I promised, in my previous blog to offer some new thinking on the role of CSSs in the changing scenario of center-state relations.

Perhaps the best way to think about the center-state dynamic is through the spirit of the 14^th Finance Commission (FFC). The core mandate of the FFC was to provide state governments’ with the fiscal space to perform their constitutionally assigned functions.

In this scenario, technically speaking the Union government ought to leave state subjects to state governments – and in practical terms, this would mean shutting down the many line ministries that people Delhi’s Lutyens zone.  But of course this is practically impossible to do for no other reason except that it would leave many politicians and bureaucrats with nothing to do!

And as I mentioned in my blog last week, the really curious consequence of the FFC mandate is that many State government actors – most of whom till recently were protesting the one size fit all model of central financing for social schemes – too are now expressing a marked preference for dealing with money from Delhi rather than their own finance departments. As my bureaucrat friends have often reminded me, the bureaucracy is incentivised to grab financial resources (for a large budgetary allocation is power), no matter where it comes from and any sign of resources reducing, results in a clamor for more. This is precisely the phenomenon that we are witnessing today.

But, more seriously, even though the Union government does not have a direct role to play in many social schemes, that are constitutionally the domain of the state, there is a strong argument for its continued engagement in ensuring that key social sector priorities are financed and provided for. The argument is important from the perspective of the moral responsibility of the Union government to ensure that all citizens’ have equal access to their rights and entitlements. The real question therefore is not whether the Union government should have a role in financing and supporting social sector investments. Rather, the emphasis ought to be on how this role might be best structured.

To answer this question, it is best to go back to first principles.

About a decade ago, in a different avatar, I worked as a research associate on a project at the World Bank that attempted to go back to first principles of public finance and accountability to unpack the optimal allocation of roles across levels of government in a federal structure. The framing developed in that project, is I believe, a very useful way of trying to address the current question of the role of the Union government in financing social sector programmes (see Pritchett and Pande 2006 and Aiyar, Hammer and Samji 2006).

Accordingly, functions that have greater economies of scale  but low degrees of transaction intensity and discretion ought to rest with higher levels of government, whereas those that need to respond to local information, that are transaction intensive and require discretionary decision making to suit local conditions should reside in lower levels of government.

This would suggest that activities like monitoring staff, designing implementation models etc. are best placed at the state and local level. The Union government, on the other hand, could play an important role in setting standards, technical knowledge sharing, assessments and monitoring outcomes.

Importantly, the Union government could also play an important role in incentivising states and encouraging creative competition and providing equalisation of funds where necessary (Bihar for instance may genuinely need money from the center for education and health related programs than say Kerala).

For the moment, the public and government debate on the role of the center seems to be limited to minor tweaks in CSSs. I would urge that the debate on the role of the Union to move away from the CSSs mode to reimagine what the Union can do keeping in mind these first principles.

Here is one model that we at AI have been proposing:

• Reduce the number of CSSs from the current (60+) to 10-15 key programmes that provide “additional” funding to states for meeting national goals. One way to rationalize the number of schemes is by linking the “national” goals to the sustainable development goals relevant to social sectors. These include goals like zero hunger, quality education, health and well-being, sustainable cities, drinking water and sanitation. For each of these key goals, the current bouquet of schemes ought to be restructured in to one single scheme that pools all allocations under a single scheme head. This restructuring will also be an opportunity to reshape the current design of CSSs.
• Real change in social sector financing will only be visible if the current design of CSSs is completely re-hauled in addition to scheme rationalization. In keeping with first principles, this re-haul ought to shift the role of the Union away from the current emphasis on determining line-item budgets and inputs to programmes to a focus on defining and measuring outcomes on the one hand and promoting innovation and competition on the other. This can be achieved by designing the financing system of CSSs as a 2 window grant. Under this system 75% of funds can provided as an untied block grant for state governments to implement their plans and a second window comprising 25% of the total budget for the state ought to be provided as a performance based grant linked to performance based outcome indicators. To access this funding, states will need to develop clearly defined achievement goals which will be linked to a five-year plan developed by the state line department and planning board. The Union government line ministries can play a facilitating role providing technical assistance to state governments, through mechanisms such as joint review missions, as they develop their five year (and subsequent annual) plans. Read Rules vs. Responsiveness: Towards Building an Outcome-Focused Approach to Governing Elementary Education Finances in India for a model we have proposed of how this can be done in the case of education).
• The process of identifying outcome indicators and measuring these indicators ought to be the responsibility of the Niti Aayog and the Central Statistical Office of India. An additional budget window could be provided to line ministries to undertake 3^rd party evaluations at regular intervals.