The amendment to the terms of reference (TOR) issued to the Fifteenth Finance Commission asking it to examine “..a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised,” has triggered some suggestions on the need to have a relook at the assignment system and redesign of centrally sponsored schemes (CSS). In an interesting article, Bibek Debroy (IE, September 22) rightly states that the Seventh Schedule is not cast in stone and that if the Union government is required to contribute to CSS in the State List, why should states not contribute to items in the Union List like defence. He also states that any restructuring/rationalisation of the CSS requires a relook at the Seventh Schedule and that this must be done with consultation with the states in an appropriate forum. These suggestions are important and need to be discussed in some detail.
Clearly, the Constitution (except fundamental rights) and, more particularly, the Seventh Schedule is not cast in stone. There have been as many as 103 amendments so far including a few in the Seventh Schedule. In fact, Article 368 provides for the amendment by introducing the bill in either house and passing it with a majority of the total membership of the house and at least two-thirds of members present and voting. In addition, changes in Seventh Schedule requires ratification of the amendment by the legislatures of at least one-half of the states. In fact, the 42nd amendment actually transferred five subjects from the State List to the Concurrent List which are: (a) Education; (b) forests ;(c) weights and measures ;(d) protection of wild animals and birds and (e) administration of justice; constitution and organisation of all courts except the Supreme Court and the High Court.
The constitutional assignments between the central and subnational governments in federations are done broadly on the basis of their respective comparative advantage. The provision of national public goods is in the federal domain and those with the state-level public service span are assigned to the states as the latter are assumed to have comparative advantage in providing these services according to the varied preferences of the people. The transaction cost of providing state level public services at the central level is higher than scale economies. In addition, there are meritorious public services with inter-state spillovers and their efficient provision requires subsidisation. Thus, while the provision of public services is mandated at subnational levels, financing is done either fully or partially by the Centre to ensure that a minimum standard of such services are provided across the country.
In the Indian context, for this reason, there are central sector and centrally-sponsored schemes. In the case of the former, funding is entirely by the Centre and states are merely implementing agencies. The CSS is a shared cost programme and is meant to ensure a minimum standard of service across the country. In fact, many of the schemes are introduced by the Centre on subjects in the State List ostensibly for their externalities but also to have a direct appeal to the electorate. Not surprisingly, several schemes were introduced and they are now restructured into 28 umbrella schemes classified into “core of the core”, “core” and “optional” with states’ contribution fixed at 30 per cent, 40 per cent and 50 per cent respectively for non-special category states. In principle, these schemes have expiry dates, but going by past experience, they are never folded up and always get repackaged. In fact, each of the schemes has multiple objectives and service delivery standards are not clearly defined. Under the Sarva Shiksha Abhiyan, for example, there are 42 interventions and states are required to prepare their budgets for each intervention with little flexibility and any change in the allocations between these heads would have to be approved by the Project Appraisal Board chaired by the Union HRD Secretary.
In principle, there should be consultations with states in designing the schemes, but this is hardly done. The classic example is the health insurance scheme announced by the prime minister from the ramparts of the Red Fort in his Independence Day speech in 2018 which evolved into “Ayushman Bharat”, requiring non-special category states to share 40 per cent of the cost. Of course, in principle, they can opt out, but only at a huge political cost. In fact, most schemes create permanent liabilities and do not have an effective expiry date.
In fact, the Finance Commissions are aware of the need for specific purpose transfers to ensure minimum standards of meritorious services and leave some fiscal space to the Centre to undertake CSS. Thus, the Fourteenth Finance Commission, while concluding that there is a compelling case for reforming the existing system of fiscal transfers stated, “In our view, the Union government should continue to have fiscal space to provide grants for functions that are broadly in the nature of ‘overlapping functions’ and for area-specific interventions.”
Can states pay for defraying expenditure on items in the Union List? In fact, Article 282 has this provision when it states, “The Union or a State may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the State, as the case may be, may make laws”. However, the important question is that should the states be asked to pay for defence?
Here, there are two specific reasons why they should not. First, defence is a national public good and keeping in view the principle that the beneficiaries of services should pay for it, it becomes the primary responsibility of the Centre to defray the cost of protecting all the people of the nation. Second, given the fact that the assigned expenditure responsibilities of the states are much larger than their revenue potential, the Constitution provides for the sharing of taxes collected by the Centre and making grants to them from the consolidated fund of the Centre based on the recommendations of the Finance Commission. The Finance Commission is supposed to take into account the capacities and needs of the Union and different states in making recommendations and the Centre’s need includes the requirements for defence of the country. The TOR of the Fifteenth Finance Commission, for example, emphasises that it should have “..regard, among other considerations, to the demand on the resources of the Central government particularly on account of defence, internal security…”
Thus, once the commission makes recommendations after assessing the requirements including those for defence, the responsibility for defraying the expense falls on the Centre. The states simply do not have the resources to spend beyond the subjects in their domain because the Finance Commission will not provide for it in its assessment.
Indeed, there is a need to reform the CSS. There should be consultations in formulating, designing and closing them down. “The one-size-fits-all” approach cannot succeed in a large and diverse country like India. As the schemes are implemented by states, they should have substantial flexibility to ensure that the schemes benefit the targeted groups. While these are important, it is not clear how a relook at the Seventh Schedule would achieve this objective.
This article first appeared in The Indian Express with the headline Leaning on the States
(The writer is adviser, Centre for Public Policy, IIM, Bangalore. Views are personal)
— This article first appeared in the September 24, 2019 print edition under the title ‘Leaning on the states’