Call it a reward for discipline. The Centre has earned a neat Rs 4,000 crore as interest from states in FY23, thanks to tighter norms for funds lying idle with them under centrally sponsored schemes (CSS).“We have found that there were states who had not paid their counterpart funding (40% share in CSS) for five years.
We were actually financing their cash to some extent,” a senior official told FE.The Centre has managed to retrieve over Rs 40,000 crore lying idle for years after it issued a diktat last year to the states, stating that either they spend the unspent balances accumulated over the years in CSS or return the monies.
The Centre’s pre-condition that states have to fully integrate their treasuries with the its public financial management system (PFMS) to be eligible to get a share in its Rs 1 trillion 50-year interest-free capex loans scheme in FY23 also helped to unravel the extent of unspent funds in the CSS.
At the beginning of March 2023, of the Rs 3.1 trillion released for FY23 under CSS, Rs 1.75 trillion or 56% was still lying with the single nodal agencies (SNAs) of states for the implementation of the schemes.This resulted in the Centre earning around Rs 4,000 crore as its share of interest from such idle funds in FY23.
While these unspent funds were channelled to the relevant schemes last year, the states were asked to deposit the Centre’s share of the interest earned on such funds.With some states using the central funds to finance their fiscal deficit, the Centre also imposed penal interest at 7%/annum from April 1, 2023 on delays beyond 30 days for the transfer of Central share to the respective SNA accounts.
Of the Rs 1.3 trillion interest-free capex loans to states in aggregate in FY24, the Centre has mandated that the first instalment of 33.3% (totalling Rs 33,300 crore for all states) will be released to each state government as per their share on meeting three fiduciary conditions: adhering to branding norms for CSS, sharing of scheme-wise spending data, and proof of deposit of the Centre’s share of the interest earned in SNA account for each scheme.
“This approach to account for each rupee transferred to states has brought a fair sense of realism into the budget-making process. The Centre’s borrowing is actually linked to spending requirements,” the official said, adding that idle funds in CSS were leading to unnecessary interest costs for the Centre.
The SNA model requires states to notify an SNA for each CSS. Under the SNA model, funds are released by central ministries to state governments’ accounts in the Reserve Bank of India. Subsequent instalment to the state can be released only after the transfer of earlier central releases from the state treasury to the SNA and the utilisation of 75% of the central share and state share.With the integration of state treasuries with the PFMS completed last year, the Centre is now able to track fund flows to the CSS by the states and actual spending on a real-time basis.