Economy News

Just-in-time release of central funds to cut borrowings

Under new mechanism, CSS funds to be in RBI custody, rather than in state treasuries.

The Centre is planning to roll out a new mechanism that would remove the floating of funds for centrally sponsored schemes (CSS) with the state treasuries and various state-level nodal agencies. This would let the Centre cut interest costs by ensuring that borrowings are undertaken just in time to meet the actual requirement of fund release.

Currently, interest payments by the Centre are nearly half of its net tax revenue. And at any given point of time, as much as Rs 1.5-2 trillion of central funds lie with state treasuries/agencies.

According to the plan, the Centre will require each state agency to open an account with the Reserve Bank of India, which will be authorised by the Centre and the states concerned to release the funds after instruction from the Centre.

Currently, the Centre transfers funds for CSS to state treasuries, and states in turn transfer these along with their own shares, typically 40%, to the implementing agencies. However, many states delay the transfer of central funds as well as their shares to the agency accounts, causing the funds to lie idle.

The Centre has already rolled out a pilot scheme for Jal Jeevan Mission to reduce such floating of funds with three states — Rajasthan, Karnataka and Odisha, a senior official said.

Under the new mechanism, the state implementing agency will maintain an account with the RBI for each scheme. Instead of releasing any money to the agency, the Centre will issue an authorization as per the sharing pattern to the RBI for the scheme, and the state concerned will also give a similar authorisation to the central bank.

When actual payment need arises, the state will move the payment file to the Centre, which will pass it on to the RBI. The RBI, which already has the authorisation, would release the amount to the agency from the Consolidated Fund of India first and then from the State Consolidated Fund.

The advantage of the arrangement is since the funds don’t need to be parked either with the state treasuries or the bank accounts of agencies, they won’t lie idle in these accounts, while having already flown out of the CFI.

“After learning from the pilot, the mechanism will be rolled out scheme by scheme gradually,” another official said.

Besides cutting floats to zero, it would also make things easier for the states as the Centre has clamped down on many states for the delay in the release of funds to implementing agencies and has imposed costs on them.

With some states using the central funds to finance their fiscal deficit, the Centre has also set the penal interest rate at 7%/annum from April 1 on the number of days of delay beyond 30 days in the transfer of Central share to the SNA account.

Of the Rs 1.3 trillion interest-free capex loans to states in aggregate in FY24, the Centre has mandated that the first instalment of 66.6% would be released to each state government as per their share on meeting three fiduciary conditions including proof of deposit of the Centre’s share of the interest earned in SNA account for each scheme.

This approach to account for each rupee transferred to states has brought a fair sense of realism into the budget-making process, the second official said.

Since the Centre’s borrowing is actually linked to spending requirements, idle funds in CSS were leading to unnecessary interest costs for the Centre. Interest costs account for Rs 10.8 trillion or 24% of the budget in FY24.

The penal interest on treasuries and interest from SNA accounts fetched the Centre around Rs 4,000 crore in FY23, enough to run a few new schemes. In FY24, the interest from unutilised central funds could fetch the Centre over Rs 5,000 crore, sources said.

The CSS spending stood at Rs 4.12 trillion in FY23 as against the BE of Rs 4.52 trillion. Even then, there were Rs 1.8 trillion central funds unspent from the releases of FY23. So, the Centre sought these funds first to be exhausted before fresh releases were initiated from FY24 budget outlays. Given the pace so far, indications are that the Centre would save substantially from the current year’s allocation of Rs 4.76 trillion, which it would use to fund new schemes or existing schemes where more funds are needed.

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