The World Bank has found fault with the functioning of the Planning Commission saying that funds allotted by the commission to the states were not monitored properly and this resulted in a huge fiscal deficit.
The Planning Commission has become a de facto development bank without the prudential financial standards that typically guide such banks, says the World Bank in a report on the economy prepared after the last budget.
It is clear that unless the states improve their financial condition, the Centre will find it difficult to continue reducing its transfers to the states, which might compromise the Centre's efforts to reduce its deficit, the report points out.
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The Bank says it has discussed the report with the government. The report has been prepared by a team of over 60 members of the World Bank, the International Monetary Fund (IMF) staff and consultants. Among the authors are many Indians or civil servants of Indian origin working in international posts.
The Bank is deeply concerned over the way the consolidated deficit of the public sector (central and state budgetary deficits and the losses of public sector enterprises) has remained relatively stable at a high 10 per cent of the GDP after a decline in 1991-92.
Fiscal adjustment by the Union government has been limited by the absence of corresponding adjustments by the 25 states.