The government’s commitment to prudent fiscal management and consolidation of public finances is unmistakable. FE has recently reported that the Centre has managed to save a considerable Rs 75,000 crore in interest costs in the five years through FY24 thanks to efficient cash management, a remarkable feat given the spike in accumulated debt after the pandemic. Market participants and rating agencies recognise the government’s fiscal efforts and transparency. Tighter controls have been kept on government borrowings, despite pressing challenges, and reasonably strong public capital expenditure. Over and above these, a new element of the policy is “just-in-time” release of funds for assorted centrally sponsored schemes (CSSs) through the Reserve Bank of India, instead of state-government treasuries. The objective is to curb “floating of funds” and fund diversions. The so-called Single Nodal Agency-SPARSH model also includes a procedure for return of unspent balances lying with state treasuries and state-level nodal agencies, with penal interests being charged for violations.

The Centre is certainly entitled to keep better track of Budget funds and ensure their optimal use for the intended purposes. However, a review of some of the criteria for allocation and release of CSS funds may be warranted. This is especially because the Centre has assumed a much greater — if not exclusive — role in deciding what the CSS funds are to be used for, after the dismantling of the Five-Year Plans. Tighter regulation of CSS funds has resulted in savings and imparted a push to economic reforms, but it also led to significant under-utilisation of allocated sums in recent years. According to the revised estimates of 2024-25, spending on CSS is estimated to be lower by over Rs 90,600 crore (18%) over the Budget estimates.

States now have to pitch in with 40% share to be eligible for CSS funds. While fiscal indiscipline and a tendency to pander to the electorate with largesse do exist, in a country with wide regional disparities, states could legitimately have development priorities different from the ones specified under the pan-India norms imposed by the Centre. Many states may want to spend according to local realities. Moreover, the stricter CSS norms coincide with a situation where tax transfers by the Centre to the states have hovered around 30-33% of the gross tax receipts in recent years. This is at variance with the Finance Commission (FC) objective of higher devolution to states to address the vertical (Centre-state) fiscal gap. The mandated 41% share of the divisible tax pool for states is inevitably honoured, but with the growth of the pool itself being compressed. Also, untied grants to states now have a much-reduced share in composite transfers (CSS grants exceeded untied FC grants by over 100% in FY23, for instance).

It is in this context that many state governments complain about receipts of CSS funds being far lower than the original Budget outlays, and/or being deprived of their “legitimate shares”. The West Bengal government, for instance, has highlighted that its rural housing scheme is entirely funded out of the state exchequer, in the alleged absence of central funds; the Tamil Nadu government is peeved at being allegedly deprived of Samagra Shiksha Abhiyan funds, and Kerala has raised the issue of an impractical timeline to spend a Rs 529-crore capex loan granted as Wayanad landslide disaster relief. Fiscal prudence is indubitably a worthy goal, but it should not be taken to an extent that states’ spending abilities are hit.