Fiscal Federalism and Centrally Sponsored Schemes
The study report has been authored by Ritwika Sharma, Mayuri Gupta and Kevin James
A significant proportion of fiscal transfers to States from the Centre is taken up by Centrally Sponsored Schemes (CSSs). CSSs, designed and partially funded by the central government, are implemented by State Governments. According to the budget estimates for 2021-22, up to 23% of the total fiscal transfers to states are set to be through the route of CSSs.
CSSs have been implemented via Article 282 of the Constitution of India. Article 282 enables the Union (as well as the states) to make discretionary grants, even beyond their respective legislative competences, for any ‘public purpose’. Since the Constitution came into force, CSSs routed via Article 282 have proliferated, with many CSSs dominating subjects within States’ legislative competence. Over time, concerns have emerged over the use of Article 282 for authorising CSSs, which inhibit states from exercising policy priorities over subjects that are constitutionally within their legislative and executive domain.
By using CSSs in the area of public health as a starting point, this report dives deep into Article 282 and the development of the practice of intergovernmental transfers. The core of this research report is a study of the architecture of fiscal federalism in India through a constitutional and jurisprudential lens, with the aim of developing a reworked interpretation of Article 282.
Article 246 of the Constitution read with the Seventh Schedule distributes legislative powers of the Union and states across three lists: Union, state and Concurrent. Articles 73 and 162 divide the executive powers of the Union and states in line with the legislative powers. Broadly, the Union list mentions subjects of national importance like defence and foreign relations whereas the state list enumerates subjects of local and regional importance like agriculture and public health. While the Centre and states enjoy exclusive legislative and executive powers on the Union and state lists respectively, both can legislate on subjects under the Concurrent list. ‘Public health’ falls under Entry 6 of the State list, which means that states are primarily responsible to legislate on health and deliver health-related services.
The manner of distribution of powers under Seventh Schedule, rather inevitably, created a fiscal gap between the Centre and states, and a consequent vertical fiscal imbalance. The Constitution assigned greater revenue-raising powers to the Union, whereas much of the expenditure responsibilities, particularly those pertaining to citizens’ welfare and development, were assigned to the states. The Fifteenth Finance Commission Report notes that in 2018-19, states had only 37.3% of the resources but were responsible for 62.4% of the expenditure incurred.
The constitutional framework seeks to address this vertical fiscal imbalance by providing for intergovernmental transfers. Transfers from the Centre to states are carried out through multiple channels, such as Articles 270 and 275, which provide for the distribution of taxes between the Union and states that are levied and collected by the Union, and for the payment of grants-in-aids of the revenues of the States, respectively as per the Finance Commission’s recommendations. Then there is, of course, Article 282.
Fiscal transfers between the Union and states have been carried out through multiple routes – via the Finance Commission, the Planning Commission, and various central ministries. Under Article 280, the Finance Commission has the duty to recommend allocation of centrally administered taxes and grants-in-aid to the states. The Planning Commission, established in 1950 by a Cabinet notification, gave recommendations on grants and loans to be provided to the States for financing their plan expenditure.
While it existed, the Planning Commission recommended several CSSs implemented by transfers routed via Article 282. As this report explains, Article 282 lifts the embargo placed under Article 162 upon Union’s power to act in respect of areas within states’ exclusive domain. CSSs, by their nature, are discretionary transfers made by the Union to the states, and routinely pertain to subjects within the state or Concurrent lists. Although the Planning Commission has ceased to exist, CSSs have persisted.
The Chairman of the Fifteenth Finance Commission has voiced his discomfiture with the alleged misuse of Article 282. He argued that the provision was not meant to be an overarching route for effecting transfers, but one to be sparingly used. Many attempts have been made to restructure and rationalise CSSs over the years. In 2015, all existing CSSs were rationalised and clubbed under 28 umbrella schemes. Despite such restructuring, confusion about the exact number of CSSs persists.
On health alone, the Centre has initiated a number of flagship programmes, such as the National Health Mission, the Rashtriya Swasthya Bima Yojana, and the Integrated Child Development Services Scheme. With the introduction of Mission Shakti, Saksham Anganwadi and Poshan 2.0, Rashtriya Pashudhan Vikas Yojana, and the Prime Minister Atmanirbhar Swasth Bharat Yojana, the number of Umbrella CSSs has risen to 35 in the FY 2021-22. With the Covid-19 pandemic far from over, concerns over erosion of fiscal federalism, expenditure in healthcare, and lack of localised planning have only amplified.
With CSSs dominating the space of intergovernmental transfers, the exact scope of Article 282, the constitutional provision used to effectuate CSSs, merits attention. This research report studies the architecture of fiscal federalism in India through a constitutional and jurisprudential lens, with the eventual aim of developing a reworked interpretation of Article 282. To that end, it analyses:
The historical background of the Constitution’s fiscal federal architecture and, in particular, the scheme of inter-governmental transfers;
The working of Article 282 and CSSs in practice and the fiscal federal tensions that have ensued;
The attempts to address these fiscal federal tensions and to interpret Article 282 over the years;
Judgments of the Supreme Court which are either premised on or comprise a discussion of ‘federalism’ or the ‘federal character’ of the Constitution of India.
Building on an understanding of the above, this report argues for a reworked interpretation of Article 282 that upholds and promotes the federal principle, as opposed to the present position that has the practical effect of undermining it. Based on such interpretation, the report recommends that grants under Article 282 should only be made for special or temporary purposes, and this power should not be used in a manner that supplants the regular, appropriate channels of transfers under other provisions of the Constitution.
Effectively, a reworked interpretation of Article 282, as envisaged by this report, would constitutionally ground existing recommendations that call for rationalising as well as reforming CSSs in a manner that ensures adequate consideration of states’ localised interests.
(The study report has been authored by Ritwika Sharma, Mayuri Gupta and Kevin James)