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The distinction between Plan and non-Plan expenditure in Budget documents and accounts should be scrapped, said Y V Reddy, chairman of the 14th Finance Commission (FC) and former governor of the Reserve Bank of India. Speaking at the Raja J Chelliah Memorial Lecture in Chennai on Monday - Reddy's first public appearance after the FC's report - he said delinking Plan expenditure from the Budget would facilitate assessment, scrutiny and approval of all expenditures in a sector or department in a comprehensive manner. "It will facilitate greater attention to maintenance expenditures and hopefully reduce incentives to boost capital works and show large-size plans," said Reddy, adding the provision of public goods, such as police and judicial services, could attract the attention they deserve.
Above all, the planning process will also be liberated from its close association with the Budget, reflecting the new realities, including the process of development requires significantly more than investments by the government in development activities and actions by the regulators, private sector and financial markets are at least equally important.
"In brief, the Plan mindset should be replaced with a development mindset, of which government budgets are an element," said Reddy.
State governments' role
Being closer to the people, state governments have an important role to play in view of the greater fiscal freedom accorded to them by the FC, Reddy said. Each state has the opportunity to take a comprehensive view of its developmental strategies and allocate financial resources appropriately without being constrained by approvals of annual plans by an agency like the Planning Commission with conditions attached. Further, if the recommendations of the 14th Finance Commission are fully implemented, states will also have a say in the sectors to which Centrally-sponsored schemes will be justifiable, their distribution across the state, and the schemes' design.
"The states could take full advantage of interacting with the experience of various strategies and programmes in other states, in view of greater autonomy in deciding some of their strategies and schemes," said Reddy.
The quality and credibility of fiscal management in both Union and states should be critically examined. Currently, the relationships between government, public, enterprises and regulators are treated with a 'joint family approach', where contributions, burdens and financial linkages are seldom accounted for. Hence, the fiscal accounts conceal more than what they reveal both at Union and state levels.
"As explained in the report of the 14th Finance Commission, computation of the extended public debt and the fiscal implications of the functioning of public enterprises become difficult under the current dispensation. Improvements in this regard will facilitate the work of future FCs.
On Finance Commission
The expertise available with FCs and the time span available for making their recommendations limit their capacity to address many issues.
According to Reddy, the reports of the Finance Commission invite universal dissatisfaction, but the FC has tried to ensure all state-holders are equally treated with the recommendations to establish its credibility.
