The State governments across India are increasingly facing backlash when it comes to welfare provisioning, with the most criticism centered on finances and fiscal stress on individual States. While concerns about shrinking fiscal space are often raised, these are not unusual. In fact, this is how States are meant to function. In our fiscal federalism, States are independent political entities. While the Union government holds the primary authority to raise most revenues, it is the States that bear a larger share of public expenditure, especially in developmental and social sectors such as education, health, nutrition etc. This division of responsibility exists for a reason: States are geographically and administratively closer to people and are better positioned to understand local needs, priorities, and social realities.
Due to the presence of this imbalance in revenue raising and expenditure powers, States depend not only on their own revenues, but also on financial transfers from the Union Government. These transfers take multiple forms; among them are the Centrally Sponsored Schemes (CSS) which are significant particularly for funding development priorities. CSS are jointly financed schemes where expenditure is shared between the Union and the States in predetermined ratios such as 70:30, 60:40, or 50:50, depending on the scheme. Historically, these schemes were meant to address issues of national importance that fall under the State or concurrent lists such as education, health, police etc. There were six ‘core of core’ schemes which included the former MGNREGA and umbrella schemes for SCs, STs, minorities etc., alongside several other ‘core schemes’.
However, the scale and scope of CSS have expanded considerably over time. At present, there are 81 schemes/programmes under CSS, with the Union expected to spend a total of ₹5.42 lakh crore on them. In contrast, in 2015, the year in which restructuring of CSS was finalised, actual expenditure on CSS stood at ₹2.03 lakh crore. This sharp increase reflects both higher spending and the introduction of new schemes. For States, this expansion translates into growing financial obligations. In Karnataka, for instance, the State is estimated to spend ₹20,656 crore as its share for CSS, nearly 5% of its total budget outlay in 2025-26, as compared with ₹18,243 crore in 2022-23. This amounts to an increase of about ₹2,000 crore over a period of three years.
This expanding scope of CSS raises multiple concerns about the erosion of federal principles. For example, CSS often involve a degree of imposition on States, particularly in terms of policy design and spending priorities. The Union largely determines the nature of schemes, their objectives, and the conditions under which funds are released. As a result, States have limited flexibility to adapt these schemes to their specific social, economic, and regional needs. This ‘one-size-fits-all’ approach is especially constraining in a country as diverse as India, where developmental challenges and administrative capacities vary widely across States. Besides, States are compelled to divert their own resources to meet CSS funding requirements, often at the cost of their own budgetary priorities.
These constraints on policy choice also affects the capacity of States to conceptualise, experiment, and administer innovative schemes that might be particularly suitable for their own contexts and requirements. In fact, there have been historical examples of several successful welfare initiatives in India that have originated at the State-level, driven by local understanding and innovations. Tamil Nadu’s bicycle scheme for schoolgirls, which helped improve girls’ enrolment in secondary education, and its recent breakfast scheme aimed at improving child nutrition and school attendance, are examples of such innovations. These innovations have also provided inspiration to other States, who have also adopted and modified some of these measures. For instance, Karnataka adopted the bicycle scheme in 2006-07 and extended it to include boys as beneficiaries in 2007-08. Now that States are increasingly being locked into funding centrally designed schemes, the fiscal and administrative space required for such initiatives shrinks.
In the recent past, CSS have also begun to function as instruments of centralised control, with growing instances of delayed, reduced, or withheld fund releases, undermining the agreed cost-sharing arrangement, and further imposing financial dilemma on States. Tamil Nadu, for example, was recently forced to self-finance nearly ₹2,000 crore under the Samagra Shiksha (SSA) scheme, despite the 60:40 funding ratio norm, after the Union government withheld funds as the State refused to implement the National Education Policy 2020 and the PM-SHRI school programme. This opposition was due to NEP’s three language formula, which conflicts with the State’s long-standing two language policy aimed at protecting its linguistic and cultural identity. Since PM-SHRI programme required full adoption of the NEP, these centrally driven programmes have been seen by the State as impingement on its policy autonomy. Similarly, Karnataka Chief Minister Siddaramaiah has pointed out recently that under the PM Awas Yojana, despite the 60:40 sharing norms, the State spends ₹4–5 lakh per house, while the Union contribution is less than ₹1 lakh. And despite this imbalance, political credit is largely claimed by the Union, even when States bear the bulk of the financial burden.
These developments point to a deeper unease in India’s federal arrangement, particularly in the functioning of CSS. The concern is not with CSS in particular, but with the growing extent to which the Union determines States’ development priorities through standardised policy frameworks and tighter control over State’s fiscal resources. Fiscal instruments are increasingly used to nudge States into aligning with centrally defined policy stances and political preferences. This shift has significant implications for federal balance: the original vision of cooperative federalism, grounded in partnership, appears to be giving way to a more coercive form of federalism, where autonomy is constrained through fiscal design.
The views and opinions expressed in this blog are of the writer and do not necessarily reflect the views or positions of CBPS.