In India’s federal structure, the Centre plays a pivotal role in financing and monitoring social welfare programmes and ensuring that all states have adequate resources. Between 2000-2018, the Centre spent over Rs 14 lakh crores on social services. A significant portion of this expenditure is met through Centrally Sponsored Schemes (or CSS)– a specific purpose transfer, from the Centre to states.
The dominance of CSS can be seen in their sheer numbers and the quantum of money flowing through them. The CSS were designed as an additional top-up to help states with human development deficits. Over time, however, the design and proliferation of CSS undermined the very rationale it was based on – fiscal equalisation to ensure minimum standard of public services for all citizens.
Good, in principle
Richer states with better administrative capacities have been able to capture a larger share of CSS funds, resulting in misallocation of resources. Analysis by the Economic Survey 2016-17 of the six top CSS (Pradhan Mantri Awaas Yojana, Sarva Shiksha Abhiyan, Mid-Day Meal, Pradhan Mantri Gram Sadak Yojana, Mahatma Gandhi National Rural Employment Guarantee Scheme and Swachh Bharat Mission) found that under no scheme did the poorest district receive even 40 per cent of the total resources.
Moreover, the centralised nature of CSS often makes it an inefficient tool to address state-specific needs and undermines state autonomy.
Recognising these limitations, numerous attempts have been made to restructure schemes and restore them to their rightful place – the states. A Committee of Chief Ministers under the aegis of the NITI Aayog was created to restructure the CSS. It made several recommendations including scheme rationalisation and transparent criterion for inter-state allocation.
The changes that followed were minimal. While schemes were reordered to “umbrella” programmes, within each umbrella programme, sub-schemes continued as before. As per the Union Budget 2016-17, even after the creation of 28 umbrella programmes, there were 950 Central Sector and CSS sub-schemes accounting for about 5 per cent of the GDP and 9 per cent of the total central expenditure. More importantly, there was no real change in the design or implementation of the schemes.
A call for rationalising CSS has again gained momentum. The Narendra Modi government recently committed to evaluating all CSS before fresh appraisals are made.
Real change in social sector financing, however, will only be visible if the current design of CSS is completely re-hauled. There are four main areas where the current design of CSS is inefficient.
Planning design failures
Budgets for CSS are determined based on incremental plans prepared by the respective state governments and approved by a central committee. This has given individual ministries significant discretion in determining scheme design and approving state-specific plans and budgets. There is often an inherent tension between central government priorities and state-perceived needs. However, since the Centre controls the purse strings, central priorities dominate.
The CSS are typically designed by the Centre but implementation rests with the state and local governments. Most CSS come with rigid guidelines for execution, which privilege a top-down, ‘one size fits all’ model with standard, fixed norms and unit costs. The National Health Mission (NHM), for instance, lay down fixed population norms to set up health facilities. These underestimate requirements in states such as Rajasthan and Madhya Pradesh, which have lower population density than the national average.
More importantly, even granular implementation details such as hiring processes, training modules and schedules, communication strategies are laid down by the Centre, giving states very little flexibility.
Most CSS are designed as a cost-sharing programme between the Centre and states. States are expected to contribute 50-60 per cent of the total approved budgets from their own plan funds.
Within a scheme, however, the matching ratio is uniform across states irrespective of their financial capability. Release of funds by the Centre are contingent on states releasing their own share and meeting other conditionalities. This has an effect on the total quantum of money received by fiscally weaker states.
The presence of conditionalities for fund release means that there is a considerable difference between the approved allocation and actual grants given. The fixed fund sharing ratios also creates perverse incentives for states that may not need the additional CSS fund to try and get it.
Bureaucratic red tape
Rigid guidelines, complex paperwork, and numerous conditionalities for fund release under CSS has also created a lot of administrative red tape, resulting in inefficiencies in approvals and fund flow. A study conducted by Accountability Initiative of NHM in Uttar Pradesh found that it took a minimum of 22 desks through which a had to pass for the release of funds from the Centre to the state level implementation body or State Health Society.
India needs to go back to the first principles of the rationale behind specific purpose transfers.
Schematic to sectoral approach
The first step is to limit the number of schemes. One way of doing this is to link finances to ‘national goals’. Instead of creating 28 umbrella programmes as done by the previous government, funds could be released specifically for priority areas rather than multiple sub-schemes.
Towards block grants
Having identified priority areas, the next step would be to ensure states have enough resources to fund these areas. Instead of allocations linked to detailed and cumbersome planning and budgeting processes with centralised guidelines, block grants could be given to states. This would allow for prioritisation of different inputs and secure greater ownership by state governments.
An example of this can already be seen in the Rashtriya Krishi Vikas Yojana (RKVY) – a CSS established in 2007 to rejuvenate falling agricultural growth rates. Unlike most other CSS, RKVY offers flexibility to states to choose activities under the scheme that most suits its domestic requirements and a state-level committee approves it.
Equitable inter-state distribution
Inter-state distribution of normative block grant portion of funding amongst states can be based on a formula that accounts for aspects like population, area and proportion of difficult areas, along with sector-specific need. Differential cost sharing norms could further assist in ensuring that the distribution of funds fulfils the criteria of need and equality.
Reforming public finance management system
There is a need to streamline inefficiencies in the approval and fund flow process. This can be done by building a just-in-time Expenditure Information Network (EIN), which brings all expenditure units under one system. The first step in this process was undertaken in 2017, when the Centre mandated all CSS expenditure to be routed through the Public Finance Management System (PFMS). The system, however, still needs to shift from a push to a pull system where each implementing unit will have the ability to automatically withdraw funds, on a needs basis.
Augmenting capacity of evaluation office
Finally, instead of focusing on monitoring the nuts and bolts of implementation, the Centre must build its capacity to develop a credible database on monitoring outcome indicators on a real-time basis. Currently, an inherent weakness in the CSS design is its focus on inputs. Over time, performance on outcomes could be linked to additional financial incentives available to states.
Avani is a Fellow at the Centre for Policy Research (CPR) and Director of the Accountability Initiative (AI).
This is the ninteenth in a series of articles titled “Policy Challenges 2019-2024” under ThePrint-Centre for Policy Research (CPR) collaboration. A longer version of this piece is available on the CPR website at www.cprindia.org. The full policy document on a range of issues addressed in this series is available on CPR’s website.