RBI warned: Cooperative federalism is getting weakened by many central schemes, states are also affected

The big financial schemes of the central government are against the spirit of cooperative federalism because they affect the freedom of spending of the states. RBI has said this in the survey report released on the budget of the states. The central bank has talked about improving the financial condition of the states but for the first time, it has talked about the far-reaching financial ill-effects of centrally funded economic schemes.

RBI has also directly said that adjusting the centrally funded schemes will help in reducing the financial burden not only on the states but also on the center. This RBI report has raised an issue that many states feel but no one has spoken about it openly.

At present, the number of Centrally Sponsored Schemes (CSS) is 75 whereas in 2016, the Union Cabinet had approved 28 schemes based on the recommendations of a sub-group of Chief Ministers of the states. Then the sub-group had said that the number of CCS should not exceed 30 in any case.

According to the RBI report, “Many schemes of the Central Government affect the flexibility of spending of the state governments and the spirit of cooperative federalism erodes. If the Centrally Sponsored Schemes (CSS) are properly adjusted, then the states will have more freedom to spend in the budget, which they can use according to the special needs of their states. This will help in reducing the financial burden on both the states and the Centre.''

The central bank said this in the context of improvement in financial health of the states and their borrowing requirements assessment becoming more transparent. This indirect warning by RBI is being taken as fully unexpected. After this comment, now we will have to wait for the recommendations of the 16th Pay Commission. Report of 16th Pay Commission, headed by Arvind Panagariya will come by October 2025.

In the budget forms for the year 2024-25, the number of centrally funded schemes is given as 75. The size of the budget in this respect has been maintained at Rs 5,06,978.07 crore. While the previous size of the same amount for the year 2022-23 was given at Rs 4,35,556.32 crore.

Through these schemes, the government is spending more than 10 percent of the total budgetary size, which is a big reason for RBI to raise questions on them. It is noteworthy that in the first term of the Modi government itself, a sub-group of Chief Ministers of the states was formed to see how to make CSS more useful. This report was also approved by the government.