Relevance: GS Paper II (Federalism, Social Justice) | GS Paper III (Government Budgeting)

Source: The Hindu 

Context: The Silent Shift

The 2026-27 Budget is “unusual” not for what it announces, but for what it hides. It marks a decisive structural shift in Indian federalism: the Centre continues to design the “Grand Schemes,” but the financial heavy lifting is increasingly being pushed to the States.

This centralization of credit and decentralization of cost threatens to erode the financial capacity of states to care for their most vulnerable citizens.

The Twin Crisis: Stagnation & Underspending

The article highlights a worrying disconnect between “Budget Promises” and “Ground Reality”:

1. Real-Term Decline: While allocations for Health and Education show a nominal rise, when adjusted for inflation, they have actually stagnated or declined.
   • Human Impact: Critical schemes for the voiceless—the elderly (NSAP) and children (PALNA creches)—saw negligible hikes, meaning less food and care in real terms.
2. The “Missing” Funds: A consistent gap has emerged between Budget Estimates (BE) and Revised Estimates (RE).
   • Example: The Jal Jeevan Mission promised ₹67,000 Cr but spent only ₹17,000 Cr. This massive underspending suggests either bureaucratic bottlenecks or deliberate fiscal tightening at the cost of public service.

The “VB-G RAM G” Shift

The text notes a major policy overhaul where MGNREGA (the rural job guarantee act) is replaced by a new scheme, VB-G RAM G.

• The Burden: The new scheme operates on a 60:40 cost-sharing model.
• Consequence: States must now cough up ~₹56,000 Cr to maintain the safety net, a burden they previously shared differently under MGNREGA. This punishes states with lower revenue generation capacity.

The Fiscal Squeeze on States

States are caught in a pincer movement of “More Responsibility, Less Money”:

• The Tax Shrink: States receive only ~34% of tax revenue, far below the 41% recommended by the Finance Commission.
• The Cess Trap: The Centre increasingly relies on Cesses and Surcharges (taxes for specific causes like roads/health). Crucially, these are not shared with states, shrinking the “Divisible Pool” of funds.
• The Cost Shift: New mandates (like the proposed replacement for MGNREGA) often enforce a 60:40 cost-sharing ratio. This forces cash-strapped states to fund 40% of schemes they didn’t design.

UPSC Value Box

Analytical Insight (Supply vs. Demand):

• The Flaw: The budget focuses heavily on Capex (building roads/bridges), hoping it will “trickle down” to create jobs.
• The Reality: Without Demand-Side Support (putting cash in the hands of the poor through welfare), rural consumption remains dead. Building a road helps, but only if people have the money to buy goods that travel on it.

Way Forward:

• Reform: We need to rationalize Cesses so states get their fair share of the national tax pie.
• Strategy: Analysts must now shift focus to State Budgets, as that is where the real battle for India’s social safety net is being fought.

Summary

The 2026-27 Budget cements a trend of “Fiscal Centralization.” By shrinking the divisible tax pool and underspending on social sectors, the Centre is tightening its purse strings while asking States to open theirs wider. This strains Cooperative Federalism and risks leaving the poor vulnerable if states run out of funds.

One Line Wrap: True federalism is about sharing both the credit for success and the cost of care.

Q. “The shrinking fiscal space of States, coupled with increasing welfare mandates, poses a severe challenge to Cooperative Federalism.” Discuss this statement in light of recent trends in social sector budgeting. (10 Marks, 150 Words)