Mode of managing CSS funds should change

Anirudha Barik | Updated on: Jul 04, 2022
Funding conundrum

Funding conundrum | Photo Credit: Denis Vostrikov

The current system of creating a single nodal agency for each scheme works to the States’ detriment

The Centre introduced Single Nodal Agency (SNA) known as ‘SNA Model’ in March 2021 which constitutes a major departure from the then existing regime of funds released under Centrally Sponsored Schemes (CSS).

The new SNA Model requires States to notify a SNA for each CSS and every SNA needs to open an account in a commercial bank. All implementing agencies (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.

Funds are released by central ministries to State governments’ accounts in RBI with a time limit of 21 days and 40 days for transfer of the Central and the State share respectively. 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 per cent of the Central share and the commensurate State taken together.

Although, the new SNA Model has been adopted by a few FRBM compliant States of like Odisha with perseverance, but some major States are still working assiduously to hammer out on its action plan. This paradigm shift in the way CSS operates has brought about a significant change in the operational autonomy of the States. Against this backdrop, it is important to put the spotlight on a few important issues confronting State governments , with emphasis on the heavily indebted States — Bihar, Kerala, Punjab, Rajasthan and West Bengal.

First, is the SNA model dampening the ability of States to use CSS funds flexibly based on their liquidity position and policy priorities? States have been at the forefront in the fight against the pandemic and their core functions had to be scaled up rapidly to meet multiple objectives, viz., emergency healthcare need of the people, implementation and enforcement of lockdown restrictions, and uninterrupted delivery of essential services.

Further, many States face in slowdown in own tax revenue, a high share of committed expenditure and new sources of risk stemming from rising expenditure on non-merit freebies, expanding contingent liabilities, and the ballooning overdues of Discoms. As the previous two years were Covid-affected, States have been struggling with the fiscal space for transferring their respective shares of CSS funds to SNA just in time.

Second, the model doesn’t facilitate States’ discretion in authorising payments, according to the needs of the hour; rather it would increase superfluous temporary mismatches in the cash flow of receipts and payments, forcing the States to jump into ways and means advances/overdraft from RBI.

There could be a rush for fund transfers to IAs in a month when it is less important, whereas in some other month that money is drawn in advance of requirements.

Third, would it not be ideal to set goal of swift fiscal support to the States in the most equitable manner to manage the State’s liquidity, especially post pandemic, till the recovery is complete? To sum-up, the SNA model is less supportive for State liquidity management. Rather, it is poised to revolutionise not only Centre’s own financial management, in terms of getting additional interest receipts, but also the banks’ too in terms of availability of parked CSS funds. Meanwhile, the States face stress in terms of temporary mismatch in cash flow management.

The way forward

While SNA is a centralised concept, certain decentralised aspects can be introduced by giving freedom to the States in adopting new features. Some short-term and long-term solutions are as follows:

An alternative option to the SNA Model should be explored by the Centre for the States, especially for high indebted States, for releasing the CSS funds as soon as possible, which calls for a serious rethink on this front. Else, the Centre should allow phase-wise adherence to the SNA model by the States — a case for extension by a few more years for its complete adoption.

Improving States’ cash flow management with robust forecasting methodology can be considered for managing the temporary liquidity crunch, with separate budget lines for the Central share and State share of each CSS.

Hence, one size does not fit for all. Many audit reports have underscored that achievements of actuals against the budgeted figures are vital at the end of financial year. Even if the SNA is not opened, the CSS funds should be paid during any financial year.

In the case of funds for specific works or services such as buildings, water supply schemes and the like, the authority should use at its discretion. After all, the ultimate objective of public financial management is to achieve budget credibility i.e., minimising deviation of actual fiscal outcome from budget estimates.

This could even be achieved without SNA. Therefore, the Centre must explore an alternative to SNA model and be attentive to States’ liquidity management.

The writer is a Senior Consultant (Public Finance expert), EY India. Views are personal

Published on July 04, 2022
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