provides funding in a pre-decided ratio that varies by state and by importance. For a core scheme such as Swachh Bharat, the fund-sharing pattern for the Centre with most states is in the ratio of 60:40, while for MGNREGA the general category states will put in 25%. The total outlay of these schemes in the current Budget is Rs 3.4 lakh crore (11% of the Union’s total Budget expenditure). In times of pandemic, there are at least three good reasons why these schemes should be reworked.
First, states are scrambling for financial resources and finding it hard to meet their end of the bargain when it comes to these schemes. They are thus unable to unlock the Centre’s share. Even for rich states such as Maharashtra and Kerala, the grants constitute 8.7% and 7.8%, respectively, of their total revenues. This money is essentially locked up. States such as Odisha have directed their departments to not allocate money to these schemes until the Centre advances its own share of funding.
On the other hand, the Centre, given the collapse in revenue mobilisation, has decided to release funds on a ‘need basis’. Even if states attempt to meet their share of funding for CSS, the cut in budgets will hurt their capital expenditure. As an RBI report points out, the cut in capital expenditure has been a steady trend for the past few years to manage fiscal constraint. This move will exacerbate the retrenchment. All of this only increases budgetary dilemmas at the state level, hurting the fight against the pandemic.
Second, even if states were to allocate funds, the transfer from the Centre would have to wait until pre-imposed conditionalities were met. These conditionalities, in many cases, act as roadblocks. Consider the case where the Centre allocated a substantial amount to Bihar for school uniforms under the Sarva Shiksha Abhiyan, but the state had its own programme for this (Kapur and Srinivas, 2019). Given the strict guidelines, Bihar can’t reallocate the money for other purposes.
Or take the CSS programme for development of infrastructure for the judiciary (court halls, residential facilities etc). One of the criteria for allocating funds is the number of old cases pending with the subordinate judiciary. This almost sets up a perverse incentive. In other cases, such as Ayushman Bharat, the Centre sets guidelines for identifying beneficiaries that either overlap or prove less comprehensive than existing state insurance programmes. Devising stringent guidelines with a one-size-fits-all approach—with programmes such as the National Health Mission—would be counterproductive to fight the pandemic.
Finally, centralising fiscal decisions does not make for effective crisis response. As Yamini Aiyar of the CPR pointed out, flexibility in allocating resources and implementation for these schemes is crucial for states. For example, if a state has a higher influx of returning migrant workers, it should be allowed to devote more funds to implementing MGNREGA. Thus, funds that may not be used—such as money for mid-day meals at schools that are now shut—should be utilised in other ways to ensure well-being of people. Unfortunately, the CSS structure does not allow for such reallocation.
Covid-19 provides an opportunity to push for decentralisation in important fiscal areas. A few solutions have been proposed. One is to completely abolish all CSS except ‘core of the core’ schemes and release untied grants to states this year. States can also choose the schemes they wish to prioritise and allocate their share of funds accordingly. Another way is for the Centre to release its share of funding for all CSS, and relax all conditionalities. This would serve as an additional source of revenue in a year where states are grappling with finances.
There will be concerns about accountability. Given this, the untying of grants could be for a limited time to fight the pandemic, and subject to year-end review. The review can determine if a decentralised model works better. Whatever form the reform takes, it is critical the government deals with structural issues plaguing fiscal federalism in India.
Srinivasan is an associate and Misra is a senior associate, IDFC Institute