16th FC moots CSS overhaul, discom privatisation, subsidy bill pruning

The 16th Finance Commission has asked the Centre to set up a high-powered committee to review all Centrally Sponsored Schemes (CSS), recommending the closure of programmes that fail to use resources productively. The government has said this proposal will be examined in due course. 

“Though the CSS were restructured and rationalised in 2015-16, over the past decade, there has been an increase in their number, with more than 80 schemes currently in operation,” the Commission noted. Such schemes now make up more than half of Union transfers to states and about 1.5 per cent of GDP. Over 20 ministries run these schemes and almost none were wound up despite objectives being met, it observed. “Continuing schemes with low, or negative social returns has the effect of crowding out higher return schemes that could replace them,” stated the report by the Arvind Panagariya-led Commission tabled in the Parliament on Sunday. 

 

The Commission flagged that five big schemes — MGNREGA, PM Awas Yojana, Jal Jeevan Mission, Samagra Shiksha and the National Health Mission — account for over half of CSS spending, and should be scrutinised first for saturation, design, and scope for continuation. 

Separately, the Commission recommended that the government promote the privatisation of power distribution utilities or discoms, stating the repeated cycles of losses, debt accumulation, and bailouts of discoms, stem from their current governance structure. 

To create incentives for privatisation, the panel said private investors need to be shielded from the accumulated debt burden after discom takeover. It recommended the creation of a special purpose vehicle (SPV) which will function as a warehouse for the accumulated working capital and other loans not backed by any asset. “This transfer will make the discoms a better investment opportunity,” it stated. 

For incentivising states, the finance commission recommended that the prepayment or eventual repayment of this debt could be made eligible for assistance under the Special Incentive Scheme for Capital Investment (SASCI), a scheme providing 50-year interest-free loans to states for capital investment projects. 

The Commission also suggested emulating the successful models of Gujarat and Haryana. All four of Gujarat’s state-owned discoms have consistently featured among the top 10 utilities and both the Haryana discoms have emerged from heavy debt following the successful implementation of Ujjwal Discom Assurance Yojana (UDAY). In the performance rankings for FY25, however, both the Haryana discoms have been downgraded from A+ to A grade. 

 The Commission also flagged subsidies and transfers as a growing fiscal risk that needs active pruning. It argues that the defensible core of subsidies is support to the poor, and that any other subsidy must rest on hard evidence of positive externalities. It has asked the Union and the states to systematically review all schemes against these tests, phase out those that fail, and tighten the beneficiary base of those that remain so that they serve only the intended groups. 

Noting that almost one-third of CAG-audited Central Public Sector Enterprises incurred losses in each of the latest four years for which we have CAG data, with annual losses ranging between ₹36,000-51,000 crore, the panel mooted that concerned departments must mandatorily take to the Cabinet any enterprise incurring losses in three out of four consecutive years for consideration of closure, privatisation or continuation.