Restrict the number of Centrally Sponsored Schemes to a maximum of 10.
What was the intention behind Centrally Sponsored Schemes?
Union government support for specific sectoral programmes is necessary to ensure a minimum standard of meritorious services — health, education, water supply, and road infrastructure — across all states in India. One way that the Union government supports State governments is by initially designing Centrally Sponsored Schemes (CSS), and then by funding them at least partially. Some examples of such schemes: MGNREGA, Swachch Bharat Abhiyaan, National Health Mission and Sarva Shiksha Abhiyaan.
What are the unintended consequences?
States are unfairly burdened, as these schemes are primarily implemented using State administration and also require them to share a part of the fiscal burden. This violates the norms of Union-State relations in India.
While the number of CSS is down to 28 in Budget 2017-18, from a total of 360 between 1997 to 2002, many thinly spread and underfunded schemes still get announced every year. Consider some such schemes being run by the Union government today — Blue Revolution (401 cr), Stand-up India (520 cr), National Ganga Plan (2250 cr), and Khelo India (350 cr). Such schemes have no raison d’être, except to showcase the alleged benevolence of the Union government.
What will this reform achieve?
If the Union government limits itself to a maximum of ten meritorious services having significant country-wide externalities, the money saved can be devolved to the States so that they can determine their own priorities and fund them adequately. With more untied funds coming their way, States will be able to invest in those areas that are of the highest concern to them.
Also, by ending a range of thinly spread schemes which have paltry allocations, the Union government can increase allocations for key meritorious services such as health, education, water supply, road infrastructure etc.
What is needed to carry it out?
The first way is to hard-code an upper limit on the number of schemes that the Union government can fund by modifying the Fiscal Responsibility and Budget Management Act (FRBMA), which is an Act of Parliament.
The second way is for successive Finance Commissions to recommend a greater portion of tax devolution directly to the States. If this happens, the Union government will indirectly be forced to reconsider its existing schemes. This is exactly what happened with the Fourteenth Finance Commission when its recommendation to increase tax devolution to the states caused the Union government to reduce the number of Centrally Sponsored Schemes from 66 to 28.
What are the obstacles to this reform?
Union governments will not give up their powers to intervene in the domain of State governments easily. Also, many State governments have weaker governance capacities and capabilities when compared to the Union government.
How can we counter this?
This reform needs either an enlightened Union government that corrects the imbalances in federalism brought about by Centrally Sponsored Schemes or it needs State governments to raise their own game and demonstrate their governance capabilities consistently.
Also check out
Chapter 5, Review of Inter-Governmental Transfers and Consolidated Public Finance, Report of the Fourteenth Finance Commission, Volume 1.
Rationalising Central Schemes, The Financial Express, M Govinda Rao