Centre Vs States: Modi Govt's Weaponisation of Central Funds is Adding to Rift

The Centre often withholds funds to push its agenda down the throats of Opposition-ruled states, notes Subhash Garg.

The Central government has been weaponising CSSs and central funds to make the opposition states fall in line.

(Photo: Vibhushita Singh/ The Quint)

Tamil Nadu Finance Minister Thangam Thennarasu has accused the Central government of withholding Rs 2,152 crore of funds slated for Tamil Nadu under the Samagra Shiksha Scheme, a centrally sponsored scheme (CSS), to force the state to implement the new education policy (NEP) and the three-language-formula.  

The Central government had earlier stopped the release of funds under Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme (another CSS) in West Bengal, citing irregularities in the scheme’s implementation. Mamata Banerjee has accused the Central government of not releasing the funds despite considerable time lapse, numerous visits by Central government teams, and no charge sheet.  

CSSs are nationally significant development schemes on subjects within the states’ legislative domain under the Constitution. Central governments have been providing grants to the states for implementing CSSs for the last 50 years without much friction. 

The Modi government has transformed CSSs into centrally owned and controlled schemes (COCSs), using central funds to push many conditions down the throats of opposition-ruled states, in particular.

Quite a few other contentious centre-state issues have come to the fore recently, including the devolution of central taxes and the reduction in southern states’ representation in Lok Sabha post-delimitation. Tamil Nadu has fired a symbolic salvo by replacing the rupee symbol (₹) on its budget documents by a Tamilian symbol (ரூ), which means rubaai or rupee.  

Will the spat between Central government and opposition states turn into an open war? Is weaponisation of CSS funds by the Central government constitutionally permissible? What would be a fair resolution? 

Centre Halts Samagra Shiksha Funds to Tamil Nadu

Samagra Shiksha (successor to the Sarva Shiksha Abhiyan) has been providing substantial central funds (Rs 32,830 crore in 2023-24) to the states since the mid-1990s to improve school infrastructure, teaching standards, and learning outcomes. The Central government has integrated all elements of the NEP into the Samagra Shiksha. Tamil Nadu’s allocation for 2024-25 stands at Rs 2,152 crore. 

In 2022, the Central government launched another scheme, Pradhan Mantri Schools for Rising India (PM SHRI), to develop 14,500 ‘exemplar’ schools showcasing all components of the NEP, with a projected cost of Rs 27,360 crore (Central share: Rs 18,128 crore.)

The Central government has linked the release of Samagra Shiksha funds to NEP compliance, mandating states to sign a memorandum of understanding (MoU) committing to its implementation.

Tamil Nadu has strong reservations about many features of the NEP (like the three-language formula replacing the two-language model of English and Tamil, and the 5+3+3+4 model replacing the 10+2 model). It has not signed the MoU, leading to the Central government withholding Samagra Shiksha funds. Tamil Nadu has vowed not to implement the NEP, even if the Central government does not release Samagra Shiksha funds.

Weaponising Central Funds

The Modi government wants to send two unequivocal messages. The hard one: CSSs are, in effect, COCSs. The soft message: CSS funds come directly to beneficiaries from Prime Minister Modi. More than 125 of CSSs or their sub-schemes have been prefixed with 'PM' since Modi took office.

The opposition-ruled states are understandably uncomfortable with such branding and Central appropriation of credit. The CSSs, implemented by the states with state-specific names in many cases, have been known as states’ schemes traditionally. The states usually bear more than 50 percent of actual cost of CSSs. 

Beyond tightening control over existing CSSs (as seen with Samagra Shiksha), the Modi government has also absorbed state-led schemes. The health insurance schemes being implemented by the states were centralised through PM Jan Arogya Yojana (PM-JAY)/Ayushman Bharat. Tamil Nadu, Kerala, and West Bengal have refused to sign the PM SHRI MoU, while West Bengal has also declined to implement PM-JAY.

In 2021, the Modi government started providing loans to states in the name of promoting capital expenditures (Rs 1.10 trillion in 2023-24), by sugar-coating the loans as interest-free, with a 50-year repayment period and additional to states’ normal borrowing limits.

In return, the Central government tied a large part of these loans (Rs 95,000 crore out of Rs 1.5 trillion in 2024-25) to many conditions, including not renaming any CSS, and subjecting to Central performance assessments.

CSSs implementation in opposition states have been subjected to additional scrutiny, including CAG audits and Central government inspections, as seen with MGNREGA in West Bengal. The Central government has, indeed, been weaponising CSSs and Central funds to make the opposition states fall in line. 

Growing State-Level Protests

Tamil Nadu's decision of not signing the PM SHRI MoU and its refusal to implement aspects of the NEP at the cost of sacrificing Samagra Shiksha funds, and replacing the ₹ symbol, are the most serious protests against CSSs since 1970s.

Karnataka has previously protested against alleged discrimination in the devolution of Central taxes, while West Bengal has taken the Central government to court for not releasing MGNREGA funds. Tamil Nadu is also rallying the opposition states against the anticipated reduction in their Lok Sabha representation post-delimitation following the next census.

The constitutional authority of the Central government to provide grants for schemes in the states’ subjects comes from Article 282, which allows the Central government to make grants for ‘any public purpose', notwithstanding the fact that such a purpose is not within its legislative domain.  

A plain reading of Article 282, however, will make it clear that the Central government cannot, by providing grants, convert states’ schemes into Central schemes with exclusive Central government branding and impose excessive conditionalities.

Withholding of the CSSs funds, as has happened in case of Tamil Nadu and West Bengal, appears to be excessive, discriminatory and unilateral, frustrating the very purpose of the scheme.

It is high time the opposition states test the constitutionality of such domineering centralisation of CSSs in the Supreme Court. 

A Time for Recalibrating Centre-State Fiscal Relations

There is another area where Modi Government has upended the constitutional balance in its favour.  

Article 293 (3) provides for a state to take the Central government’s approval for raising loans if it is indebted to the latter. In the plan era, the states got indebted to the Central government as the latter financed them with plan and small savings loans, instead of permitting them to raise borrowings from the market.  

The Central government stopped providing loan financing to the states post 2005 and, by 2020, the states’ outstanding loans to Central government had come down drastically, with a few states projected to become Central-government debt-free in a few years.

Besides starting capital expenditure loans to keep the states indebted to it, the Modi government started putting numerous conditions to states’ borrowings from 2020. Today, the states are in a tight bear-hug of Central government in the matter of their borrowings. 

The provisions of Article 293(3) seek to prevent the states from over-borrowing, so as not to default on Central loans. The states have adequately demonstrated that they borrow far more responsibly than the Central government, and have not exceeded 3 percent prudential limit of borrowing for many years. There is a good case for getting Article 293 (3) also interpreted by the Supreme Court. 

In the last 75 years, after India becoming a republic, states have become stronger fiscal entities. The Central government, especially in last 10 years, however, have demonstrated strong tendency to intrude into states’ fiscal space and turn them into fiscal-subordinates. 

It is high time that we, as a nation, reassess and reconfigure the centre-state fiscal relationship in all its dimensions—sharing of taxes, provision of grants, and raising of loans.    

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, We Also Make Policy, and Explanation and Commentary on Budget 2024-25'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)