Expenditure review: Development needs a wider role of state govts

As the Centre reviews hundreds of schemes, the push to rationalise spending could reshape fiscal federalism, ease pressure on states, and improve the efficiency of public expenditure

The Union Ministry of Finance (MoF) is reported to have asked all government departments and ministries to rationalise centrally sponsored schemes (CSS) and central sector schemes. The idea is to merge overlapping schemes and improve efficiency in implementation. The government runs 54 CSS and about 260 central sector schemes. While the merits of individual schemes may be debatable, it is reasonable to argue that the Union government runs too many schemes, which may be affecting outcomes. Therefore, a periodic review of schemes is necessary. As announced in the 2016 Budget speech, schemes have been aligned with the Finance-Commission cycle and their continuance is based on evaluation. Given that the exercise is being undertaken now, the government, particularly the MoF, would be well advised to examine each one of them carefully. 

There are several arguments in favour of a close review, particularly in the case of CCS. One of the criticisms of the recent change in the rural employment guarantee programme under the new Viksit Bharat — Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025, which is a CSS, is that it puts an additional fiscal burden on states. State governments will need to shoulder 40 per cent of the expenditure. The previous scheme was a central sector scheme and largely financed by the Union government. Several states may not be in a position to increase expenditure. So, while CSS are designed by the Union, they are partly funded by state governments, and this curtails their fiscal freedom. As a result, states may not be able to spend on programmes they wish to pursue. This was also highlighted by the Reserve Bank of India (RBI) in its study of state finances. An observation in the December 2024 RBI study is worth quoting here: “... too many Central government schemes reduce flexibility of State government spending and dilute the spirit of cooperative fiscal federalism”. 

Thus, the rationalisation of CSS could improve the fiscal space, both at Union and state levels. This can increase overall expenditure efficiency. Further, Indian states are at different levels of development with varying requirements. What, for instance, needs to be done in the education sector may be very different in northern Indian states than in southern states.  State governments are better equipped to deal with state-level challenges. Besides, there is often an unwarranted political tussle for credit in such schemes. Preferably, for better outcomes, most of the developmental and social-sector schemes must be designed and run by state governments because they are better-positioned to do so. Thus, there is a case for greater fiscal empowerment of states. State governments, in turn, should empower local bodies. However, as highlighted in this space earlier this week, this is not the case. It would be interesting to see how the Sixteenth Finance Commission has approached this issue. 

At a broader policy level, it is worth debating whether India should reconsider the allocation of fiscal resources to achieve faster growth and development. In this context, it is also necessary to discuss how state governments manage their finances. Several states have high levels of debt stock, but this is not stopping them from launching populist schemes. As a recent study showed, in some states, interest payments are growing faster than revenue. This is not a sustainable position. However, this should not be taken as a reason for not empowering states. What is needed instead are hard fiscal rules and transparent accounting of state finances. It is time for a wider expenditure review.