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March 08, 2016

The Shifting Political Economy of Centrally Sponsored Schemes


In this Article, Pranay Kotasthane of Takshashila Institution says that with the increasing trend of consolidation of centrally sponsored schemes (CSS) during last three budgets, states now  "have a better idea of the fiscal space available to them and are in a better position to decide and shape their own priorities".


He says "the changes in CSS started last financial year with a higher tax devolution recommended by the Fourteenth Finance Commission (FFC). This higher tax devolution without a corresponding increase in revenue receipts meant that the Union government restructured its approach of running a plethora of central schemes under state plans. Specifically, the Union government decreased its own support for some of them in last year’s budget. In a few cases, the government discontinued some centrally sponsored schemes altogether, bringing down the total number of CSS from 147 to 66."


"On the other hand, the response of the states to the question of CSS restructuring was two-fold. Initially, states had submitted to the FFC that proliferation of CSS impinges upon their fiscal autonomy as they do not have any say in design of these schemes and face many restrictions in their implementation (Finance Commission 2015: 88). At the same time, states also clearly demonstrated an endowment effect — they continued to see CSS an important source of money that they weren’t willing to give up."


"This changed pattern is likely to be featured in all state budgets. Chief ministers will claim that the state’s fiscal plans will be affected, mainly on account of  increasing contributions to those ‘Core schemes’ on which they otherwise spent less than 40%. A trick that this budget missed is shifting to a regime of specific purpose open-ended matching grants instead of a fixed 60:40 ratio. The fixed ratio will mean that states will be compelled to implement these schemes just to avail of the 60% assistance, even if they have done considerably well in a particular area. For instance, Kerala might be reluctant to shift its focus from primary education to other priority areas even though it has done considerably well in the former, just because of the political economy around the 60% assistance promised by the central government."


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