Aug. 17: Prime Minister Narendra Modi’s decision to bite the bullet and scrap the Planning Commission is the first in a long line of bullets that he will need to chew on if he is serious about breaking the Socialist-era paradigm within which successive governments have been constrained to work since 1950.
In his Independence Day speech, Modi said the Planning Commission would be replaced by another entity whose remit is not very clear at this stage.
That Modi has always been unhappy with the way the Planning Commission has functioned is pretty well known.
The move to scrap the Planning Commission was clearly suspected after a government-backed entity, the Independent Evaluation Office (IEO), recommended that the Planning Commission had outlived its purpose and should be taken down.
The IEO had submitted its report on May 29 — three days after Modi assumed office. It’s one of the reasons why the position of the deputy chairman of the Planning Commission has remained vacant since Montek Singh Ahluwalia resigned.
The IEO was formed in July 2013 under the authority of the Planning Commission with the objective of evaluating the government’s flagship social welfare schemes.
Ajay Chibber, who headed the IEO, had said the role of the Planning Commission should be carved up: its role as the allocator of resources to states should be assumed by the Finance Commission, and the allocation of resources among central ministries should be decided by the finance ministry.
If the government accepts this position, the entity that it plans to interpose between the Finance Commission and the finance ministry — in effect creating a new triad that will assess and allocate resources — might find itself questioning its raison d’etre.
But the reforms within the government’s decision-making apparatus won’t stop with the elimination of the Planning Commission.
The decision to wind up the Planning Commission is closely linked to the other recommendation that finance minister Arun Jaitley made in his budget speech: To set up an expenditure management commission.
“The government will constitute an expenditure management commission, which will look into various aspects of expenditure reforms to be undertaken by the government. The commission will give its interim report within this financial year,” Jaitley had said.
A high-level panel headed by C. Rangarajan, which was established by the Planning Commission, had suggested radical reforms in November 2011 that the Modi government ought to take a hard look at.
Plan, non-plan divide
For a start, the Rangarajan report had suggested that the Great Divide between Plan and Non-Plan expenditure should be removed as the distinction between the two kinds of expenditure was flawed, contrived and had lost all its relevance.
Rangarajan’s suggestion did not resonate with the UPA.
If the Modi government accepts the radical suggestion, it will change the process in the way the government prepares its annual budget.
“The division (between plan and non-plan expenditure) originates from the budgeting exercise where the non-plan expenditure is estimated first,” says Rangarajan.
Here’s how it works: the finance ministry first estimates how much of committed non-plan expenditure it has to make on stuff such as interest payment on loans, subsidies, and pensions. It then assesses its non-tax and tax resources. The amount of resources left after meeting non-plan spending is termed as Balance from Current Revenue (BCR). It then assesses its miscellaneous capital receipts on a net basis — which come largely from disinvestment receipts. The two streams of non-debt receipts are then clubbed with the net market borrowings of the government to create the large corpus from which plan expenditure is defrayed.
Rangarajan argued that the classification of expenditure as plan and non-plan had become “dysfunctional” and it had created a bias among policymakers in favour of plan expenditure.
“This distinction should go for both Union and state budgets,” Rangarajan added.
Once that happened, he believed there would be a fundamental shift in the approach to public expenditure management — from a segmented view of plan and non-plan to a holistic view of expenditure; from a one-year horizon to a multi-year horizon, and from input-based budgeting to a process of budgeting linked to outputs and outcomes.
The division made sense in the initial years of planning when the bulk of plan expenditure was in the nature of capital investment — creating bridges, dams and forming public sector units. But over time, the bulk of plan expenditure has become revenue expenditure, blurring the distinctions between the two.
In budget 2014-15, for instance, total revenue expenditure under the plan component was Rs 4.53 lakh crore against a total capital expenditure of Rs 1.22 lakh crore.
If the government removes the so-called artificial division between the two streams of expenditure, it will not only change the way the Centre prepares its own budget but also the way it distributes funds to states.
There is one benefit for states from the removal of this distinction. “There may not be any need for approval of state plans under the current practice. States may provide information about the budget/plan …to the Planning Commission or ministry of finance to enable consolidated information to be prepared and (made) available in public domain,” the Rangarajan report said.
However, the Rangarajan report did not anticipate the scrapping of the Planning Commission. In fact, it wanted a bigger role for the organisation. It said it ought to define rules or guidelines for transfer of resources to states and “may scrutinise the budget allocations proposed by the finance ministry during the annual budgeting exercise”. But now that the Modi government has decided to scrap it, most of the log rolling on fund transfers will probably have to be done by the finance ministry under Jaitley.
The other big reform would be to scrap the Raj-era relic of delivering a separate budget for the railways.
Railway finances were separated from the general revenues way back in 1924.
In a radical report presented in 2001, Rakesh Mohan — a former chief economic advisor to the finance ministry and a former deputy governor of the Reserve Bank of India — had recommended that the practice be scrapped.
“The most serious problem with the railway budget… is that it… blurs the dividing line between policy-making and implementation. Added to that is the high visibility of the railway budget that generates political compulsions which are best avoided,” Mohan had said in The Indian Railways Report 2001, which sparked a furore when it was presented.
The Vajpayee-led NDA government did not have the guts to go through with the suggestion. Modi may just have the gumption to consign the practice of presenting railway budgets to the dustbin.