Union Government’s Financial Transfers to States

Sub: Eco

Sec: Fiscal Policy

Context:

Tamil Nadu CM alleged the Union government is withholding funds for vital state projects.
Concerns arise over tax policies reducing financial transfers to states, potentially weakening cooperative federalism.

Historical Financial Transfers:

Fourteenth Finance Commission (2015-16):
- Recommended devolving 42% of Union tax revenues to states.
Fifteenth Finance Commission:
- Retained 41% (excluding Jammu & Kashmir and Ladakh).

Decline in States’ Share:

Gross vs. Net Tax Revenue:
- Net tax revenue is calculated after deducting collections under cess, surcharge, Union Territories’ revenue, and tax administration expenditure.
Revenue from Cess and Surcharge:
- Increased from 5.9% in 2015-16 to 10.8% in 2023-24.
- These collections are not shared with states and are used for specific Union government schemes.
Grants-in-Aid to States:
- Declined from ₹1.95 lakh crore in 2015-16 to ₹1.65 lakh crore in 2023-24.
Combined Share:
- Statutory financial transfers declined from 48.2% to 35.32% of the gross tax revenue of the Union government.

Centralisation of Public Expenditure:

Centrally Sponsored Schemes (CSS):
- Increased from ₹2.04 lakh crore in 2015-16 to ₹4.76 lakh crore in 2023-24.
- States must commit matching finances to avail grants, affecting inter-state equity.
Central Sector Schemes (CSec):
- Fully funded by the Union government, allocation increased from ₹5.21 lakh crore in 2015-16 to ₹14.68 lakh crore in 2023-24.
- Only ₹60,942 crore devolved to states in 2023-24.

Impact on Cooperative Federalism:

Non-Statutory Transfers:
- CSS and CSec schemes are non-statutory, forming 12.6% of gross tax revenue.
- Total financial transfers as a proportion of gross tax revenue were 47.9% in 2023-24.
- Tied grants reduce states’ expenditure freedom.
Fiscal Power of Union Government:
- Retains more than 50% of gross tax revenue.
- Incurs a fiscal deficit of 5.9% of GDP.

Centrally Sponsored Schemes (CSS)

Centrally Sponsored Schemes are schemes funded by the Union government but implemented by state governments.

Key Features:

Funding Pattern: The funding is shared between the Union and state governments, with the Union government typically providing a significant portion of the funding while the states contribute the remainder.
Implementation: These schemes are implemented by state governments, which means that while the central government designs and funds these schemes, the responsibility for their execution lies with the states.
Objective: CSS aims to ensure that national priorities are addressed through state-level implementation, often focusing on sectors like health, education, agriculture, and rural development.
Types of CSS: CSS can be broadly categorized into core schemes (national priorities like health and education), core of the core schemes (most crucial schemes like MNREGA), and optional schemes (schemes of lesser priority).

Examples:

Central Sector Schemes

Central Sector Schemes are schemes entirely funded and implemented by the Union government.

Key Features:

Funding Pattern: These schemes are fully funded by the Union government, with no financial contribution required from the states.
Implementation: The implementation of these schemes is directly managed by central government agencies or departments.
Objective: CSec Schemes are designed to address issues that fall within the exclusive jurisdiction of the central government or to achieve objectives that are national in scope.
Focus Areas: These schemes often focus on areas such as defense, space technology, infrastructure development, and other strategic sectors.

Examples: