Govinda Rao: Markets, planning and federalism

In its present form, the Planning Commission does not do the things it should and does many things that it should not.

We stand where we sit; don't we? Kirit Parikh's spirited defence of the role of the Planning Commission ("The role of planning", July 21) is not surprising. Indeed, I am grateful to him for the pains he has taken to explain the Planning Commission's role. But unfortunately, his article raises more questions than answers. Let me at the outset state that I do see a role for the Planning Commission in helping to create an enabling environment. The problem in the present setup is, it does many things it should not and does not do things it should.

Let us first deal with the mechanics of planning. Parikh clarifies that the Planning Commission no longer sets sector-wise targets and spends only two person years per year for its own modelling work. It however supports four external models to answer the "if-then" question. The point is whether you do it in-house or outsource it, the process is mysterious. What is the exact use of these models? How are the results of the models reconciled? If it does not set sector-wise targets using models, are sector-wise allocations made purely on the basis of judgements? What is the purpose of answering "if-then" questions if they do not provide inputs for determining sectoral allocations? Indeed, we know that often, the growth target itself is politically given and if the saving and investment rates do not support it, the Planning Commission simply adjusts the incremental capital output ratio. Where does the technical analysis fit in this frame?

The important tasks undertaken by the Planning Commission according to Parikh are planning for infrastructure; allocating public investment; designing implementable strategies; and monitoring them to ensure the realisation of targeted outcomes. If so, why do we have such serious problems with infrastructure in the country? Why are resources so thinly spread across several projects and programmes resulting in huge time and cost overruns? Why is there a serious disjunction between planning and budgeting? Why are there disparities in basic infrastructures across states? If the implementation strategies for programmes such as Sarva Shiksha Abhiyan, National Rural Health Mission and rural roads programme are made by the Planning Commission, what is the role of central ministries? Parikh states that the Planning Commission is better placed to undertake the advocacy task because, unlike the central ministries, it does not have a vested interest and, therefore, gives an unbiased opinion. But, is it not true that the actions of the Planning Commission are motivated by increasing the plan size even if it means creating more distortions in raising resources, creating disjunctions with budgets and compressing maintenance expenditures?

The justification for the Planning Commission to approve the state plans on the grounds that it promotes fiscal discipline is new. The record of the Commission has been to jeopardise the fiscal discipline by encouraging states to formulate infeasible plans and resort to unsustainable borrowings. The assertion that the Commission enforces fiscal discipline in the process of approving the state plans is like the proverbial cat going on a pilgrimage after devouring a hundred mice! If indeed the Planning Commission was concerned about fiscal discipline, it should have worked out individual state borrowings from the point of view of sustainability and balanced development of infrastructure and prevented a one-size-fits-all solution. Analysis shows that the planning process in the country has led to serious distortions in the budgeting systems through the plan and non-plan distinction.

On the Commission's grants-giving role, there are questions of both legitimacy and competence. While there is a case for both general purpose and specific purpose transfers, there is a need for a holistic view. In India, while the Planning Commission determines the Gadgil formula grant which is a general purpose grant, the grants to various central schemes are designed by central ministries. Both are given under Article 282. Many experts consider this to be irregular. In a written opinion given to the Ninth Finance Commission, K K Venugopal stated, "...The practice followed so far is contrary to the Constitutional provision". In his view, Article 275 is comprehensive and enables giving grants for both revenue and capital purposes as well as general and specific purposes. Further, Article 282 is merely to lift the bar so that the centre or a state may make grants to the other for a public purpose which is beyond its legislative jurisdiction and is not meant for making regular grants.

Parikh argues that the Planning Commission is the saviour of disadvantaged sections and poorer regions. Surely, regional income differences depend on a variety of policy and institutional factors. However, there is a wealth of material to show that the only component of transfers with significant equalisation is from the Finance Commission. The Gadgil formula assistance, being politically determined, does not offset the fiscal disabilities of the states. Furthermore, analysis of investments in central enterprises shows that 10 higher-than-average-per-capita-income states with 49 per cent population had 58.3 per cent of the capital stock and seven poorer states with 44.5 per cent of the population had only 28.7 per cent of the capital stock in 2003-04.

That brings us back to the question: what role should the Planning Commission play? Surely, in the present state of development and markets, we need to undertake planning much more than the French indicative planning? Infrastructure for the country has to be planned, an enabling environment for the private participation in infrastructure provision and financing created, and the gap in infrastructure publicly provided. There is also a need to co-ordinate large inter-connected projects. The various central government ministries and states may need advice and guidance on technical matters such as social cost-benefit analysis for the selection of projects and project evaluation to analyse their impact. In a recent paper, T N Srinivasan (Unfinished Reform Agendum: Fiscal Consolidation and Reforms, Processed, 2006) suggests that the Planning Commission should work as a Fund for Public Investment (FPI) for both the centre and states. The FPI, like a development bank, should advance long-term development finance by borrowing domestically and abroad. It will appraise the projects for their feasibility, economic and social returns and also for the soundness of the borrower. We surely need more discussion on the appropriate role the Planning Commission should take and the type of expertise it should have.

The author is Director, NIPFP. The views are personal. He can be reached at mgr@nipfp.org.in