With the new affluence, the style of official architecture in Delhi is changing; new commissions are building palaces. But in the days of socialist austerity, government buildings were designed as pigeon coops for file-shuffling bureaucrats. Amongst those coops, the Planning Commission, built in the Fifties, occupies a prominent position. Situated a stones throw away from Parliament, it presents layer upon layer of windows, behind which teem advisors, section officers and other file-pushers. For its size, however, its output is rather modest. Approach papers, five-year plans, mid-term reviews all the documents together are not voluminous enough, let alone illuminating, to justify such an imposing organization.
Maybe, however, most of its output consists of services to other organizations. A look at the Central budget would suggest so. Virtually every item of expenditure is divided into plan and non-plan categories. All plan expenditure is divided into capital and revenue expenditure. It would be an exaggeration to say that the budget would be a quarter its length if there were no Planning Commission; but its contribution to the budgets complexity is not inconsiderable.
This contribution has been questioned by Amaresh Bagchi, a veteran taxman and public financier, in the issue of Economic and Political Weekly (November 3-9). He highlights a neglected function of the Planning Commission. Because of the way the Constitution divided taxing powers, the Centre was much richer than the states; the Constitution envisaged the appointment of periodic finance commissions to decide on compulsory, unconditional revenue transfers the Centre must make to the states.
When the Centre instituted five-year plans, it also decided to control expenditures related to the plans. As far as the private sector was concerned, the Centre exercised the control, approximately and ineffectively, through an industrial licensing mechanism. But the states had actually to meet satraps in the Planning Commission and the Central finance ministry and negotiate with them what plan schemes they would undertake and how much aid for the schemes the Centre would give them. The Planning Commission was thus used to enslave states financially.
When they decided how much to give a state, both the finance commissions and the Planning Commission looked at how much the state had spent. So states had an incentive to spend as much as they could. The Centre could stop them from spending too much. The Reserve Bank of India could place a limit on the states overdraft, and bounce its cheques when it exceeded its limit. The Centre could stop states from borrowing. But after Congress lost its hegemony in the Seventies, the Central government lost the political will to control states borrowings. After it nationalized banks in 1971, it had started to force them to lend to itself. In the late Seventies it gave states a share in this captive market, and forced banks to lend to them as well.
So began the states relapse into fiscal drunkenness. By the early years of this century, they were so bankrupt that some of them had to borrow even to meet their revenue expenditure. Then they had a stroke of luck. The United States of Americas payments deficit flooded the world with dollars; the excess liquidity brought down interest rates in India as elsewhere. The Centre helped states to refinance their debt at lower interest rates, and the fall in interest costs restored the financial health of most states.
But in the long period of bankruptcy, the states did not have money even to pay their bureaucracy, let alone to implement big plans. So their annual plan expenditure has shrunk to almost nothing. In the circumstances, Bagchi suggests an end to the state chief ministers annual pilgrimage, with a numerous entourage, to the Planning Commission to discuss their plans.
Once these processions to Delhi cease, what use would the Planning Commission have? It could still make Central ministries investment plans. But the dismantling of socialism has shrunk their investment as well; apart from the armed forces, hardly any ministry has much capital expenditure to boast of. And what little there is can be monitored by the finance ministry.
So the Planning Commission is ripe to be wound up. But as a responsible ex-bureaucrat, Bagchi finds such a conclusion too extreme. He suggests instead that the commission should be turned into an investment bank. But an investment bank has to have money to invest; where will the Planning Commission get some? The finance ministry controls all the money. And it feels quite capable of handling the money itself. There is no particular reason to divide Central money into two tranches, one finance ministrys and the other Planning Commissions.
Five-year plans have long been an anachronism. It is impossible to predict the course of an economy five years ahead; five-year plans become obsolete almost as soon as they are published. The obvious thing to do is to update the plan every year in effect, to have a rolling plan. But the Planning Commission huffs and puffs to produce a plan even once in five years; how is it going to do the exercise every year? The treasury in Britain issues a rolling five-year macroeconomic forecast together with its annual budget. Our finance ministry should really think in terms of a rolling five-year fiscal plan.
If it does so, the Planning Commission will still be otiose in the exercise. But it has to be found some work; where else will the prime minister park his favourites and flunkeys who cannot be accommodated in the government? At least the Congress is not going to privatize the public enterprises. So one idea would be to give these enterprises to the Planning Commission to manage like a holding company. That would stop a minister like A. Raja from swapping improper favours with a public enterprise in his empire, or a bureaucrat from arranging for a ministers mother-in-law to be taken in state to Tirupati at a public enterprises expense. Precisely because such improprieties are prized by their perpetrators, ministers would vehemently resist handing over public enterprises to the Planning Commission. The real question is whether the prime minister has the courage to carry out this undeniable reform in the teeth of their opposition.
It is politically impossible to close down the Planning Commission, however good the case for doing so may be. The only useful work ever done in it was done by the project evaluation division, which in its heyday used to audit government projects and report on what was going right or wrong with them.
Ministries should be doing this, but they have a vested interest in keeping projects under their protection going, and cannot be critical enough. This is where the Planning Commission can be an external, relatively objective observer. The comptroller and auditor general does the same thing with admirable candour and objectivity, but his scrutiny is only financial. Maybe the Planning Commission can work with the CAG, and take a more comprehensive look at major government investments. It will not be entirely free of political pressures; no institution within the government can be. But it can recruit experts from outside the government for additional objectivity. That is perhaps a way of making it useful if it cannot be abolished.