azadi ka amrit mahotsav: How to revolutionise fiscal transfers from the Centre to states

Centrally sponsored schemes (CSS) contribute significantly to fiscal transfers from the Centre to states. In 2021-22, Rs 3.8 lakh crore was released to states under CSS, accounting for 20% of the total fiscal transfers. CSS funds are released by the ministry concerned to the state governments’ accounts in the Reserve Bank of India (RBI). Many studies and audit reports have underscored multiple concerns in the flow and utilisation of these funds.

As no time limit was prescribed for release of funds from state treasuries to implementing agencies (IAs), the fund transfer was based on liquidity position and priorities of the state governments. Fund flowed to more than 18 lakh IAs from the state to the village level. The absence of separate heads of account for the central and the state share in state budgets had made tracking of the state share contribution a herculean task.

The finance ministry has put in place a web-based public financial management system (PFMS) integrated with banks and state treasuries. Through an expenditure-advance-transfer (EAT) module, PFMS captures financial information from IAs too. However, data exchange between PFMS and state treasuries was irregular. Information on fund utilisation by IAs was not forthcoming either. Only 4% of them were uploading information in the EAT module.

For more effective cash management and enhancing transparency and efficiency in release and utilisation of funds, the Department of Expenditure notified a new procedure for release of funds under CSS on March 23, 2021. Known as the ‘SNA Model’, the new rulebook came into effect from July 1, 2021. It marked a paradigm shift in the way CSS operate.

The SNA Model requires states to notify a single nodal agency (SNA) for each CSS. Every SNA needs to open an account in a commercial bank. All IAs down the ladder are to either operate directly from the SNA’s account or open zero-balance subsidiary account with drawing limits set by SNA. IAs were also directed to transfer the funds available in their accounts to SNA.

Under the SNA Model, too, funds are released by central ministries to state governments’ accounts in RBI. However, a time limit of 21 days and 40 days has been prescribed for transfer of the central and the state share, respectively, from the state treasury to SNA.

Subsequent instalment to the state can be released only after transfer of earlier central releases from the state treasury to SNA and utilisation of 75% of the central share and the commensurate state taken together. Besides, the new procedure mandates that in a single instalment, the central ministries shall not release more than 25% of the funds likely to be provided to a state during the financial year.

The SNA Model further ensures a tight monitoring of availability and utilisation of funds by mandating that CSS funds shall stay only in the SNA account. Interest earned is reflected in PFMS and is to be remitted to the respective consolidated funds as per the fund sharing ratio. All SNAs and IAs are to use the EAT module or integrate their systems with PFMS. Bank accounts of all SNAs and IAs are onboarded on PFMS.

Combined and concerted efforts of central and the state governments have firmly established the SNA Model, which has been adopted by all the states. With implementation of parentchild accounts, float has declined sharply with consequent reduction in cost of funds to the government. Funds stay in just 3,074 bank accounts now. Scheme-wise and state-wise funds available with SNAs is visible to stakeholders. As on June 3, 2022, SNAs had Rs 1,15,923 crore in their accounts.

Expenditure incurred by 9.77 lakh IAs onboarded on PFMS is evident too. PFMS also informs the central ministries about the central share released to a state but not released by the state to SNA as well as about the outstanding state share.

Since expenditure on a CSS in a state is being made from a single bank account, submission of utilisation certificates has become easy. Transparency in fund flow and setting of time limits has dampened the tendency of states to retain CSS funds.

Information on interest accrued in SNAs’ accounts is available to stakeholders, too. In 2021-22, interest of Rs 259 crore was credited to the SNAs’ accounts. Moreover, since central releases are now based strictly on the information available in PFMS, the data exchange frequency between state treasuries and PFMS has soared. The SNA Model is also generating invaluable data to aid policymaking, budgeting and scheme appraisals.

As a part of celebration of ‘Azadi Ka Amrit Mahotsav’, the finance minister will launch SNA dashboard on June 7. The dashboard will provide comprehensive, real-time picture of release, expenditure, account balance, interest earned, etc. to the scheme managers and decision makers. Although a lot has been achieved, more needs to be done to further improve users’ experience, optimally utilise the data available in PFMS, and build additional features. Nevertheless, the SNA Model is poised to revolutionise public financial management in India and will immensely contribute to the Prime Minister’s vision of a Digital India.

(The writer is additional secretary in department of expenditure, finance ministry)

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