Why the Centre needs to give states more control over schemes it co-finances

Last year, the Bharatiya Janata Party-led central government made dramatic and unplanned reductions in the number and budget allocations of centrally sponsored schemes – programmes designed and largely funded by the Centre and implemented by the states, which often co-finance them.

These changes, based on the recommendations of the 14th Finance Commission, garnered much public comment and debate. This year too, Finance Minister Arun Jaitley announced further rationalisation and restructuring of “more than 1500 Central Plan Schemes into about 300 Central Sector and 30 Centrally Sponsored Schemes”. The restructured schemes were given the evocative label of “umbrella schemes”.

This move was one of many recommendations to restructure the schemes made by a committee of chief ministers in the Niti Aayog, the successor to the Planning Commission. At first sight, it appears to be a welcome step towards greater flexibility and efficiency in the implementation of these schemes. However, a closer look at the budget suggests it’s a case of old wine in new bottles – a relabelling rather than actual restructuring.

The story so far

Centrally sponsored schemes started as a tool by the Centre to assist states in fulfilling their Constitutional responsibilities in areas of national priority like agriculture, health and education. They soon grew in both number and importance, and by 2012, 147 of these schemes accounted for 42% of the Centre’s plan expenditure. Moreover, in some states centrally sponsored schemes became the predominant mode of financing social sector expenditure. For instance, after the Right to Free and Compulsory Education Act was passed, over 50% of the total elementary education budget in Bihar and Madhya Pradesh was financed through the Sarva Shiksha Abhiyan – the primary vehicle for implementing the Act.

However, state governments responsible for implementation have had an uneasy relationship with centrally sponsored schemes. States have repeatedly complained that the proliferation of such schemes infringes on their autonomy by reducing their fiscal space as they are expected to co-finance schemes. For instance, under Sarva Shiksha Abhiyan, till 2015, states were expected to contribute 35% of the total approved budget.

The uniform norms and strict guidelines provided for centrally sponsored schemes further hamper the autonomy of states and can lead to inefficient overlaps. For instance, in 2010, the government of Bihar launched a number of schemes, including one for uniforms. However, that was the year the Right To Education was launched by the Centre too. This saw a significant influx of money into the Sarva Shiksha Abhiyan. One of the components under this scheme was funding for uniforms for all states. As a result, the Union government increased Bihar’s budget for uniforms under the Sarva Shiksha Abhiyan by a whopping 200%. But by then, Bihar had already spent its own money on uniforms and much of the central allocation was not utilised.

Many centrally sponsored schemes also require setting up of parallel structures for implementation and fund flows. These tend to bypass state governments, and undermine their authority and monitoring ability.

Funding guesswork

Allocations to centrally sponsored schemes are very volatile too. The Union Budget allocates funds to schemes, but not to states. Thus, state governments often don’t know in advance either how much money it will get, or even when the money will be released. This causes uncertainty in state finance departments, and at the grassroots. For instance, district officials of the National Health Mission interviewed by Accountability Initiative in Uttar Pradesh said they received irregular reimbursements of their official travel expenses. As a consequence, officials responsible for the implementation of programmes that receive lakhs of rupees in funding were forced to purchase petrol on credit from petrol pump owners.

These problems led to a series of efforts to restructure the schemes. The end of every Five Year Plan has invariably seen the disbanding of a number of schemes, the transfer of many others to states, and restrictions on the creation of new programmes. An example is the Integrated Rural Development Programme, a major scheme started in 1978 but later disbanded.

Restructuring is not reform

As attempted many times before, schemes were restructured this year too by grouping related programmes into umbrella schemes. However, this grouping seems to be superficial, rather than a concerted effort to restructure centrally sponsored schemes and make them more effective.

First, the overall allocation has increased, and currently stands at 2.27 lakh crore. Consequently, most programmes retain last year’s allocations, but have been grouped under a common name. For example, the National Education Mission is a new label for a basket containing familiar schemes such as the Sarva Shiksha Abhiyan, and its counterparts in secondary and higher education – the Rashtriya Madhyamik Shiksha Abhiyan and the Rashtriya Uchchatar Shiksha Abhiyan. No effort has been made to change the schemes themselves or make them more effective. Consequently, they are likely to continue exactly as before.

Second, a number of old discontinued schemes seem to be back. For instance, schemes for food processing and modernisation of police, which were “delinked from Union Support” last year, have been allocated hundreds of crores of rupees.

Third, for every few schemes that were discontinued, new schemes continue to be launched, such as those for organic farming and digital literacy announced this year.

Finally, some components of an umbrella programme have completely different institutional structures, which may negatively affect the scheme’s impact. For instance, the rural component of the Swachh Bharat Abhiyan is run by the Ministry of Drinking Water and Sanitation, while the Ministry of Urban Development handles the urban component. Different departments function more or less independently with limited coordination. If the point of merging the scheme was to ensure greater coordination between rural and urban efforts, it is hard to see how these two components will come together to form a united plan for Swachh Bharat.

What next?

When both the NITI Aayog in 2015, and the Planning Commission in 2011 recommended grouping of schemes, the idea was to grant states greater flexibility in the implementation of sub-components. One way of doing this would be to retain the identity of different schemes grouped under one umbrella, but allow states to allocate funds to its sub-components as they prefer. Under this model, the Centre would allocate money to a particular state for, say, the National Education Mission. But the state would choose how to distribute the funding amongst the Sarva Shiksha Abhiyan, the Rashtriya Madhyamik Shiksha Abhiyan and the Rashtriya Uchchatar Shiksha Abhiyan.

Another possibility identified was to remove individual schemes, and instead offer a menu of activities and interventions from which states could pick and choose. In this model, under the National Education Mission, a particular state could choose to spend all its money on infrastructure (on secondary or primary schools), while another might instead choose to improve the quality of teachers by organising training workshops.

Clearly, the mere merger of schemes doesn’t address the deeper problems with centrally sponsored schemes. What are the appropriate roles of the Union, state and local governments? How can greater flexibility be given whilst also ensuring effective monitoring? These questions remain unanswered.

In many ways, the groundwork has been laid for greater reform. The disbanding of the Planning Commission, the 14th Finance Commission recommendations and the Prime Minister’s repeated commitments to cooperative federalism all point towards it. Restructuring that is limited to the tinkering around the edges that has been happening for decades would be a missed opportunity.

There is, however, some hope. The Niti Aayog has requested Union ministries to create an objective formula by which funds allocated to a particular scheme are distributed among states. This is a welcome step if implemented as it will enable states to know how much funding to expect by looking at the Union Budget, reducing uncertainty in fund flows and helping speedy action. But, large-scale reform needs more than a letter from the Niti Aayog – it will require bold leadership from the highest levels of government. One can only hope that the government will grab this opportunity in the true spirit of cooperative federalism.

The authors are researchers with the Accountability Initiative, Centre for Policy Research.