Finance Minister Arun Jaitley’s Union Budget for 2015-16 is likely to mark a seminal shift in the annual exercise by freeing up funds to the tune of almost Rs 3 lakh crore and allowing states the flexibility to spend the resources given their priorities. This is expected to be done by wielding the axe on centrally sponsored schemes which will be restricted to a handful. As much as 85 per cent of the total Rs 5.75 lakh crore of Plan Budget this year is tied to various schemes that are conceived by the central government.
Prime Minister Narendra Modi, who as Gujarat chief minister argued that states know best to utilise the money, is likely to give the first indications of a changed approach in a meeting with all chief ministers soon. He will address state CMs within a few days of chairing the first meeting of the National Institution for Transforming India (NITI) scheduled for February 6, senior officials said. The CMs are expected to press for more flexibility on spending while providing inputs for the Budget, the officials added.
Several states including Punjab, Rajasthan, Madhya Pradesh and Maharashtra have for long been demanding such flexibility in funding. A chief minister, who did not wish to be named, said, “Tying up funds to schemes devised by the central government makes little sense. It need not be 0 per cent. But 85 per cent is unacceptable.”
While the previous government did start with the process of snipping away at the centrally sponsored schemes (CSS), Modi may just wield the hammer. The bulk of these schemes may be done away with, in the event handing out more unhinged resources to states. At present, there 66 CSS with a budgeted provision of Rs 2.52 lakh crore for 2014-15.
“The Budget may reduce the number of CSS to single digits (no more than ten). These could be largely pan-India schemes in key areas like health, education, housing and physical/social infrastructure,” said an official.
The CSS include the previous government’s flagship schemes such as MGNREGS (job guarantee), Sarva Shiksha Abhiyan (SSA) and Jawaharlal Nehru National Urban Renewal Mission. These are fully or partly funded by the centre and implemented by the states. While the centre initially demands only a token contribution from states in many of these schemes, much of the burden is passed on to states in subsequent years, another chief minister said.
The expenditure management commission under former RBI governor Bimal Jalan — it recently submitted its interim report to the Finance Minister — is learnt to have recommended that the number of CSS be significantly pared. In 2011-12, there were 147 CSS with a total budget allocation of Rs 1,80,389 crore. The number of schemes has been reduced to less than half now — 66, to be precise.
CSS is the biggest component of central assistance to state plans. The other component, block grants to states, is a grant and states have full flexibility in utilising this, but this is just 15 per cent of the total Plan funds. (See chart).
Besides the central assistance to state plans, the resources used for central sector schemes (these are distinct from CSS) account for 41 per cent of the Plan funds. These funds are allocated to 70 central ministries and departments and implemented by them. Again, states cannot spend these resources for any other purpose.
The dismantling of the Planning Commission and its replacement by NITI Aayog, which focuses more on policy, has anyway rendered redundant the old regime of central fund releases for state plans. “Ideally, all CSS should go. The centre will save on intermediation costs and in the long term, there would also be higher implementation efficiency in terms of outcome yields on every rupee spent,” said Dhirendra Swarup, former secretary, department of expenditure.
But even bigger a driver for the proposed new mechanism of central transfers is the Fourteenth Finance Commission which is said to have proposed a 42 per cent share for states in central gross tax revenues. This is a substantial step-up over the current 32 per cent level. A 10-percentage point increase in tax devolution would leave the centre poorer by about Rs 136,000 crore or one per cent of GDP.