Centrally Sponsored Schemes (CSS)

Why in the News ?

The Comptroller and Auditor General of India (CAG) has formed a committee to address “problems and issues” in the Centrally Sponsored Schemes (CSS).

UPSC Relevance 

GS2, Issues and Challenges Pertaining to the Federal Structure, Devolution of Powers and Finances up to Local Levels and Challenges Therein.

GS 3, Government Budgeting

PYQ

2023 – 10 Marks

Explain the significance of the 101st constitutional amendment act. To what extent does it reflect the accommodative spirit of federalism?

2025 – 15 Marks

Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?

Centrally Sponsored Schemes

Centrally Sponsored Schemes are distinguished by the following features:

• Shared Funding: The cost of the scheme is shared between the Centre and the States in a pre-determined ratio. This is the fundamental difference from Central Sector Schemes, which are 100% funded by the Union Government.
• Implementation by States: Although the guidelines and funding originate from the Central Government, the implementation of the scheme falls under the responsibility of the respective State/Union Territory administration.
• Constitutional mandate : CSS are typically formulated on subjects that fall under the State List or Concurrent List under Article 246 of the Constitution (e.g., health, education, welfare), enabling the Central Government to supplement state efforts in these areas of national priority.
  • They are routed through the discretionary grants under Article 282.
• Differentiated Funding Pattern: The Centre-State financial sharing ratio is not uniform and varies based on the type of scheme and the state category. The general patterns include:
  • Normal States: Usually 60:40 (Centre:State)
  • North-Eastern and Himalayan States (Special Category States): Often 90:10 (Centre:State)
  • Union Territories (without Legislature): May receive 100% Central funding.
• Categorisation: CSS are generally categorised based on their national importance and funding:
  • Core of the Core Schemes: Schemes considered essential for national priorities (e.g., National Social Assistance Programme).
  • Core Schemes: Schemes representing key national development priorities (e.g., National Health Mission).

Examples of CSS

Increasing Share of CSS 

• The decision is significant because CSS allocations are rising, with some schemes (like MGNREGS, Jal Jeevan Mission, and PM-Kisan) having an annual budget of over ₹50,000 crore.
• The Centre allocated ₹5.41 lakh crore for CSS in the Union Budget 2025-26.
• The government has also begun evaluating schemes before allowing their continuation in the next finance commission cycle, starting in April 2026.

Significance & Rationale of CSS

• Promoting National Goals: CSSs are a crucial instrument for the Central Government to ensure the implementation of schemes that address issues of national importance, such as education, healthcare, and poverty alleviation, even though these subjects fall primarily under the State or Concurrent Lists of the Constitution.

• Addressing Fiscal Asymmetry: The Central Government generally has greater resource-raising powers, while states have greater expenditure responsibilities. CSSs act as a mechanism to transfer financial resources from the Centre to the states, helping states fund large-scale development programs they might not be able to finance entirely on their own.
• Targeted Funding: Unlike general statutory transfers (recommended by the Finance Commission), CSS funds are earmarked for specific purposes, ensuring that money is spent on intended developmental or welfare programs
• Policy Coordination: CSSs encourage a degree of policy coordination and cooperation between the Centre and the states on shared subjects. The central design and funding, combined with state-level implementation, represent a collaborative approach to governance (sometimes referred to as Cooperative Federalism)

• Addressing Regional Disparities: By directing funds to specific, underdeveloped regions or for programs targeting vulnerable populations (like Scheduled Castes, Scheduled Tribes, women, etc.), CSSs contribute to balanced regional development and social equity
• Welfare Delivery: Schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Pradhan Mantri Awas Yojana (PMAY) for housing, and the National Health Mission are key examples of CSSs that directly impact the quality of life for millions of citizens

Issues arising out of CSS

• Encroachment of state functions:
  • Since many CSS are for subjects primarily falling under the State List (like health, education, and agriculture), the Central Government’s involvement through funding and guidelines can be seen as an infringement on the constitutional domain of the states.
  • This limits the policy-making and executive freedom of states on their own subjects.
• Misuse of Article 282 : Using Article 282, a provision for special or exceptional grants, as the primary mechanism for transferring large, sustained, conditional funds to states for subjects in the State List fundamentally undermines the federal balance and the constitutional scheme of resource sharing devised through the Finance Commission.
• One size fits all:
  • The uniform design of schemes often fails to account for the diverse socio-economic, geographical, and administrative realities across different states in India.
  • A scheme tailored for a developed state may be inappropriate or ineffective in a less developed or geographically difficult state, leading to poor utilization of funds and sub-optimal outcomes.
• Limited flexibility:
  • States have little room to modify the scheme design, financial norms, or operational guidelines to suit their local needs. This lack of adaptability restricts local innovation and responsiveness to specific regional challenges.
• Inadequate deliberations with states:
  • CSS are often designed by the central ministries with insufficient consultation with the state governments.
  • This results in a ‘top-down’ approach that overlooks valuable ground-level knowledge and can lead to a lack of ownership and commitment during implementation by the states.

• Proliferation of Schemes but Resources are thin:
  • A large number of CSS (historically over a hundred before rationalization) often leads to limited financial allocation for each individual scheme, spreading resources thinly and diluting the impact.
  • States face administrative difficulty in managing and monitoring a multitude of separate schemes.
• Strain on state’s Resources:
  • Centrally Sponsored Schemes typically require a mandatory matching contribution from the state governments.
  • This compulsory expenditure locks up a significant portion of the state’s own resources, restricting their fiscal space and ability to fund their own developmental priorities or critical state-specific schemes. This burden is particularly felt by financially weaker states.

Recommendations on CSS and Fiscal Federalism

NITI Aayog’s Sub-Group of Chief Ministers (2015)

• Reduction in Number of Schemes: Recommended that the total number of CSS should be reduced from 66 to a maximum of 30 to improve visibility and impact.
• Categorization of Schemes: Schemes should be grouped into three categories:
  • Core of the Core Schemes: For social protection and social inclusion (e.g., MGNREGA, National Social Assistance Programme), which should be the first charge on available funds.
  • Core Schemes: For the National Development Agenda where the Centre and States work together (e.g., National Health Mission, Swachh Bharat Mission).
  • Optional Schemes: Where states would be free to choose the schemes they wish to implement, with funds allocated as a lump sum by the Ministry of Finance.
• Increased Flexibility: Raised the availability of flexi-funds within each CSS from 10% to 25% for States and 30% for Union Territories to allow for better adaptation to local needs.
• Revised Funding Patterns: Proposed new Central-State fund sharing patterns for Core Schemes (e.g., 60:40 for general states, 90:10 for North-Eastern and Himalayan states) and Optional Schemes (e.g., 50:50 for general states).

14th Finance Commission (2015-2020)

• Increased Vertical Devolution: Recommended increasing the states’ share in the divisible pool of central taxes from 32% to 42%. This gave states greater fiscal autonomy.
• New Institutional Mechanism: Recommended evolving a new institutional arrangement to review CSS and other non-FC transfers to minimize discretion, improve design, and promote cooperative federalism.

15th Finance Commission (2021-2026)

• Building on the 14th FC’s changes, the 15th FC focused on improving the efficiency and design of the remaining CSS.
• Continuation of High Devolution: Recommended the states’ share in central taxes be 41% (a 1% adjustment from 42% was made for the newly created Union Territories of J&K and Ladakh).
• Minimum Funding Threshold for CSS: Suggested fixing a minimum threshold for annual allocation to any CSS, below which the scheme’s funding should be stopped to phase out those with limited impact.
• Outcome-Based Schemes: Emphasized shifting the focus of CSS, especially in sectors like health, from inputs (spending money) to measurable outcomes and suggesting performance-based incentives for states.
• Transparent and Stable Funding: Recommended that the funding pattern for all CSS should be fixed upfront in a transparent manner and be kept stable.
• Third-Party Evaluation: Recommended that a comprehensive third-party evaluation of all CSS should be completed within a stipulated timeframe.