Centrally Sponsored Schemes and the Quiet Recentralisation of Indian Federalism

India's Fourteenth Finance Commission, reporting in 2015, recommended raising the states' share of the divisible pool of central taxes from thirty-two to forty-two per cent, a change widely described at the time, including by the government that implemented it, as a landmark shift toward genuine fiscal federalism, giving states more untied money to spend according to their own priorities rather than the Union government's. In the years since, states have found that this increase in formal tax devolution has been accompanied by a parallel and less discussed trend: a steady rise in the share of central assistance delivered through centrally sponsored schemes, programmes designed in New Delhi with specific guidelines, cost-sharing ratios, and conditions attached, that leave states executing rather than designing policy even in areas that fall squarely within their own constitutional domain. The net effect, as several state finance ministers across party lines have argued in recent years, is that states have gained on one ledger and lost on another, and the loss is harder to see because it does not show up as a reduction in headline transfers.

How Centrally Sponsored Schemes Work

Centrally sponsored schemes cover a wide range of subjects, from the National Health Mission and Sarva Shiksha Abhiyan's successor programmes in education to rural roads and housing schemes, and typically require states to contribute a share of the funding, commonly forty per cent though ratios vary by scheme, while accepting central guidelines on implementation, monitoring formats, and often even branding. States that want the central share of funding have little practical choice but to accept these conditions, effectively surrendering policy discretion over subjects, health and education prominent among them, that the Constitution places in the State List or the Concurrent List. A NITI Aayog subgroup of chief ministers, convened in 2015 specifically to examine this issue, recommended rationalising and reducing the number of such schemes and giving states greater flexibility in their implementation. Some rationalisation followed, several hundred schemes were consolidated into a smaller number of umbrella programmes, but the underlying architecture of conditional, centrally designed transfers has remained largely intact, and the share of total central transfers flowing through this route rather than through unconditional devolution has not fallen as the 2015 reforms intended.

The GST Complication

The introduction of the Goods and Services Tax in 2017 added a further, more structural layer to this centralisation debate. States surrendered significant taxation autonomy, on excise, sales tax, and a range of other levies, in exchange for a share of GST revenue and a five-year compensation guarantee against revenue shortfalls, an arrangement negotiated through the GST Council and generally regarded as a reasonable trade at the time. When that compensation period ended in mid-2022, several states, particularly those with weaker own tax bases, found themselves with meaningfully less fiscal room than before, at precisely the moment they were also managing a larger share of scheme-related conditional spending. The combination, reduced tax autonomy under GST plus a growing share of conditional scheme transfers, has left several state finance departments describing their effective fiscal discretion as narrower today than it was a decade ago, even though gross transfers from the centre have generally risen in nominal terms.

Political Dimensions of the Dispute

This has become a genuinely partisan fault line, though not in a simple ruling party versus opposition sense, since states governed by the party in power at the centre have also raised concerns about scheme design, even if usually less publicly. States governed by opposition parties, Tamil Nadu, Kerala, Karnataka, and West Bengal among the most vocal, have argued more pointedly that conditional scheme funding, along with delays in releasing GST compensation and disputes over Finance Commission population weighting, amount to a systematic squeeze on states that happen not to be politically aligned with the centre. The central government's position, articulated by successive finance ministers, is that centrally sponsored schemes address genuinely national priorities, universal health coverage, universal primary education, that require a baseline of consistency across states regardless of local political preference, and that the conditions attached are about ensuring funds reach intended beneficiaries rather than about controlling states for its own sake.

A Fair Case for Some Conditionality

There is a defensible version of the centre's argument that deserves acknowledgment. Purely untied transfers carry their own risk, that funds intended for health or education get diverted to politically more visible but less socially valuable spending, a risk that is not hypothetical given documented instances of discretionary state spending being directed toward populist measures with weaker long-term development payoff. Certain minimum national standards, in vaccination coverage or basic learning outcomes, arguably justify some degree of conditionality to prevent a race to the bottom in areas with strong positive externalities that cross state lines, communicable disease control being an obvious example where one state's underinvestment imposes costs on its neighbours.

Measuring the Real Shift

What is harder to justify is the sheer proliferation and specificity of conditions attached even to schemes far removed from clear cross-state externalities, right down to prescribed physical designs for infrastructure built under some rural schemes, which leaves states with minimal room to adapt programmes to genuinely different local conditions, a rural road appropriate for Kerala's terrain and rainfall being a poor template for Rajasthan's. Fifteenth Finance Commission data on the composition of central transfers shows the centrally sponsored scheme component holding a substantial and fairly stable share of total transfers even as overall devolution numbers moved in the states' favour, which is precisely the pattern that state finance departments across the political spectrum have flagged as the more consequential trend hiding beneath the more publicised headline transfer numbers.

The Federalism Debate That Numbers Alone Cannot Settle

Resolving this tension requires an honest, scheme-by-scheme accounting of which conditions genuinely protect a national public interest and which merely reflect a preference in Delhi for retaining visible credit and control over programmes that states are, on balance, better placed to design for their own populations. That accounting has been attempted in pieces, by the NITI Aayog subgroup, by successive Finance Commissions, by state government white papers, but never completed with the rigour or the political consensus that would let it settle the argument. Until it is, the paradox of rising formal devolution alongside shrinking genuine discretion will remain one of the more consequential and least examined threads in the ongoing argument over what Indian federalism is actually supposed to mean in practice.