ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Transformation of Central Grants to States

Central grant financing of state sector subjects is the principal instrument used by the centre to influence states' policies and expenditure. Such grant financing has proliferated over the years and has taken over the development space in the states' jurisdiction affecting their autonomy and responsibility. The earlier limits on Centrally Sponsored Schemes no longer exist and state Plan assistance has also assumed a non-block character with the proliferation of additional central assistance schemes. The centre has also introduced purely discretionary schemes. Another major change has been witnessed in the form of central schemes bypassing state budgets and directing funds to state agencies and local bodies. This paper categorises and analyses central flows based on the Outcome Budget and Expenditure Budget of the government of India for 2005-06.

Transformation of Central Grants to States Growing Conditionality and Bypassing State Budgets

Central grant financing of state sector subjects is the principal instrument used by the centre to influence states’ policies and expenditure. Such grant financing has proliferated over the years and has taken over the development space in the states’ jurisdiction affecting their autonomy and responsibility. The earlier limits on Centrally Sponsored Schemes no longer exist and state Plan assistance has also assumed a non-block character with the proliferation of additional central assistance schemes. The centre has also introduced purely discretionary schemes. Another major change has been witnessed in the form of central schemes bypassing state budgets and directing funds to state agencies and local bodies. This paper categorises and analyses central flows based on the Outcome Budget and Expenditure Budget of the government of India for 2005-06.


he Indian system of budgeting and accounting divides expenditures into the two broad categories of Plan and non-Plan expenditure, besides the usual internationally accepted classification of revenue and capital outlays. Expenditure on public goods, maintenance of development works and schemes, interest and pensions are classified as non-Plan outlays. Expenditures on new schemes of development in social and economic spheres are classified under the Plan category. The Plan and non-Plan distinction primarily tries to differentiate new and continuing expenses in the development space. To quote from the Tenth Plan document,

Plan expenditure arises out of schemes freshly introduced in an ongoing Five-Year Plan (FYP) period. In the same period, nonplan expenditure arises out of schemes carried forward from previous FYP periods. Non-plan expenditure, therefore, supports the old schemes of governments and plan expenditure, the new schemes. Since new schemes add to the economy’s productive capacity as the old schemes did in the past, plan expenditure reflects government’s investment in enhancing the economy’s productive capacity. Thus non-plan expenditure maintains the existing capacities and plan expenditure adds to it.

Plan expenditure can be both revenue and capital. Most of the social sector Plan expenditure like the expenditure on education, health and social security is classified as revenue expenditure, whereas expenditure on asset creation in new developmental schemes is classified as capital outlay. Obversely, capital expenditure is not necessary Plan expenditure. Capital expenditure on non-developmental sectors like defence is classified as non-Plan expenditure.

The central government’s gross budgetary support (GBS) to the Plan is divided into two broad classes – the central Plan and central assistance to the state and union territory (UT) Plans. Central government enterprises also finance their Plan expenditures from their internal resources and by raising resources directly from the market. These resources are broadly categorised as internal and extra budgetary resources (IEBR). The GBS for the central Plan (i e, excluding GBS for central assistance for state and UT Plans) and IEBRs of the enterprises of the central government together are referred to as the central Plan.

This broad division of GBS for the central Plan into the central Plan and state Plan assistance has been prevalent since 1969 when central assistance to the state Plans was drastically restructured and it was decided to allow such assistance to flow to the states in a pool (usually called a “block”) and unconditional form (except that states have to ensure that the actual total Plan expenditure is at least equal to the approved Plan). Over the years, a rule of thumb emerged that 60 per cent of GBS would be for the central Plan and 40 per cent for central assistance to states and UTs. This has, however got diluted over the years. The GBS for the state Plan has come to be recognised in practice as states’ resources. As the GBS for the state Plan was largely in the form of normal central assistance and was allocated according to the Gadgil formula (modified from time to time in some respects), the central government had very little discretion in transferring this grant resource to the states.

The specific purpose discretionary Plan expenditure of the centre on development schemes in areas falling in the states’ domain, usually referred to as Centrally Sponsored Schemes (CSS) or the State Sector Central Plan Schemes, forms part of the GBS for the central Plan. These CSS are designed by the centre and are subject to detailed guidelines. Fund allocation to individual states is also not driven by the Gadgil formula, but are specific to schemes. Actual releases are based more on the “actual performance” and therefore final transfers to the states may vary substantially from the original allocations. Central government spending on CSS is constantly increasing.

Preference for more schematic/discretionary assistance within the constraint of the broad 60:40 allocation criterion for the central and state Plans has made the centre alter the basic character of assistance to states. Specific purpose schemes have been introduced as part of central assistance for state Plans diluting the “block” character. These schemes, to distinguish them in the budgets and accounts, are referred to as Additional Central Assistance (ACA) schemes. There is no real distinction between

Economic and Political Weekly December 2, 2006

Chart: Relationship and Components of Central Plan andCentral Gross Budgetary Support to the Plan

Gross Budgetary Support (GBS)Central Plan IEBR GBS to Central Plan GBS to Central Plan (CP) GBS to State Plans* (1) Central Sector Schemes CSS/CP Schemes (2) (C) Normal Central Assistance (A) ACA Schemes (C) Central Organisations State/District entities and local bodies State Government

* Includes Special Central Assistance and Special Plan Assistance.

the ACA and CSS schemes in terms of objectives, nature of operations, guidelines issued and implementation.

Funds for ACA schemes are usually routed through the state governments,1 but not necessarily so in the case of CSS. The CSS and other schemes in the central Plan are implemented through states, government entities at state or district levels and also through local bodies. If we classify CSS into two broad categories of (i) CSS implemented through state governments, and (ii) CSS implemented through state agencies and local bodies (funds bypass state budgets in such schemes), then specific purpose conditional schemes of the central government operating in the constitutional domain of the states comprise the three categories of (i) CSS through state governments, (ii) CSS through state agencies and local bodies, and (iii) ACA schemes.

General purpose grants from the central government to states, called normal central assistance (NCA), are routed through the ministry of finance to the budgets of state governments. Of late, the central government has started using significant amounts of grants as purely discretionary grants under the two broad heads of special Plan grants and special central grants. While special Plan assistance (SPA) grants are budgeted and allocated amongst states at the discretion of the deputy chairman, Planning Commission, special central assistance (SCA) grants are not budgeted initially, but included in the budget at the revised estimate (RE) state.

Central grants for states,2 therefore primarily comprises central GBS for state Plans (1 in the chart) and CSS in the GBS for the central Plan (2 in the chart) in terms of the formal structure of the budget. In terms of the nature of grants, the three way classification in the chart is in the form of general purpose grants (A), discretionary assistance and special purpose grants.

CSS have been subject of major controversies. States usually prefer to get unconditional block assistance, whereas central ministries/departments have favoured schematic assistance. States have also protested against the central government transferring large chunks of CSS funds to state agencies and local bodies (primarily rural) directly bypassing the state budgets and accounts. Recently, the central government announced a few major initiatives of such transfers like the Rural Employment Guarantee Scheme, the National Urban Renewal Mission and Rural Health Mission. The funding pattern of these schemes was also sought to bypass the state budgets.

Approach and Methodology

This paper is based on a larger study,3 done mainly on the basis of two documents. The government of India (GoI) prepared and issued its Outcome Budget for 2005-06 in August 2005. The document provided schematic details for 61 ministries and departments of GoI with an aggregate outlay of Rs 1,10,987.48 crore, and with GBS for Plan expenditure of Rs 1,43,496.78 crore. The remaining outlay of Rs 32,509.30 for three central ministries and state Plan assistance to UTs through the finance ministry and home ministry was not dealt with in the Outcome Budget.

The Expenditure Budget (Volume II) provided schematic outlays for each ministry/department and also a brief description of each of such Plan schemes. The volume provides head-wise details of Plan and non-Plan expenditure as well. As head 3601 always identifies the Plan/non-Plan expenditure (separately) going to the state budgets, it was used to identify CSS flows going through the state government budgets and those bypassing budgets. There are, however, several schemes where central grants are transferred through state budgets, but the expenditures are not booked under head 3601. Such schemes were classified based on collateral evidence.

Our estimates, classification of CSS and outlays going through bypassing the budgets and our analysis of CSS are presented in Section I. Estimates and analysis of the state Plan assistance outlays of the central government in all their forms – normal central assistance (block), additional central assistance for schemes/ externally aided projects and discretionary assistance are presented in Section II. Integrated analysis of all types of central Plan grants transfers for state subjects is presented in Section

III. We present our agenda for reforms of central grant system for state sector subjects in Section IV.

I Centrally Sponsored Schemes

States in India face a strong vertical gap, which is primarily bridged by giving them a share in central taxes and grants in aid of their revenues. The CSS are not meant to bridge the vertical gap, but to provide the states additional resources for expenditure which the GoI considers of national/regional priority although being within the states’ domain. The CSS forms part of the central Plan and part of the central budget, as distinct from the state Plan assistance in the central budget. Specific purpose grants and loans in the form of specific purpose schemes (though not termed CSS before 1969) were a major area of discord between the centre and the states ever since independence. The states preferred unlinked, untied or block assistance, whereas the central government was more inclined to provide specific purpose assistance. The states would typically argue that if the centre had additional resources, the same should be given to the states as part of additional share of taxes through the Finance Commission, failing which these should be given to them in block form.

To resolve this, GoI and the states decided in the National Development Council in 1969 that central assistance to the states for their Plans should be by and large in the form of block/ unconditional assistance (termed normal central assistance or NCA) so that states could make their Plans according to their own priorities. To provide outlays for those few programmes which are considered to be of national/regional priority for subjects constitutionally in the domain of the states, it was decided that the centre could provide schematic support (in the form of CSS) but such support should not be exceeding one-sixth of the amount to be given as block assistance (NCA). Central assistance for state Plans was almost entirely in the form of NCA for some years after 1969. However, over the years, the CSS grew enormously and at a much faster rate than the block central assistance (NCA). Later, state Plan assistance, intended to be almost exclusively in the form of NCA also began to be partly in schematic form (ACA schemes). Consequently, the NCA component has come down very sharply in total central assistance to states and the schematic component (CSS and ACA) has gone up.

Central assistance to state Plans, both NCA and for specific schemes (ACA), are routed through state budgets, with very few exceptions. CSS funds to states are channelled in two forms. Some CSS are budgeted and accounted for as being routed only through state budgets.4 Many other CSSs are, however, not so structured and listed in the union budget.5 The fund routing for such CSSs is approved as part of the scheme and may change from time to time. This class of CSS may route part or all funds through state governments, or may route them to special state or district level agencies or local bodies directly from the central government bypassing the state budgets. Most such schemes bypass state budgets. Such routing is not unconstitutional as Article 282 of the Constitution permits the centre and also states to give grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the legislature may make laws.

Centrally Sponsored Schemes in the Central Plan

The central government’s GBS for the 2005-06 Plan was placed at Rs 1,43,496.78 crore with GBS for the central Plan amounting to Rs 1,10,385 crore. There are two types of CSS in the central Plan. The first category (Category I) of CSS includes those schemes for which outlays are explicitly recognised6 as CSS/CP schemes in the central budget (these are also listed as part of a separate statement in the Expenditure Budget, Volume I). The CSS grants for this class are routed through the budgets of the state governments. The second category (Category II) of CSS includes all those schemes which are budgeted with a separate programmatic minor/sub-minor head under the specific functional head of the department (and not as grants in aid to state governments under head 3601). The study enumerates all Category I schemes with total outlays of Rs 15,637.23 crore in 2005-06(BE). The study also listed all functional CSS, which had a total budgeted outlay of Rs 38,942.43 crore in 2005-06(BE). Outlays of Category II CSS are not recognised as transfers to the states in the central budgets, Expenditure Volumes I and II and also in Budget at a Glance. Total CSS outlays aggregated to Rs 54,579.66 crore, out of the total GBS of Rs 1,10,385 crore. The state centric focus of the central Plan can be realised from the number and the amount of resources transferred to the states through CSS, which made up roughly half of the central Plan expenditure.

CSS through State Budgets

In addition to the CSS listed under head 3601, there are quite a few other CSS with functional budget heads, which are also actually implemented with transfer of resources to the states through their budgets. The study found 43 such CSS flows which fully or partly transferred funds through state governments. There are a total of 112 CSS under Category I, i e, those which are budgeted to be funded through state budgets with an estimated total outlay of Rs 15,637.23 crore. In addition, there are 43 CSS with a total budget provision of Rs 4,617.76 crore under category II, which were budgeted functionally, but actually go to the states through their budgets, fully or partly. The number of and funds for both these types of schemes passing through the state budgets for each ministry/department of the government of India are given in Annexure A. Aggregating these two types of CSS give us total central Plan allocations of Rs 20,254.99 going through the state budgets. Total budgeted outlay of CSS routed through state governments’ budgets in 2005-06 thus formed 14.12 per cent of total GBS to the Plan, 18.35 per cent of the total GBS for central Plan, 61.17 per cent of the central assistance to state Plans and

149.58 per cent of the NCA.

CSS Bypassing State Budgets

We have also enumerated 41 CSS schemes, budgeted under departmental functional heads in the central budget, with funds actually going to the state/district agencies operating outside the state budgets. These outlays thus bypass the state budgets. The total outlay of these CSS was Rs 34,324.67 crore in 2005-06(BE). Ministry/department-wise details of the number and outlays of such schemes is given in Annexure A. The total budgeted outlay of CSS which would bypass state governments’ budgets in 2005-06 formed

23.92 per cent of total GBS for the Plan, 31.10 per cent of the total GBS for the central Plan, 103.66 per cent of the central assistance to state Plans and 253.48 per cent of NCA.

Total CSS Grants

There were approximately 1907 CSS in operation during 2005-06. Thebudgeted outlay for these 190 CSS was Rs 54,579.66 crore, which was approximately 38 per cent of the entire GBS for the Plan from the ministry of finance and 49.44 per cent of

Table 1: Centrally Sponsored Schemes Outlays

(Amount and as percentage of GBS and Normal Central Assistance)

State Sector Outlays in Central GBS Category Amount (Rs Crore) CSS budgeted to go through state budgets 15,637.23 Functional CSS going through state budgets 4,617.76 Total CSS going through the state budgets 20,254.99 CSS bypassing the state budgets 34,324.67 Total CSS 54,579.66 Total GBS for Plan (Rs 1,43,496.78 cr) 10.90 3.22 14.12 23.92 38.04 Total GBS for Central Plan (Rs 1,10,385 cr) 14.17 4.18 18.35 31.10 49.44 Total GBS for Normal Central State Plan Assistance (Rs 33,111.78 cr) (Rs 13,541.28 cr) 47.23 115.48 13.95 34.10 61.17 149.58 103.66 253.48 164.83 403.06
Economic and Political Weekly December 2, 2006 4979

the total GBS for central Plan. The central government spends approximately half of its central Plan GBS on state sector subjects.

Expenditure of central government on state sector specific purpose schemes (usually referred to as CSS) during year 2005-06 is summarised in Table 1.

It is a significant fact that not only are there large outlays for CSS in the central budgets, but a majority of such outlays bypass the state budgets. As much as Rs 34,324.67 crore, out of the total CSS outlay of Rs 54,579.66 crore or 62.89 per cent of CSS funds were for the CSS, which would bypass the state budgets and go to the state agencies and local bodies directly. Almost all the outlays bypassing the state budgets go to autonomous societies registered under the society registration laws. These societies are typically run by state government officials. This funds flow arrangement has huge implications for the sanctity and integrity of the budgeting process and legislative control over state expenditures. The central government has pushed for these arrangements, largely for two reasons: one, to give more operational freedom to the programme implementing agencies and, two, to prevent the funds being used for meeting ways and means needs of state governments. The efficacy, constitutional propriety and accountability of this arrangement need to be examined seriously.

II Central Grants for State Plan Assistance

State Plan assistance was designed to provide formula based block assistance or untied resources (Gadgil formula) to the states to finance their own Plans. The broad caveat attached was that the states should be able to stick to their overall Plan size and Plan expenditure earmarked for some of the priority schemes. In this form, Plan assistance was in the nature of resource transfer to the states and was therefore routed through the ministry of finance. However, over the years, several distortions have crept in. There are primarily three kinds of distortions. First, specific purpose schemes have been increasingly included as part of the state Plans, which dilutes the block resource transfers character of the Plan assistance. Secondly, schematic outlays are being budgeted in the budgets of some ministries/departments now as state Plan outlays, making it very difficult to discern the difference between two types of schematic outlays for state sector schemes in the budget of the same ministry. This also disturbs the integrity of state Plan assistance transfers and falsely disguises a CSS as a state Plan assistance scheme. Finally, purely discretionary outlays are being included in Plan assistance in the name of statespecific economic packages or plainly without any particular objectives as special Plan assistance or special central assistance.

State Plan outlays were transferred as 70 per cent loans and 30 per cent grants to general category states, which made Plan assistance look quite large, whereas the bulk of transfers were loans which were repaid by the states later. State Plan outlays have become 100 per cent grants now after the government of India accepted the recommendations of the Twelfth Finance Commission to eschew the loan component of state Plan assistance.

The budget papers (Expenditure Budget Volume I) placed state Plan support at Rs 29,997.39 crore for the financial year 2005-06. However, the entire state Plan support is not funded from the Consolidated Fund. The amount of Rs 1,478.55 crore, placed in the demands of the ministry of road transport is sourced from the Road Fund in the Public Account of India. Therefore, GBS for the state Plan amounted to only Rs 28,518.84 crore only. State Plan outlays (schematic) in finance ministry budget: There are 12 schemes/groups of schemes (additional central/special central assistance schemes) which are schematic in state Plan assistance outlays of the department of expenditure in BE 2005-06 with a total outlay of Rs 11,049.05 crore. Details are in Annexure B (Part A). These schemes have different objectives, different formulae for allocation of resources to the states and earlier and different loan grant ratios. The schematic part of state Plan assistance constituted 33.37 per cent of the total central assistance to state Plans. One-third of state Plan assistance has also practically turned into state sector specific purpose schemes by now. The budgeted outlay of state Plan schemes was as much as 81.90 per cent of the total outlays of NCA. State Plan outlays in ministries’ budgets: Three ministries/departments (ministry of tribal affairs, department of north-eastern region and department of agriculture) have state Plan allocations in their ministry/department budgets. The ministry of road transport also has a state Plan scheme with an outlay of Rs 1,478.55 crore, but this outlay is funded from the Road Fund and hence does not form part of GBS. These state Plan schemes of three ministries/departments had a total budget provision for transferring to state governments of Rs 2,018.51 crore. Details of these are placed at Part B of Annexure B. The total budgeted outlay of state Plan schemes which go to the state budgets but were budgeted in the ministry/department budgets in 2005-06 formed

6.10 per cent of the central assistance to state Plans and 14.91 per cent of the NCA. Block and discretionary assistance in state Plans: Block assistance to states for their Plans is delivered as NCA. The NCA was placed at Rs 13,541.28 crore in the budget for 2005-06. Discretionary assistance in the form of special Plan assistance

Table 2: Central Assistance for State Plans

State Sector Outlays in Central GBS in As a Proportion (in Per Cent) of
Different Dimensions Total GBS for Plan Total GBS for Total GBS for Normal Central
Central Plan State Plan Assistance
(Rs Crore) (Rs 1,43,496.78 cr) (Rs 1,10,385 cr) (Rs 33,111.78 cr) (Rs 13,541.28 cr)
State Plan outlays in ministries/departments budgets 2,018.51 1.41 1.83 6.10 14.91
Schematic state Plan outlay of finance ministry 11,049.05 7.70 10.01 33.37 81.60
Total schematic outlay of state Plans 13,067.56 9.11 11.84 39.46 96.50
Normal central assistance through MoF budget Discretionary assistance through MoF budget* 13,541.28 1,910.00 9.44 1.33 12.27 1.73 40.90 5.77 100.00 14.11
Total non-schematic assistance 15,450.95 10.77 14.00 46.66 114.10
Total state Plan outlay in GBS Non-GBS state Plan outlay** 28,518.51 1,478.55 19.87 1.03 25.84 1.34 86.13 4.47 210.60 10.92

* Discretionary assistance ends up much larger than the budgeted as the MoF usually does not provide any budget estimate for a discretionary head ‘Special

Central Assistance’, but recoups the entire assistance so given during the year by way of supplementries later. ** This is budgeted as part of the ministry of road transport, but funded from the Road Fund in the Public Account.

was placed at Rs 1,910 crore. Together, the non-schematic assistance was budgeted at Rs 15,450.95 crore. Non-schematic assistance was only Rs 10.77 per cent of the central government GBS for Plan, 14 per cent of GBS for the central Plan and 46.66 per cent of the GBS for state Plan assistance. Total state Plan outlay: The total state Plan outlays for the financial year 2005-06 are summarised in Table 2.

III Overview of Central Grants for State Subjects

The centre’s GBS for the Plan was placed at Rs 1,43,496.78 crore (Expenditure Budget-Volume II)8 in 2005-06. GBS for the central Plan was budgeted at Rs 1,10,385 crore and central assistance for state and UT Plans was placed at Rs 33,111.78 crore. The finance ministry released the Outcome Budget in August 2005, in which the outcomes identified and targets set by the ministries/departments for themselves were compiled by the Planning Commission and the ministry of finance, only for Plan expenditure. The Outcome Budget actually did not cover the entire Plan expenditure. There are a total of 105 demands9 for all the ministries and departments in the expenditure budget. The document provides schematic details for 61 ministries and departments with an aggregate outlay of Rs 1,10,987.48 crore, out of Plan expenditure of Rs 1,43,496.78 crore. The remaining outlay of Rs 32,509.30 for 10 demands (three central ministries, central Plan assistance to states through the finance ministry and six demands for UTs) have not been dealt with in the Outcome Budget.

Total Central Plan Expenditure on State Sector Schemes

Central government outlay on CSS were analysed in Section I and on state Plan assistance in Section II. Aggregating both, the total central Plan outlay on state sector subject amounts to Rs 83,098.17 crore in BE 2005-06. We summarise the central expenditure on state sector subjects, budgeted and delivered to the states in multiple formats, directly through their budgets or bypassing their budgets in Table 3.

The central Plan budget is increasingly turning into a states’ budget. As much as 57.91 per cent of total GBS to the Plan was meant to be spent directly on state sector schemes. It is not possible to clearly identify expenditures on numerous central government organisations, which have come into existence to deal with essentially state subjects. Expenditures and funds transferred through them to the states and their agencies should also be rightly captured as state sector expenditures. If that is done, it would not be surprising if we find that more than two-thirds of central Plan outlays are spent on state sector subjects. This should raise very serious questions about the primary pre-occupation of the central government. Why is the centre so involved in the state subjects?

Central Plan Expenditure on State Sector Subjects and States’ Budgets

It is interesting to measure the role of central Plan expenditure in what is essentially the states’ constitutional domain. We compare in Table 4, central Plan expenditure in the states’ domain in terms of their proportions to states’ total revenues, revenue expenditure and total Plan expenditure.

Central Plan grant support to the states was more than 50 per cent of their annual Plan size. This support made up one-fifth of the states’ total revenue receipts. It should be quite easy to guess the kind of influence which central Plan outlays has on the states’ Plan and total expenditure.

State Sector Outlays of Centre Bypassing State Budgets

It is important also to examine comparative position of central outlays which bypass state budgets as compared to what goes through the budget. Table 5 provides the comparative position in terms of central budget indicators.

Table 3: Central Government’s Plan Expenditure on States Sector Subjects in Various Formats

State Sector Outlays in Central GBS As a Proportion (in Per Cent) of in Different Dimensions Total GBS for Plan GBS Dealt with Total GBS for Total GBS Normal Central in Outcome Budget Central Plan for State Plan Assistance (Rs Crore) (Rs 1,43,496.78 cr) (Rs 1,10,987.48 cr) (Rs 1,10,385 cr) (Rs 33,111.78 cr) (Rs 13,541.28 cr)

CSS 54,579.66 38.04 49.18 49.44 164.83 403.06 Schematic outlay of state Plans 13,067.56 9.11 11.77 11.84 39.46 96.50 Total schematic state sector outlays 67,647.22 47.14 60.95 61.28 204.30 499.56 Normal central assistance

(block-non schematic) 13,541.28 9.44 12.27 40.90 100.00 13,541.28 Special Plan (discretionary) 1,910.00 1.33 1.73 5.77 14.11 1,910.00 Total state sector outlay in GBS 83,098.17 57.91 74.87 75.28 250.96 613.67

Table 4: Central Government’s Plan Expenditure on State Sector Subjects as a Proportion of State Revenues, Expenditureand Plan Expenditure (BE 2005-06)

State Sector Outlays in Central GBS in Different Dimensions As a Proportion (in Per Cent) of Total Revenue Total Revenue Total Plan Receipts of States Expenditure of States Expenditure of States (Rs Crore) (Rs 4,21,324 Crore) (Rs 4,45,818 Crore) (Rs 1,60,081 Crore)

Total CSS going through the state budgets 20,255 4.81 4.54 12.65 CSS bypassing the state budgets 34,325 8.15 7.70 21.44 Total CSS 54,580 12.95 12.24 34.10 Total schematic outlay of state Plans 13,068 3.10 2.93 8.16 Total schematic state sector outlays 67,647 16.06 15.17 42.26 Normal central assistance and special Plan assistance 15,451 3.67 3.47 9.65 Total state sector outlay in GBS 83,098 19.72 18.64 51.91

Economic and Political Weekly December 2, 2006

In terms of schematic transfers (special purpose schemes), of the total central outlay of Rs 67,647.22 crore, Rs 33,322.55 crore

(49.26 per cent) goes through the budget, whereas Rs 34,324.67 crore (50.74 per cent) was to bypass the state budgets. Out of the total central expenditure of Rs 83,098.17 crore on state subjects through state governments, state agencies and local bodies, the outlay going through the state budget was Rs 46,863.83 crore (58.69 per cent) and that bypassing the state budgets was Rs 34,324.67 crore (41.31 per cent). It would be quite reasonable to conclude that a significant amount of central Plan expenditure on state subjects bypasses state budgets. If we view this phenomenon only in terms of the CSS, a very high percentage (62.89 per cent) bypasses state budgets.

Transfers under Special Purpose and Other Discretionary Grants

This study has been able to place definitive numbers on the schematic transfers. The role of special purpose schemes in state budgets can be viewed from the share these now command in the total revenue receipts of the states. The states’ revenues were budgeted at Rs 4,30,270 crore in 2005-06 (BE). The importance of such transfers in terms of states’ total revenue receipts is indicated in Table 6.

IV Issues and Agenda for Reforms

Stakes and concerns of states for special purpose schemes: States have tremendous stakes in central grant transfers, particularly in special purpose conditional grants, usually referred to as CSS and ACA schemes. These schemes have provided a major financial lever to the central government to change states’ choices in these subjects, which are constitutionally almost exclusively their mandates. Special purpose schemes have grown substantially over the years and have acquired many dimensions, most notably of bypassing the states budgets in last few years.

States have two kinds of principal questions concerning these special purpose transfers. First, the states, in general, believe that these special purpose schemes have grown too big and are are too many and therefore take away their fiscal independence in much of the expenditure field and therefore, as a policy and general approach, these should be wound down and central funds should either be transferred to them as an additional share in tax revenue or in the form of block grants. Second, not having been able to stop the growth of CSS, leave alone curtail them, despite several attempts, the states want to take as much of a share of CSS funds, as is possible for them, since CSS funds are grant funds. There is another dilemma which states face and that is internal to them. Finance departments of most states are in favour of constraining CSS growth and receiving central funds in block form, whereas most of developmental line departments at the state level favour schematic transfers from the centre, as such transfers assure them of earmarked outlays in their sectors, especially in the context of fiscal stress faced by states. Complicated central grants transfer regime: The current central grants transfer regime is unnecessarily complex. There is no reason why schematic transfers (special purpose schemes) should be part of CSS as well as the state Plan. There is no reason why the discretionary component of the state Plan should be increasing, which makes the assistance more and more subjective. The outlays for schemes implemented bypassing the state budgets have proliferated substantially, without any conscious consensual policy decisions between the centre and the states. In fact, this proliferation has taken place in spite of a resolution passed in the chief ministers’ meeting in 2002 that central Plan assistance should only be routed through the state budgets. The number of CSS/ACA schemes has only grown in numbers. There are many schemes with similar objectives. There are many schemes with small outlays and there are many schemes which are not of national importance. These numerous grant funding mechanisms have hundreds of different allocation formula, without the rationale having been explained. Block assistance is now much reduced in size. Budgeting and accountability issues: The central government is transferring large amounts to state level societies and local bodies directly. These amounts are not reflected in the state budgets and accordingly are not subject to states’ financial control and are not accountable to state legislatures. There are large amounts of unutilised funds lying with these agencies. Ministries/departments of the centre are more interested in dispensing funds as that is what counts in their performance. Administrative ministries/departments do not hold the state agencies and local bodies accountable for proper use of the funds. The CAG system is too centralised to conduct a good audit of these agencies. Audits by chartered accountants appointed by these agencies are usually not qualitatively appropriate. There is a real absence of an accountability mechanism for central funds which bypass the state budgets. Constitutional scheme compromised: Constitution envisaged the Finance Commissions to be primarily responsible for estimating states’ need for grants-in-aid and to make recommendations to

Table 5: Classification of Centre’s Plan Expenditure on StateSubjects through State Budgets and Bypassing State Budgets

(In Rs crore)

Outlays Total GBS for GBS for Central Total GBS for Normal Central
Plan Plan State Plan Assist
Total schematic
outlays (state Plan and CSS) going through state budgets Total outlay going through state budgets (inclusive of NCA) CSS bypassing the state budgets 33,322.55 46,863.83 34,324.67 23.22 32.66 23.92 30.19 42.45 31.10 100.64 141.53 103.66 246.08 346.08 253.48

Table 6: CSS as a Proportion of Total Revenue Receipts

Items Amount Per Cent of
(Rs Crore) TRR
Total CSS going through the state budgets 20254.99 4.71
CSS bypassing state budgets 34324.67 7.98
Total CSS 54579.66 12.68
Total schematic outlay of state Plans 13067.56 3.04
Total schematic state sector outlays 67647.22 15.72
Normal and other non-schematic
central assistance in finance ministry 15450.95 3.59
Total state sector outlay in GBS 83098.17 19.31
CSS bypassing the state budgets 34324.67 7.98
Total outlay going through state budgets 48773.50 11.34

Note: TRR is total revenue receipts which includes both tax and non-tax receipts of states from their own sources and transfers from the centre.

the president for the same. Finance commissions do make this assessment, but have over the years confined themselves to the non-Plan side. Finance commissions grants have now become a minor component of the total grants transferred from the centre to the states. As against over Rs 83,000 crore of grants estimated to be going to the state and state agencies from the centre on the Plan side in 2005-06, the grant from finance commissions, including grants for the non-Plan revenue deficit gap, is only Rs 26,000 crore. Excluding non-Plan revenue deficit grants, which only bridge the financing gap of some of the resourcestricken states, the grants from the Finance Commission for the states in 2005-06 were only Rs 11,000 crore. Certainly, the constitutional scheme seems to have got largely compromised in the dispensation of grants from the centre to the states.

Reforms Agenda

The central grant scheme for state sector subjects needs to be reformed for better productivity and outcomes. The following agenda can address the issues plaguing central transfers to the states:

(1) The artificial distinction between special purpose schemes in the Plan budget of ministries and departments (CSS) and the budget of the ministry of finance (ACA schemes) needs to be done away with. Special purpose schemes should only be in the budgets of the administrative ministries/departments.

  • (2) Normal central assistance intended to provide block and untied assistance to the states for their Plans has become relatively small. The allocation formula (Gadgil-Mukerjee) formula is unnecessarily complicated and does not really relate to the objective of directing resources for additional Plan expenditure. More often than not, NCA has been used for funding the non-Plan gap, rather than being available for financing new developmental expenditure. It is time the NCA is given up. The present level of NCA can be distributed amongst the states, as per Finance Commission weights for determining the states’ share in taxes. The next Finance Commission can be asked to take this resource available as additional grant resource and recommend its distribution amongst the states.
  • (3) Purely discretionary funding avenues (special Plan assistance and special central assistance) as part of the state Plan assistance, being subjective, need to be also listed.
  • (4) Assistance to states against their externally aided projects should be passed through the public account on a back-to-back basis as recommended by the Twelfth Finance Commission, as the funds received for state projects are not truly central funds/ revenues.
  • (5) The net effect of the above four suggestions is that state Plan assistance would cease to exist in the present form and central Plan grants would only be for special purpose schemes.
  • (6) There has been a consensus that special purpose schemes or CSS should be for large schemes of national priority. However,
  • Annexure A Centrally Sponsored Schemes (With Different Fund Routing Arrangements)

    (Union Budget 2005-06; amount in Rs crore)

    CSS Budgeted to Go Ministry/Department through State Budgets No Amount Agriculture and cooperation 1 4 1267.89 Animal husbandry and dairy 1 1 307.80 Agro and rural industries 1 1.00 Civil aviation 1 0.05 Consumer affairs 1 1.50 Culture 1 1.79 Environment and forests 6 104.19 Health 7 323.08 AYUSH 4 133.70 Family welfare 3 3515.86 Elementary education 3 1996.57 Secondary education 9 152.58 Women and child development 3 3269.96 Labour 3 26.47 Law and justice 1 3.00 MNES 2 9.23 Panchayati raj 1 12.00 Planning 1 3.02 Rural development 1 4.79 Land resources 4 126.00 Drinking water supply 1 2259.75 Shipping 2 15.50 Road transport 2 67.00 Small-scale industries 1 4.00 Social justice and empowerment 8 954.61 Statistics and programme implementation 2 37.13 Textiles 5 74.80 Tribal affairs 5 269.45 Urban development and works 2 249.00 Urban development 1 150.90 Water resources 3 273.06 Youth affairs and sports 3 21.55 Total 112 15637.23 Economic and Political Weekly December 2, 2006 CSS Functionally Budgeted Passing through Bypassing the State Budget State Budget No Amount No Amount 2 615.00 1 5 1750.43 9 142.74 1 218.50 4 684.35 6 765.00 1 1846.48 9 8181.03 1 5.00 2 125.05 7 279.00 7 18249.21 5 1146.00 2 2014.90 1 32.50 1 1580.00 2 32.00 5 935.24 4 340.00 4 1 34324.67 4 3 4617.76 Total CSS No Amount 3 1 3633.32 2 0 450.54 2 219.50 1 0.05 1 1.50 1 1.79 1 0 788.54 1 3 1088.08 4 133.70 4 5362.34 1 2 10177.60 9 152.58 4 3274.96 5 151.52 1 3.00 9 288.23 1 12.00 1 3.02 8 18254.00 9 1272.00 3 4274.65 2 15.50 2 67.00 1 4.00 9 987.11 3 1617.13 5 74.80 7 301.45 7 1184.24 5 490.90 3 273.06 3 21.55 196 54579.66 4983

    Annexure B State Plan Assistance

    Part A: Schematic State Plan Assistance to States (through Ministry of Finance)

    Sr No Name of the Scheme Outlay in 2005-06 (Rs Crore)

    1 Special Central Assistance for Hill Areas (Hills Area Development Programme) 144.00 2 Special Central Assistance Border Areas (Border Areas Development Programme) 325.00 3 Additional Central Assistance (ACA) for Externally Aided Projects 587.33

    4 ACA for Other Projects 0.00 1 Accelerated Irrigation Benefit Programme (AIBP) 0.00 2 Accelerated Power Development and Reforms

    Programme (APDRP) 630.00 3 National Social Assistance 1,182.58 4 Nutrition of Adolescent Girls 162.97 5 National E-governance Plan 300.00 6 Household Electrification 1,100.00 7 National Urban Reform Mission (NURM)-

    Sub Mission on Slums 589.62 8 National Urban Reform Mission 12. NURM-Sub Mission on Urban Infra and Transport 1,027.55 9 Backward Areas/District Fund 5,000.00 Total 11,049.05

    Part B: State Plan Schemes in Administrative Ministries/Departments

    Sr No Schedule Name of Scheme/ Objective/Outcome Outlay of Number in Programme for Scheme Outcome Transfer

    Budget to States (Rs Crore)

    Department of agriculture and cooperation

    1 50 State Plan Scheme-Promoting watershed, 30.00 Watershed preventing land Development degradation by Projects in Shifting discouraging Cultivation Areas. shifting cultivation.

    Department of north-eastern development

    2 1 NLCPR Project specific 585.00 sanctions are made to the states of NE by DoNER in various sectors. Project proposals are submitted by the states (including Rs 100 crore for BTC area in Assam).

    3 2 NEC Balanced socio-economic 296.50 development in the region by taking up projects of regional importance/interstate projects in the NE and regional planning.

    Ministry of tribal affairs

    4 1 Special Central To provide financial 727.01 Assistance to TSP support to states/UTs (SCA to TSP) for implementing family

    oriented incomegenerating activities amongst STs living in below the poverty line.

    5 2 GIA under To meet the cost of 380.00 Article 275(1) development schemes/ of the Constitution projects for promoting

    welfare of STs also to raise the Scheduled Areas Administration.

    Total all ministries and departments 2,018.51

    this norm has been flouted with impunity. The only way the objective of having few but large and effective CSS is to place a statutory limit on central revenues which can be used for CSS and a statutory system of allocating such amounts. It is felt that CSS should be limited to one-quarter of the states’ share in central taxes. As the states’ share in central taxes is presently 30.5 per cent, the CSS should be limited to 7.5 per cent of central taxes allocable to states.

  • (7) Finance commissions need to be given the jurisdiction to take into account grants transfer to the states from the centre. Like in Australia, finance commissions can be asked to estimate grants transfers to the states through central Plan schemes and keep that into account while determining their needs for grant in aid.
  • (8) Finance commissions’ specific purpose grants complicate and sometimes overlap the same grant field occupied by central government grants. Finance commissions should refrain from recommending specific purpose grants and model the grant regime on equalisation principles.
  • (9) The practice of central grants bypassing the state budgets needs to stop. There is no reason for using a state vehicle and bypassing the state governments.
  • (10) Special purpose grants from the centre should be modelled on an “a la carte” principle, with the states’ share in aggregate grant funds determined on a formula driven objective basis and the states allowed to choose the schemes from a menu of CSS and spend as much money on any particular scheme, according to their judgment, out of the total share allocated to them.
  • EPW



    1 The Rural Electrification Scheme (an ACA scheme till 2003-04) was routed for many years through the Rural Electrification Corporation, acentral government owned enterprise.

    2 This study does not deal with the Finance Commission grants to states. Finance Commission grants amount to approximately Rs 25,000 crore annually.

    3 ‘Centrally Sponsored Schemes and Their Funds Flow to the States’, unpublished study done for USAID.

    4 Statement 17 of the Expenditure Budget (Volume I) lists such outlaysfor each ministry/department in the aggregate, but not scheme-wise. Expenditure Budget (Volume II) provides line item-wise division of such CSS outlays.

    5 These schemes are listed as specific schemes in the outlays of ministries/ departments. Budget documents do not distinguish them as CSS anywhere. Budget documents for 2006-07 have begun providing a schedule (statement18) which lists outlays, for the first time, which are transferred through state/district agencies and local bodies. Statement 18, however, is not complete and seems to have left out outlays of some CSS which bypass the state budgets.

    6 These are listed under head 3,601 – an omnibus head for transferring amounts as grants to state governments.

    7 Schemes listed in the three columns of the annexure add up to 196. However, there are some schemes which have components of funds going through as well as bypassing state budgets.

    8 Expenditure Budget of the union government is published in two volumes. Volume I is analytical and places key aspects of expenditures in various analytical statements. This volume also provides reconciliation betweenexpenditure as presented in the demands for grants, annual financial statement and Expenditure Budget, Volume II. Volume II presents ministry/ department-wise Plan and non-Plan budgets on a line item basis. Detailed demands for grants do not form part of budget documents and are dealt with at the ministry/department level.

    9 The government presents its expenditure proposals to Parliament in theform of grants. Once grants are approved, the government moves appropriation bills for getting authorisation to draw money approved for grants from the Consolidated Fund of India (CFI).

    Dear Reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Back to Top