The new mechanism would regulate the release of funds to the states and track their use, thereby preventing idling

The Union government executes a plethora of welfare programs aimed at providing basic and necessary amenities and upliftment of the most disadvantaged members of society. It does so mainly through "Central Schemes" (CS) which are fully funded and implemented by it. A total of 740 CS schemes are currently under implementation. During FY2022-23, the CS spending was Rs 1208,000 crore

In addition, there are "Centrally Sponsored Schemes" (CSS) designed to supplement the efforts of the states in achieving various socioeconomic goals and implementing national priorities. These are funded by the central government and the states in varying proportions viz. 90:10, 60:40, 50:50 and so on depending on the scheme. These schemes are implemented by the states. During FY2022-23, the spending on a total of 50 CSSs was Rs 412,000 crore   

Put together, the total expenditure of the Centre on CS and CSS schemes during FY2022-23 was Rs 1620,000 crore. It was 41 per cent of the total Budget spending of Rs 3940,000 crore during the FY. It is, therefore, imperative that the money is used judiciously. At one level, the government needs to be extremely circumspect in identifying the beneficiaries based on a rational criterion and removing any scope for fictitious claimants. At another level, efficient cash management and technology-based transparent delivery mechanisms hold the key to the efficient utilization of funds. 

Since 2022-23, Modi – government has come up with innovative ideas to achieve these goals. At the outset, let us take stock of the arrangements before the FY 2022-23.

Under a large number of fragmented banking arrangements, the central government transferred funds to the implementing agencies (IAs) based on a tentative assessment of their spending requirement. This resulted in inefficient cash management, which often left certain IAs short of funds, while others were sitting on idle money. Consequently, the government was forced to resort to short-term borrowing (albeit for agencies facing shortfall), which imposed an additional interest burden.

For CSS schemes, the Centre transferred funds to state treasuries, and states in turn transferred these along with their shares (for instance, under a scheme requiring fund sharing on a 60:40 basis, out of say Rs 100/- Rs 40 has to be contributed by the state) to the IAs. However, many states delay the transfer of central funds as well as their shares to the agency accounts, causing the funds to lie idle.

Moreover, the states are generally prone to divert the funds for other uses to meet pressing expenditure commitments in those areas or simply use the money to show a better picture of their overall budgetary position. The very fact of funds (read: money transferred by the Centre) being available in their treasury makes them fiscally imprudent. That implementation of the Scheme for which the funds were meant gets hamstrung, doesn’t seem to bother them.      

To deal with the anomaly of funds remaining idle with certain IAs even as other agencies face shortages, in FY 2022-23, the Centre moved to a Treasury Single Account (TSA) with close to 200 autonomous bodies receiving funds through this account maintained with the Reserve Bank of India (RBI). Similarly, two other accounts - a central nodal agency system (CNAS) for central schemes and a single nodal agency (SNA) model for CSSs were opened.

Under the new arrangement, each state is required to identify and designate a SNA account for every scheme. All funds for that state in a particular scheme are credited to this bank account, and all expenses are made by IAs from this account only. The Centre promptly releases funds through these accounts with minimum float allowed meaning only a quarter of the money is released with the rest to be given only after evidence of using the earlier 75 percent is given. Further, year-end release is avoided.

Furthermore, in June 2022, the Finance Minister, Nirmala Sitharaman launched a SNA dashboard under the Public Financial Management System (PFMS). The dashboard depicts the release of funds made to different states by ministries, further releases made by state treasuries to the SNA accounts, expenditures reported by the agencies, interest paid by banks to SNA accounts etc. in intelligible, informative and visually appealing graphics.

The new mechanism thus regulates the release of funds to the states and tracks their use including at the level of IAs thereby preventing idling. Further, because the funds go to a dedicated SNA account of a scheme, it nips in the bud any chances of the State diverting funds. As for the outcome, according to the RBI, the number of accounts for CSS schemes has fallen from a whopping 1800,000 to 3,300. Besides, the Centre saved around Rs 10,000 crore in interest during FY 2022-23.   

But, these savings are a pittance of 0.9 per cent of the annual interest payments by the Centre Rs 1080,000 crore (FY 2023-24). Moreover, given that at any given point in time, as much as Rs 150,000 - 200,000 crore of central funds lies with state treasuries/IAs, there remains tremendous scope for garnering more savings by eliminating the free float.

How can this be achieved?

The Centre intends to roll out a new mechanism. This will require each state IA to maintain an account with the RBI for each scheme. Instead of releasing any money to the IA, the Centre will issue an authorisation as per the sharing pattern to the RBI for the scheme. The state concerned will also give a similar authorization to the RBI.

When the actual payment need arises, the state will move the payment file to the Centre, which will pass it on to the RBI. The RBI, which already has the authorization, would release the amount to the agency from the Consolidated Fund of India (CFI) first and then from the State Consolidated Fund (SCF). The advantage of this arrangement is: that since the funds don’t need to be parked either with the state treasuries or the bank accounts of IAs, they won’t lie idle in these accounts while having already moved out of the CFI.

Apart from the resultant savings in interest, the idea of ‘fund release only when the need arises’ helps the Centre in another way. Consider this: during FY2022-23, the CSS spending was Rs 412,000 crore as against the budget estimate (BE) of Rs 452,000 crore. Even then, there were Rs 180,000 crore central funds unspent from the releases of FY2022-23. Had the proposed mechanism been in place, the Centre could have restricted the allocation to Rs 232,000 crore (412,000 – 180,000) thereby improving the fiscal position for that year. 

The new mechanism would also help states save money to the extent that their contribution to the IAs is released from SCF only when the demand arises. The states will also be spared the penal interest @7 per cent the Centre charges – under the existing dispensation - on the number of days of delay beyond 30 days in the transfer of its share to the SNA account.

The Centre has already rolled out a pilot scheme for Jal Jeevan Mission with three states Rajasthan, Karnataka and Odisha. After running the pilot, it intends to roll out the scheme pan India. To conclude, ‘fund release just when the need arises’ is a brilliant idea. The government should pursue its logical culmination with beneficial effects on the finances of the Centre and states.

(The writer is a policy analyst, views are personal)