In August this year, the government of India approved the recommendations made by a sub-group of chief ministers on rationalization of centrally-sponsored schemes (CSSs). The rationalization plan would first prune the existing 66 CSSs to 28, and then further divide them into three categories—six ‘core of the core’ schemes, 20 core schemes, and two optional schemes. The ‘core of the core’ schemes include the pension schemes, Mahatma Gandhi National Rural Employment Guarantee Act, and four umbrella schemes targeting “vulnerable sections" of the population.

Further, the flexi-funds component of the CSSs would be increased to 25% for the state governments to programme. Another set of recommendations were made around the modalities of release of funds. For instance, the release of a tranche of funds would no longer be dependent on producing a utilization certificate of the previous instalment; and instead, it would be based on the submission of the instalment preceding the last one.

This is another step in the process of improving the governance of CSSs in India, with the specific rationalisation exercise being prompted by the ongoing fiscal reorganisation between the Centre and state governments. Starting last year, transfers from the Centre to state governments went up by approximately Rs1.8 lakh crore. This was a result of the 14th Finance Commission recommendations which increased the devolution of the Centre’s tax receipts to state governments from the prevailing 32% up to 42%. This reduced the ability of the central government to continue funding CSSs at their previous levels, and at the same time, provided state governments a greater measure of flexibility in financing their own priority development schemes.

The recommendations thus far appear to have three main implications. The first one is the categorization of schemes into a slightly smaller set of schemes. This is of minor consequence because the schemes remaining in the pruned list actually add up to 50, if you count the items under each of the umbrella schemes.

The second implication that comes from recommendations that relate to release of funds appears more significant, since there are several difficulties state governments face in ensuring a smooth flow of funds. Aiding that process is critical to the performance of these schemes. For example, the change in rule regarding the utilisation certificate may not count as a big bang reform, but has huge relevance for transfer of funds to the lower levels of government, and directly affects implementation.

The third implication is that this rationalisation process furthers the extent to which specific governments can be held accountable for delivery of services. In this column, I have previously lamented the phenomenon of ‘mutual denial of accountability’—when faced with poor outcomes, the centre blames state governments for poor implementation, while the state governments respond by saying that they have no control over how funds are spent. With these reforms, we make a bit of progress.

But the circumstances right now are ripe for a major push forward. One option on the table should be a performance-linked financing model between the Centre and the state governments.

For the schemes designated ‘core’, state governments now contribute 40%. This means that it would be possible for state governments to initiate work in the year, and secure funds on the basis of performance. Performance of public schemes should be defined as a combination of immediate results (outputs) and long-term change (outcomes) in key indicators of interest. Given the greater flexibility that state governments have in choosing which components to invest their funds in, a truly performance-linked model can be designed. In time, one expects increases in both the state’s proportional contribution to these schemes, as well as further rationalisation of schemes. Even in the current arrangement that has umbrella schemes containing multiple disparate schemes, there is an opportunity to set headline sector targets while avoiding being prescriptive about the way state governments work towards achieving those targets.

There are several benefits in moving to a performance-linked financing model. It puts the onus of ensuring delivery on the state governments, and downwards, on the lower tiers as applicable. It also forces state governments to work on ironing out implementation issues, including setting up stronger monitoring systems, empowering lower bureaucracy, etc. The independent monitoring by Niti Aayog could then be used in this arrangement to verify the levels of achievement reported against the said indicators.

What we have so far are a set of gradual incremental steps towards reforming the CSS architecture in India. However, with the backdrop of ‘Team India’, the promise of improvements in implementation, and the stated intent to effect concrete CSS reforms that date back to the previous government, the current reforms seem not only too slow, but also far too little. The current government has tended to use technology as a means to leapfrog implementation challenges, but the basic institutional structure threatens to negate the expected benefits. Enhancing the levels of accountability for the quality of delivery, and pushing accountability down the implementation chain must take top priority in the ongoing reforms process.

Suvojit Chattopadhyay works on issues of governance and development. Over the last decade, he has worked with a range of development agencies in India, Ghana and Kenya.

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