India's Public Welfare Hinges On 'Centre Vs State' Dynamics At Play | The Reason Why

Have you noticed how many government schemes today come with the prefix “Pradhan Mantri”? Before you even read what a scheme is about, you already know whose photo will be on the hoardings. What’s less visible is everything that follows. Most of the key decisions — funding, timelines, scheme details — are set in New Delhi, often far from local realities.

Over the past decade, the centre-state relationship has changed quietly, courtesy rise of centrally sponsored schemes and conditional transfers.

The central government transfers funds to states in different forms. In FY26, total transfers are expected to exceed Rs. 25 trillion. Around 55% is the state’s share of central taxes like income tax, corporate tax, etc., called ‘devolution’. Centrally Sponsored Schemes (CSS) form about 20%, with the rest in Finance Commission grants, loans, and other transfers.

CSS include programs created to advance national priorities in sectors where minimum standards were considered essential, such as health, education, housing, and rural development.

Funding is typically shared between the centre and states in a 60:40 ratio (though it varies for Northeastern and Himalayan states). Flagship examples include PM Awas Yojana, Samagra Shiksha, the National Health Mission, and MGNREGA. There are hundreds of such schemes.

CSS are highly centralised, and the states don’t enjoy much flexibility. For instance, the centre has tied Samagra Shiksha Abhiyan (SSA) funds to the implementation of PM SHRI (Pradhan Mantri Schools for Rising India). It’s a scheme for modernising schools.

Both SSA and PM-SHRI are under CSS. Kerala denied implementing the PM SHRI scheme as it believed it had already met most objectives of the scheme. The Centre responded by pausing over Rs. 1,000 crore of SSA funds, while Kerala approached the courts.

Sometimes the issues erupt due to built-in inconsistencies and flaws. Consider Pradhan Mantri Awas Yojana. It still uses beneficiary data from the 2011 census. States cannot add families who have fallen into poverty in the last decade, or remove those who are no longer poor.

These schemes assume a uniform starting point for all. They ignore the fact that the needs of poor and rich states are different. That results in money not being spent for that purpose.

The FY26 budget acknowledged that around Rs. 1.6 trillion of CSS funds were lying unspent with the states. Even with idle funds, CSS allocations were raised in FY26, highlighting the lack of coordination. Unfortunately, states cannot use those funds for any other purpose.

These frictions show up not just in implementation, but also in the composition of transfers themselves. The chart above shows a decline in the proportion of devolution over time, while that of other transfers is rising.

Devolution is the only untied portion in all of the transfers. The state can decide what to spend, when, and how. It doesn’t have to ask the centre or follow the centre’s scheme rules.

Its falling share means that the states’ autonomy over spending money has shrunk. Despite the 14^th Finance Commission increasing states’ share of the divisible tax pool from 32% to 42%, the states continued getting 30-35% of total taxes collected by the centre.

That’s because a growing part of central revenue now comes from cesses and surcharges, which it does not share with states. On the other hand, CSS and other tied funds come with strings attached. States can access these funds only by complying with these rules.

Moreover, states cannot levy income tax, have minimal control over GST rates, and face politically challenging property taxation. Large chunks of their budgets go into salaries, pensions, and interest payments. Conditional transfers like CSS exacerbate this squeeze, further limiting states’ flexibility while increasing dependence on the centre.

States are the real front‑runners of public welfare. They are closest to people’s needs, and many of India’s most successful social programs — from MGNREGA to the Midday Meal Scheme — began as state innovations before gaining national acceptance. That history alone shows why states need greater autonomy.

Both the 14th and 15th Finance Commissions have cautioned that an overreliance on conditional transfers risks weakening the foundations of fiscal federalism. The broader lesson is straightforward: governments are most effective when they focus on doing fewer things, but doing them well.

Instead of multiplying schemes or repackaging old ones under new umbrellas as it did in 2015-16, the priority should be to create frameworks that allow states the flexibility to tailor programs to local realities. In a country as diverse as India, empowering states isn’t just administrative efficiency — it’s essential for better welfare outcomes.

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