CSS and Fiscal Federalism | 10 Feb 2025

Source: FE 

Why in News? 

The Centre cut the 2025-26 centrally sponsored schemes (CSS) outlay to states by Rs 91,000 crore (18% of the budget estimate for the schemes) after finding Rs 1.6 lakh crore in unspent funds from past transfers. 

• Many states have termed this decision as contrary to fiscal federalism and raised questions on the viability of Article 282. 

What is Article 282? 

• About Article 282: It allows both the Union and States to make grants for any public purpose, even if the purpose is outside their legislative jurisdiction. 
  • Unlike tax devolution (Articles 270 & 275), grants under Article 282 are discretionary and not bound by Finance Commission (FC) recommendations. 
  • Initially intended for unanticipated contingencies, successive central governments have used it to introduce CSSs. 
    • Articles 270 and 275 mandate that the FC determines the States' share in Union tax revenues. 
• Judicial Stand: In the Bhim Singh Case, 2010, the Supreme Court (SC) upheld the Union’s power to provide discretionary grants under Article 282, even beyond FC recommendations (Article 275). 
  • Grants can be made even for subjects beyond Parliament's legislative competence, provided they serve a public purpose. 
  • Citing Ram Jawaya Kapur Case, 1955, the SC ruled that Appropriation Acts, authorizing expenditure from the Consolidated Fund of India (CFI), legally justify grants under Article 282. 

How CSS Pose Challenge to Fiscal Federalism? 

• Discretionary CSS Funding: Grants under Article 282 the Union or a State can grant funds for any public purpose, even if it lacks legislative authority over it. 
  • The NITI Aayog 2015 (like earlier Planning Commission which guided grants though they lacked constitutional status), continues to influence CSS design. 
• Erosion of States’ Fiscal Autonomy: CSSs have strict fund utilization conditions, limiting states' flexibility to adapt them to local needs.  
  • E.g., under the Poshan Abhiyaan, States cannot modify target groups or key nutrition indicators. 
• Resource-Expenditure Asymmetry: The 15th Finance Commission (2021-26) highlighted the Union holds 63% of resources but spends 38%, while states get 37% but bear 62% of expenditure. 
  • It makes states reliant on CSS funds and limit state-specific initiatives. 
• Prioritization Issues: CSS funds require states to provide matching grants, diverting their resources from state-priority sectors. 
• Threat to Cooperative Federalism: During Constitutional debates, Dr. BR Ambedkar emphasized a co-equal partnership between the Union and states but over-reliance on discretionary CSS grants undermines the constitutional intent of cooperative federalism. 
  • E.g., CSS guidelines mandate “branding” to highlight central leadership, reinforcing central control. 
• Pushing Union’ Policies: CSSs have increasingly been used as political instruments to control states. 
  • E.g., the Ministry of Finance’s 2022 guidelines included a Rs 50,000 crore interest-free loan for states willing to disinvest public sector enterprises, a move opposed by several states. 
• Proliferation of CSS Funding: CSS fund releases rose from 7.5% of total transfers in 2014-15 to 47% in 2022-23, reducing FC recommended transfers. 
  • As opposed to the Seventh Schedule of the Constitution, many CSSs operate in areas under the State List, leading to Central encroachment into State jurisdictions. 

What is CSS? 

• About: CSSs are jointly funded by the Centre and states, implemented by states, and cover sectors under the State and Concurrent Lists of the Constitution. 
  • They supplement the efforts of State Governments, as the Central Government has greater financial resources. 
  • All transfers to States for CSSs are being routed through the Consolidated Fund of the State. 
• Types: CSS is divided into three main categories: 
  • Core of the Core Schemes: These schemes are the most crucial for social inclusion and protection. E.g., MGNREGA. 
  • Core Schemes: These schemes focus on various developmental sectors such as agriculture, infrastructure, education, health, and rural development. 
    • E.g., Mid-Day Meal Scheme (School Nutrition Programme), Pradhan Mantri Gram Sadak Yojana (Rural Roads) etc. 
  • Optional Schemes: States are free to choose the ones they wish to implement.  
    • Eg: Border Area Development Programme etc. 
• Funding Pattern: The Centre allocates about 12% of its budget to CSS, with funding shared in varying Centre-State ratios: 
  • 60:40 (Majority of Schemes) 
  • 80:20 (Some Schemes) 
  • 90:10 (For North-Eastern & Special Category States) 
• Difference Between CSS and Central Sector Schemes:

Way Forward 

• Judicial Clarity on Article 282: The SC should evaluate whether CSS affects federal balance and establish the special circumstances under which discretionary grants can be used. 
• Rationalisation of CSS: Merge similar CSS into effective Umbrella Schemes and conduct regular impact assessments to eliminate ineffective ones. 
• Review Funding Mechanism: Revise the fund-sharing pattern to ease states' financial burden, especially for general category states, and restore support for backward regions after Backward Regions Grant Fund (BRGF) discontinuation. 
• Strengthening Cooperative Federalism: Establish regular Centre-State consultations via the Inter-State Council and NITI Aayog, and grant states more flexibility in adapting CSS to local needs.