SPECIAL ARTICLEnovember 3, 2007 Economic & Political Weekly92Role of Planning and the Planning Commission in the New Indian Economy: Case for a ReviewAmaresh BagchiIs there a case for continuing with planning and persisting with practices that on the face of it seem to be irrelevant? This article draws attention to the need to define the role of planning and the Planning Commission in the economy post-liberalisation with greater clarity and to reform the institutions that are supposed to support the planning process to make them relevant and effective. With control over investment in the private sector beyond the purview of the Planning Commission, development planning can at best be indicative.The issue is not whether planning is needed – it surely is – but whether the most effective place to do the planning is in a government centralised bureau or at the level of the firm. Today most economists are sceptical about the ability of a centralised bureau to do effective planning.–Joseph E Stiglitz (1997, p 984)Can there be a role for centralised planning in a market economy such as India’s after liberalisation? The question was debated at some length in the wake of the reforms launched in the nineties to liberate the economy from licensing and controls.1 It was realised that after liberalisation planning in the way it was practised in the first four decades after inde-pendence was no longer tenable. In due recognition of this real-ity the Eighth Plan (1992-1997), the first to come out after the initiation of the reforms, stated in its preface: “The Plan is in-dicative in nature”. That planning now has to be primarily in-dicative and the state can at best be a facilitator for private enterprise was reiterated in the two plans that followed, the Ninth and the Tenth. However the practice of drawing up ambi-tious plans on a five-yearly basis (five-year plans,FYPs) under the aegis of the agency that was created for the purpose, i e, the Planning Commission (PC) – a habit imbibed from the Soviet era – persists with all its paraphernalia, the collapse of the Soviet system notwithstanding.Also, as before, the PC continues to preside over the allocation of central funds meant for the “Plan” both for the centre and the states. In the case of the states, the practice of requiring them to come to Delhi for their “plan approval” every year also continues even after it has, by all accounts, lost its rationale, leaving an in-escapable impression of “path dependence”. The institutions that had come up to help implement the plans during the controlled economy era also remain almost intact despite their well known shortcomings and irrelevance in the changed economic milieu. On the other hand, matters that needed to be addressed to opera-tionalise the plans effectively have gone unattended, gravely undermining the utility of the huge exercises that are under-taken routinely to formulate the FYPs. Given this background, is there a case for continuing with planning and persisting with practices that on the face of it seem to be irrelevant?This paper seeks to draw attention to the need for defining the role of planning and the PC in the economy post-liberalisation with some more clarity than has been forthcoming, and reform-ing the institutions that are supposed to support the planning process to make them relevant and effective. The focus of the discussion on institutional reforms is on three of the institutions/The views expressed here are the personal opinion of the author.

SPECIAL ARTICLEEconomic & Political Weekly november 3, 200793practices that have a vital bearing on the results sought to be achieved through the plan. These are: one, the disjunction between the budgets of the government and the plan, and the practice of classifying expenditures in government budget under “plan and non-plan”; two, inadequate fiscal space of the states for fulfilling the objectives of the plans while major responsibilities for plan implementation are devolved on them; and three, the system of intergovernmental transfers that is supposed to help address one of the basic objectives of planning, i e, balanced regional growth. What could be the appropriate role of planning in a market economy is taken up first. 1 Role of Planning in a Market Economy Following liberalisation, the role of the public sector in the Indian economy has palpably shrunk and is shrinking further. Three-fourths of investments in the economy are now flowing from the private sector. Financial constraints emanating from the Fiscal Responsibility and Budget Management law coupled with ineffi-ciency and waste in service deliveries have led to demand for the state to vacate even areas hitherto regarded as the responsibility of the government, like education and health. “Public-private partnership” orPPP is now emerging as the preferred vehicle for initiatives in development, wherever possible. Given this back-ground can or should there be any role for planning? The answer clearly has to be in the affirmative. The reason is twofold. One, when resources happen to be limited – and that liesat the heart of the economic problem of choice – given the objec-tives, actions must be guided by a well-designed plan. Planning is necessary to provide the information necessary as a guide to action and that applies for both the public and the private sectors. In other words, planning has a very useful “indicative” role. Two, it has to be recognised that even in a market economy the state has to play a vital role not only as a facilitator but also as a provider of basic infrastructure, physical, social and financial [Stiglitz 1996]. In the Indian context, even after the emergence of the private sector as the bigger player in the economy, public sector plays– and will continue to play in the foreseeable future – a vital role as a major investor in several critical areas, particularly infrastruc-ture as is expressly acknowledged in the latestEconomic Survey put out by the ministry of finance.2Besides,given the stark dis-parities in living conditions, public services and opportunities for self-development among the people and across regions, the state has to play a redistributive role as well [Parikh 1994]. Not only there has to be a plan of action to achieve desired objectives, a central agency with the requisite expertise is also needed to draw up the plan and set the parameters to guide ac-tion in all sectors. An agency is needed also to harmonise and/or coordinate the plans of different ministries and government agencies and monitor results. The PC was created in 1950 to perform precisely these tasks.Another function of planning is “prescriptive”, that is, influencing the behaviour of both public and private agents to serve public goals through “prescription”, such as by suggesting appropriate tax policy and measures to create incentives for economic agents to save and invest, to protect the environment, promote employ-ment, ensure the smooth functioning of the common market, and so on. Our FYP documents are replete with “prescriptions” em-bracing almost all fields of social and economic policy. That they have not always been heeded is another matter. But thePC can make valuable contribution in this regard, such as by spelling out the choices in critical policy issues like in goods and services tax.That planning can be helpful in a market economy by provid-ing “indication, coordination and prescription” has been ac-knowledged even in countries avowedly market-oriented, like Korea and France [Kuznets 1990]. However there can be no gain-saying that planning in a largely market-driven economy cannot proceed on the same footing as in an economy that is heavily controlled by the state. In the Indian context, this implies that there has to be a clear shift in the focus of planning now as com-pared to the past. As noted at the outset planners in India are amply aware of the need for such a change. However as the dis-cussion that follows would show, many vestiges of the past that have lost their purpose are still there.1.1 Shortcomings of the Planning ProcessIn a paper written for the PC seminar of 1994, the late V M Dandekar presented an incisive critique of planning practised in India in the era of controls and considered at some length what could be the appropriate role of planning and the Planning Commission, post-liberalisation. Though written a decade ago, the points made in the paper merit attention. Dandekar’s critique of Indian planning focused on three par-ticular features of the planning methodology and the planning process. These are: one, the use of sophisticated mathematical models to ensure intersectoral consistency among production targets set by the plan; two, duplication of the jobs of central ministries and the states by setting up parallel divisions in the PC; and three, the system of budgeting that in the absence of annualised break-up of targets set in the plan, ends up by com-promising the goals of the Plans in a most arbitrary way.Dandekar questioned the usefulness of mathematical models mainly on the ground that these are based on input/output coef-ficients that are highly aggregative. With highly aggregated sectors as set out in the I/0 tables, he argued, I/0 coefficients have little meaning and inter-sectoral consistency would allow, for example, for “more of wheat compensated by less of tea or more of hydro-genated oil for less of processed tea”. Then there are data problems.These objections cannot be refuted easily. Nevertheless, even for indicative planning, some idea is needed of the projections of key macro-variables like output growth, saving, investment, etc, in the medium and long term. A model of the economy is obvi-ously needed for making any such projections. A major function of the PC must therefore be to prepare a macro-perspective plan which would indicate the growth and major characteristics of the economy with a longer perspective than just five years. Based on this, long-term sectoral objectives should be prepared. The main plan need not be too detailed, being in the nature of forecasts that can be revised as circumstances change.As mentioned at the outset, the three FYPs that have come out in the post-reform era, the Eighth, Ninth and Tenth, especially the last two, took cognisance of the changed environment and sought to evolve a new method of investment planning for the

SPECIAL ARTICLEnovember 3, 2007 Economic & Political Weekly94public sector. The sectoral investment targets for the economy were worked out based on the targets of output growth and in-cremental capital-output ratios (ICORs), but the targets for the government’s sectoral investments were derived residually from the desired investment programme after estimating the likely pattern of private investment and assessing the likely investment by the states (para 2.49, Tenth Plan, Vol I). The exercise had its limitations and this was duly acknowledged in the text of the Plan but it was believed to serve a useful purpose as an indicator of the likely investment requirements of various sectors and the gaps in resources sectorwise. This indeed is akin to “indicative planning” and retains its value even in a market economy.No exception can therefore be taken to the exercises undertaken to present the macro-targets of growth, saving,investment,public sectors’ resources, etc, in the Approach Paper for the Eleventh Plan (APEP). One possible reason for the use of mathematical models could be, Dandekar averred, going by the observations of a former Ad-viser in the Perspective Planning Division (PPD) of the PC, that the plan model provides a device which the Planning Commis-sion has used “to enforce discipline on the central and state gov-ernments, their ministries, departments and undertakings”.No doubt planning based on a rigorous model can help to get the centre and the states to abide by its (PC’s) priorities but expe-rience shows conforming to the model may not always be practi-cable. However, thePC, it may be noted, derives its sway over ministries and states, not so much from the mathematical models as from its authority to disburse large sums – centre’s support for the plan called Gross Budgetary Support (GBS) – to help them implement projects/schemes under the plan. Use of the centre’s spending power to pursue national objectives through centrally sponsored schemes cannot be objected to. How or to what extent this power should be used raises issues beyond the scope of this paper. However, it may be pertinent to note that instead of dissi-pating resources over a plethora of small and open inconsequen-tial projects across all states, the PC would do well to undertake the responsibility of developing backward states both through public investment and pertinent policy initiatives, as Raja Chelliah has emphasised in a recent paper [Chelliah 2007].In the case of the central ministries, the role of the PC as a co-ordinating if not disciplining agency remains and is perhaps unavoidable. This is because some coordination is needed to ensure that the sectoral plans drawn up by the different ministries are in conformity with the overall objectives of the plan and come with-in the availability of funds. Left entirely to themselves, the minis-tries may tend to take a narrow sectional view and put forward schemes that are inferior to possible alternatives. If adequately equipped, the PC should be able to provide a corrective role in this regard. However, this should not require compelling the ministries to come to the PC for changes in approved projects so long as they keep within their allocation.3 Nor does it justify run-ning parallel divisions in the PC.Even with coordination by the PC, problems arise. This happens when the requirements to meet the targets set under a FYP are sought to be translated into annual plans and the role of the PC is subordinated by the exigencies of resource availability imposed by the ministry of finance. For even after five decades of planning no workable mechanism has been evolved to annualise the re-quirements of aFYP to provide a basis for the budget and that constitutes the Achilles heel of Indian planning. ThePC also pro-vides prescriptions for public policy in vital areas – but given the political realities, they often remain buried in the plan docu-ments.4 The basic problem however stems from the lack of proper integration of the annual budgets with the FYPs.2 Disjunction between Planning and Budgeting Whatever be the parameters of government revenue and expend-iture laid out in the FYP, the annual plans are drawn up every year based on the resource availability as handed down by the ministry of finance. Where the requirements put forward by the different central ministries exceed the available resources, cuts are imposed by the PC often, on a prorata basis . To quote another PPD adviser, “since the Annual Plans reflect the actual resources available to the government, they may be substantially different from the yearwise phasing that is envisaged in the FYP docu-ment”. More often than not, the resources available fall much short of what would be required to fulfil the targets of the plan. “In such situations”, to quote the adviser again, “ since committed expenditures on ongoing schemes and projects have to be neces-sarily met, the reduction in outlays falls disproportionately on new projects and schemes”. When resources are inadequate it is no doubt preferable to see that the existing schemes are run properly rather than start new ones. An implication of this, how-ever, is that sectors which require special emphasis during the plan period through a significant step-up in investment are not able to receive adequate allocations unless there are substantial reallocations from other ministries. “This kind of reallocation is strongly resisted and therefore only marginal changes can be ef-fected during the Annual Plans”.5 The point simply is that although the budgets of both the centre and the states are expected to incorporate the amounts needed to meet the (physical) targets of the FYP, the link between the two is seldom there. The reason is that there is no yearwise phasing of the Plans either in physical or financial terms. The lacuna in the plan implementation process still persists.For instance, while talking of “empowerment through educa-tion”, the APEP states “…the Eleventh Plan should ensure that we move towards raising public spending in education to 6 per cent of GDP which is anNCMP (National Common Minimum Pro-gramme) commitment”. There is no indication of howmuchthis will mean for the budgets of the years coming under theElev-enth Plan. Further, the APEP notes that the number of scientists and engineers per million in Korea is 50 times more than that of India. It also refers to the estimates made by thePM’s Science Advisory Council of what would be required to raise the number of PhDs by five times the existing number. What will be the magnitude of the efforts needed to reduce these gaps in financial terms is not known. 6Meanwhile the union budget for 2007-08, the first year of the Eleventh Plan, proposes large increases in the allocation for education as also health and family welfare. Whether and to what extent these will help to achieve the professed targets (like

SPECIAL ARTICLEEconomic & Political Weekly november 3, 200795getting all children in the age group 6-14 in school) is not clear. For that one needs information as to what has been the progress in physical terms in achieving the goal so far, how much remains to be done, or what that would mean in financial terms, assuming as is suggested more than once in the APEP, that PPP will help fill a part of the gap. Ideally, budget allocations should be made in the light of figures so derived. That does not seem to be the prac-tice. The allocations appear to be made incrementally or in an ad hocfashion and the link with the plan is far from obvious. One thus finds in the Budget speeches of the union finance minister for the years 2006-07 and 2007-08 nearly identical figures of the number of additional classrooms to be constructed and teachers to be appointed even though the additional allocation proposed in the budget for Sarva Shiksha Abhiyan is much less than in the previous year. 7 The disconnect between the budget making and planning is most glaring in the case of defence budgeting. Defence accounts for the largest amount of revenue expenditure in the union budgetnext to interest payments. A plan for defence expenditure is supposed to be drawn up by the ministry of defence based on the requirements of the three services. It appears however, there is no defence plan that could form the basis of the defence budget. That would call for planning in terms of building up capability to meet threat perceptions or force planning which are critical for making any meaningful estimates for defence needs. There is no evidence that defence budgets are made that way. There was a time when the defence budget used to be based on an “approved plan”. That is not the case now.8If planning has to have any meaning, expenditures needed for different sectors to reach their physical targets should be worked out keeping in view how much to expect from the private sector under PPP, etc, and how they are to be spread yearwise. The amounts required to be spent on the projects/schemes of all ministries/agencies proposed to be taken up for implementation under the plan over the plan period, year by year should be added up and a view taken as to how much of the requirements can be met out of available resources. If the amount available falls short of the estimated requirements, the PC should prevail on the MoF to mobilise more resources by raising revenue or cutting expendi-ture. Alternatively, thePC should reprioritise the programmes in the light of the goals set out in the plan instead of leaving it to the ministry of finance to impose cuts at a late stage as seems to be happening all the time. This calls for a closer collaboration be-tween thePC and the MoF. For, at base the disjunction between theFYP and the budget reflects a disconnect between the PC and theMoF.9 There should be a mechanism to sort out the differences as otherwise the disjunction between the annual budget and the FYP will remain. At the same time a fundamental change is called for in the system of budgeting.2.1 Case for Multi-year BudgetingInstead of focusing only on the coming year the budget should have a longer term perspective and commitment extending beyond one year. Since five years may be too long a period the budget should be set in a three-year frame whereby there will be a “firm” budget plan for the first year, firm also for the second year subject to any unavoidable major change in the second year, and “provisional” for the third year. There should also be a tenta-tive budget for the fourth and fifth year. All ministries/agencies should know in advance what they may expect from the budget in absolute terms in the current as well as the next two years so that they can set their plan spending in a predictable manner.Multi-year budgeting is required also because of the fact that different programmes have different time spans. For example, the Bharat Nirman is a time bound programme for action rural infrastructure over the four-year period 2005-09, while the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) contemplates an allocation of Rs 50,000 crore by the central government as grants to states/UTs over a period of seven years,the scheme starting from 2006. These time spans do not always coincide with that of aFYP. It would be more realistic to haveathree and five year perspective for drawing up the budget as indicated above. In the absence of a budget system that helps to operationalise it annually, the FYPs remain at best an academic exercise.Table 1: US Department of Defence Budget Plans(in billions of dollars)DoD Plan 1997 1998 1999 2000 2001 2002 2003 2004 2005FY1998 (2/97) 250 251 256 263 270 277 FY1999 (2/98) 255 257 263 271 274 284 FY2000 (2/99) 263 267 286 288 299 308 FY2001 (2/00) 280 291 295 301 308 316Source: Larson, Orletsky and Leuschner (2001).Many countries in the world now routinely prepare their in-vestment plan on a roll on basis as an integral part of their annual budget making.10 This imposes a healthy discipline in budget making in that it helps to do away with the practice of budgeting on an incremental basis as is the practice now. It will also compel the government to spell out the financial implications of special “packages”, etc, announced during a year for the budgets of the next three years. With elections being held in the middle of a plan period, there is a tendency on the part of the new govern-ment to begin by bringing in a new economic agenda. That in-variably causes a break in the “Plan” drawn up earlier. Multi-year budgeting in a three-year frame would help to accommodate such changes in the plans while also serving to put a restraint on the tendency on the part of the politicians in power to come out with new schemes now and then. How multi-year budgeting operates can be seen from the way budget plans of the department of defence in the US are drawn up. This is illustrated in Table 1. Some flexibility can be allowed even within this framework. Under the comprehensive spending review introduced in theUK in 1997, expenditure programmes of government departments are divided into two parts: one for pro-grammes which departments can control directly or indirectly called departmental expenditure limits orDEL, and two, more volatile, largely demand-led spending known as annually managed expenditure (AME).The control regime requires departments to live within theirDELs and account for any violation of these limits. There is a small reserve for contingencies held centrally while every department is permitted to have its own reserve.The FRBM Act of 2003 requires the FM to place before the Parliament along with budget papers a Medium Term Fiscal Policy

SPECIAL ARTICLEnovember 3, 2007 Economic & Political Weekly96Statement (MTFPS). Along with the budget estimates for the year, the rolling targets of “fiscal indicators” are provided for the next two years also. But these are given as percentages of GDP and not in absolute terms11 and do not quite meet the requirements of multi-year budgeting. There is no budget as such for the next two years. Multi-year budgeting would make the MTFPS more trans-parent and meaningful.In a multi-year budgeting framework the rolling plans should also reflect what has happened to private investments relative to what was assumed in the originalFYP. Along with multi-year budgeting reform is needed also in the system of expenditure classification in the government budgets.2.2 The Plan/Non-Plan Dichotomy: Need to Demolish the Divide Although there is no transparent link between the annual budg-ets and the FYPs, expenditures set out in the budget of both the centre and the states are required to be classified in a manner that carries an impression to the contrary. This refers to the practice of tabulating all expenditures under the sub-heads, “plan” and “non-plan” each under “revenue” and “capital”. The purpose obviously is to indicate the extent to which the addi-tional spending or expenditure on new projects/schemes are budgeted to achieve the objectives of the plan. In the absence of any link between the budgets and the FYP, the purpose is not served however.In order to keep an account of the expenditure on schemes of development undertaken by government under the plan in a given year, all capital expenditures relating to projects/schemes under a five-year plan are classified as “Plan”. However, the implemen-tation of such schemes besides creating tangible assets also en-tails some current expenditure (like teachers’ salaries for new schools set up under a plan); these are also classified as “Plan” but under “revenue”. Expenditures shown under “revenue” and “capital” are thus further subdivided into plan and non-plan. Hence, we have “plan revenue”, “non-plan revenue”, “plan capital” and “non-plan capital”.12 The result has scarcely been wholesome. Since “plan” is taken as synonymous with “development”, there has been a tendency on the part of governments to go in for larger and larger “plans”, neglecting to undertake expenditure required on maintenance and running of existing assets. Large sums are allocated for new schemes while the potential already created goes neglected. A classic example is the poor utilisation of the ir-rigation potential created under the Accelerated Irrigation Devel-opment Programme (AIDP).13Another fall-out of this practice was that a good part of revenue expenditures are financed by borrowing, if they happen to come under “Plan”. Anticipating that the revenue componentof the expenditures under a plan would not be more than a third of the total, while providing for central assistance for state plans, the PC had stipulated that no more than 30 per cent would be given as “grant” and the rest would go as “loan”. The expectation did not materialise. In their anxiety to get political mileage by announcing a larger plan than before, state govern-mentsstartedcoming up with proposals for their annual plan withoutspecifyingtheir break-up under revenue and capital and the PC went on approving the state plans in terms of only outlays without any specification of their revenue and capital components.The AnnualPlan discussions, that were held individu-ally with the states every year turned out to be a process of ac-cording approval for the quantum of borrowing of the states withoutspecificationofthe schemes in view or their require-ment of expenditures under revenueand capital. The grant com-ponent in the assistance for state plans (for general category states) continued to be no more than 30 per cent, while revenue expenditures constituted to be over 50 per cent of their plan expenditure. In some states (Kerala) the proportion exceeds 75 percent (Table 2). Borrowing was required to finance plan revenue expenditures also because the balance from current revenue proved insufficient, in fact mostly negative. As pointed out by the Tenth Finance Commission (TFC), this was a major factor that bred fiscal indiscipline among the states and led to large revenue deficits.14In the centre’s plan expenditures too, the revenue component came to account for an increasingly large part (around two-thirds, vide Table 3), while there was no surplus left in the non-plan revenue account.The deleterious effect of the plan and non-plan dichotomy on asset maintenance on government finances has come in for ad-verse comments from several observers [Vithal and Sastry 2003] Table 2: States’ Plan Revenue Expenditure as a Proportion of Total Plan Expenditure (in %)States 1990-91 1995-96 2002-03 2003-04 2004-05Andhra Pradesh 55.60 31.41 55.47 57.78 54.11Bihar 49.10 69.5450.83 40.15 58.9Gujrat 39.02 45.78 46.44 48.61 50.42Haryana 50.00 51.09 50.83 47.46 53.7Karnataka 54.47 58.45 50.95 48.14 49.56Kerala 51.64 55.26 77.09 76.77 78.65Maharashtra 47.11 50.43 62.78 47.96 50.29Madhya Pradesh 61.15 64.27 55.03 49.86 43.89Orissa 56.16 65.88 56.31 58.62 64.3Punjab 36.35 38.19 41.73 32.242.38Rajasthan 47.94 42.14 51.44 35.92 40.54Tamil Nadu 76.50 70.20 64.07 53.03 45.53Uttar Pradesh 55.75 59.25 47.98 45.6 49.96West Bengal 55.34 50.48 54.24 61.38 59.41Source:State Finances: A Study of Budgets, different issues.Table 3: Centre’s Plan Revenue ExpenditureYear Plan Expenditure of Of Which, Plan Plan Revenue Expenditure the Centre (Rs Crore) Revenue Expenditure as a % of Total Plan (RsCrore)Expenditure1990-91 29,118.00 12,666.00 43.501991-92 30,961.00 15,074.00 48.691992-93 36,660.00 19,777.00 53.951993-94 42,855.00 24,624.00 57.461994-95 47,378.00 28,265.00 59.661995-96 46,374.0029,021.00 62.581996-97 53,534.0031,635.00 59.091997-98 59,077.00 35,174.00 59.541998-99 66,818.00 40,519.00 60.641999-2000 76,182.00 46,800.00 61.432000-01 82,669.00 51,076.00 61.782001-02 1,01,194.00 61,657.00 60.932002-03 1,11,455.00 71,554.00 64.202003-04 1,22,280.00 78,638.00 64.312004-05 1,32,276.00 87,495.00 66.152005-06 1,40,638.00 1,11,858.00 79.542006-07(RE) 1,72,730.00 1,44,584.00 83.712007-08(BE) 2,05,100.00 1,74,354.00 85.01Source:Budget at a Glance, different issues.

SPECIAL ARTICLEEconomic & Political Weekly november 3, 200797and committees – the last three Finance Commissions in parti-cular. But the practice continues. The distinction has however lost its significance now as unfinished programmes taken up under a five-year plan are allowed to be carried forward to the next “Plan”. It is time the dichotomy was done away with. It is sometimes argued that if the plan/non-plan distinction is removed and government expenditures are classified only under “revenue” and “capital”, monitoring the implementation of the plans would not be possible and the PC would lose its grip on the country’s economic development. This is a misconceived appre-hension. The distinction between plan and non-plan in the ex-penditure budgets is of no help in evaluating the progress of the plan on the ground. As is acknowledged now, it is the “outcome” and not the outlays that matter. With all the ministries now coming out with an outcome budget of their own, the plan/non-plan classi-fication has become redundant and misleading. In any case, if any of it, the states are now placed in the forefront of the task of furthering development. Thus, while setting out the various tasks envisaged for the Eleventh Plan, the APEP observes that these will involve major initiatives on the part of the states as the responsibility for delivering many of the services in view rests with the states (para 6.4). The intention however does not seem to be matched by action as evidenced by the facts mentioned below.Declining States’ Share in Gross Budgetary Support: Over the years, the share of the states in the total plan outlay in the FYPs has shrunk. As against over 60 per cent in the First Plan and around 45-50 per cent in the subsequent seven plans, the states’ share has come down to only about 41 per cent now (Table 4). Of the total GBS for the plan in a year, the proportion of assistance to state plans now stands at barely 25 per cent (Table 5).Table 4: Share of States in Plan Outlay in the Public Sector(Rs crore) First Plan Second Plan Third Plan Fourth Plan Fifth Plan Sixth Plan Seventh Plan Eighth Plan Ninth Plan Tenth PlanCentre Plan 706.00 2,534.00 4,212.00 7,826.00 18,755.00 57,825.00 95,534.00 2,47,865.00 4,89,361.00 8,93,183.00 (36.02) (54.24) (49.11) (49.60) (47.57) (52.91) (53.07) (57.10) (56.96) (58.54)State Plan 1,245.00 2,115.00 4,227.00 7,675.00 20,015.00 49,458.00 80,698.00 1,79,985.00 3,69,839.00 6,32,456.00 (63.52) (45.27) (49.28) (48.64) (50.77)(45.25) (44.83) (41.46) (43.04) (41.46)UT Plans 9.00 23.00 138.00 278.00 656.00 2,009.00 3,768.00 6,250.00 (0.46)(0.49)(1.61)(1.76)(1.66)(1.84)(2.09)(1.44) Total 1,960.00 4,672.00 8,577.00 15,779.00 39,426.00 1,09,292.00 1,80,000.00 4,34,100.00 8,59,200.00 15,25,639.00 Figures in brackets are percentages of total plan outlay. Source: Indian Planning Experience – A Statistical Profile, Planning Commission.Table 5: Share of States in Centre’s Gross Budgetary Support (2002-03 to 2006-07) (Rs crore) 1990-91 (RE) 1995-96 (RE) 2002-03 (RE) 2003-04 (RE) 2004-05 (RE) 2005-06 (RE) 2006-07 (RE) 2007-08 (BE)1 GBS 29,956.00 48,684.00 1,14,089.00 1,21,507.00 1,37,387.00 1,43,791.00 1,72,730.00 2,05,100.00Ofwhich 2 Budget Support for Central Plan 17,594.00 28,830.00 68,219.00 72,847.00 82,529.00 1,07,253.00 1,26,510.00 1,54,939.003 Central Assistance for States and UT Plans 12,362.00 19,854.00 45,870.00 48,660.00 54,858.00 36,538.00 46,220.00 50,161.004 (3) as a percentage of (1) 41.27 40.78 40.21 40.05 39.93 25.41 26.76 24.46Source:Union Budget documents.idea is required of the expenditure proposed on a plan scheme, the details provided in the expenditure budget should suffice.3 Diminishing Fiscal Space of the States A major factor that has impeded the realisation of the goals of planning has been the tendency on the part of the centre to micro-manage things from above. Soon after planning was launched, powers of controlling industrial investment in the private sector were taken over by the centre. This was complemented by the centre acquiring control over financial institutions. Although much of the responsibility for delivering public services was as-signed to the states under the Constitution, the states were sup-posed to follow the dictats of the centrally designed plan. State budgets, like the budget of the centre, were expected to act as a vehicle for implementing the plan and subserving its objectives. Assistance was extended to the states to help in the endeavour. The states were left with little space for economic policymaking of their own. This proved counter-productive. Moreover, tensions built up as the era of one-party rule at the centre and the states came to an end. Things seemed to change with liberalisation and decontrol. Demanding “cooperative federalism”, the states seemed to be regaining their autonomy in economic policymaking. However, the reality has been somewhat different. On the face Dwindling Untied Gadgil Formula Grant: What is worse, of the central assistance for state and UT plan, a good part is pre-empted also by the centre’s programmes inasmuch as matching funds have to be provided by the states for the central plans and centrally-sponsored schemes (CSSs) which are meant to be im-plemented by the states. In the latest union budget, of the total amount ofGBS for 2007-08 (Rs 2,05,100 crore) centre’s share stands at Rs 1,54,939 crore leaving hardly Rs 50,000 crore for central assistance for state plans, some of which are again pre-empted by the priorities of the centre. The amount of untied plan grant – supposed to be dispensed under the Gadgil formula – is unlikely to exceed Rs 20,000 crore.15 This goes completely against the NDC’s resolution to allow no more than one-sixth of the central assistance for state plans to flow outside the Gadgil formula. Thus, although on the face of it the share of the states in aggregate government expenditure continues to stand at 55-56 per cent, the proportion of expenditure truly at their command is much smaller. What these trends portend for the question of the relative roles of the centre and the states raise issues that are not gone into here. Suffice it to note that as mentioned earlier, there can be a good case for central intervention through special purpose grants but too many CSSs create administrative problems for the state and local bodies. If the states are to play a constructive role in

SPECIAL ARTICLEnovember 3, 2007 Economic & Political Weekly98development, they must be allowed more fiscal space of their own. This is important also for fostering fiscal responsibility. How exactly this should proceed needs consideration in greater depth than is undertaken here.The point to note is that although the states get little from the PC now to implement their plan, the practice of getting the states to obtain approval of the annual plan from the PC continues. With the stoppage of on-lending by the centre following the recom-mendations of the Twelfth Finance Commission (TFC), the Annu-al Plan discussions yield only the amounts of additional central assistance (ACA) for special problems of individual states. Going by current reports, this forms a small part of the proposed state plans. For the year 2007-08, the ACA promised for Rajasthan comes to Rs 50 crore, forMP Rs 100 crore and for Orissa Rs 80 crore.16 The discussion cannot be said to provide a handle to the PC to oversee the borrowing by the states; that is a responsibility of the MoF and the RBI. The entire exercise involving visits by CMs with a large entourage of officials has become a wasteful ritual. It is time the practice was discontinued. 4 Flaws in the Transfer SystemTo address the imbalances arising from the asymmetry in the assignment of responsibilities and fiscal powers between the two levels of government and regional disparities in development, India’s Constitution makers wanted the centre’s revenue to be shared with the states mandatorily and recommended the crea-tion of a Finance Commission (FC) at least once every five years. It was expected that the twin imbalances that marked the federal fiscal system – vertical and horizontal – would be taken care of through transfers mediated by the FC. The results achieved have however fallen short of expectations in important respects. In particular, the objective of balanced regional growth has eluded the planners.The ratio of per capita gross state domestic product (GSDP) of the highest to the lowest income states has gone up from 2.5 at the time of independence to nearly 5 now. At the close of the last decade the proportion of per capita government expenditure on social and economic services of the poorest state in relation to the average was 47 and 34 per cent respectively.17 In a recent survey of the trends in regional disparities, Govinda Rao concludes “Despite 50 years of planning the governments have failed to enable poorer states to catch up with more advanced states in literacy, infant and maternal mortality and eradication of poverty. …Ironically … some of the well-endowed states Bihar, Orissa, MadhyaPradesh and Uttar Pradesh are the poorest” [Rao 2006]. As pointed out by Rao, while disparities are caused by many factors like resources and policies of the state governments, insti-tutions also matter. Among the institutions the system of federal transfers figures prominently. Contrary to what was apparently envisaged in the Constitu-tion, transfers have been taking place almost since inception through channels bypassing the FC. While the bulk of the revenue transfers do flow under the mediation of the FC, a significant part, roughly one-third, is dispensed by the PC, an ostensibly political body. ThePC was also required to allocate the on-lending by the centre for the state plans, and that together with the plan grants came to be based on the Gadgil formula. The revenue required to implement plan projects under a plan – “plan revenue Table 6: State-wise Per Capita Approved and Actual Plan Outlay and Expenditure – 2002-03 to 2005-06 (in Rs crore)State Tenth Plan – 2002-07 Annual Plan – 2002-03 Annual Plan -2003-04 Annual Plan -2004-05 Annual Plan – 2005-06 Annual Plan 2006-07 ProjectedOutlayApprovedOutlayActual Approved ActualApproved ActualApproved RevisedOriginally Approved ExpenditureOutlayExpenditureOutlay ExpenditureOutlay Expenditure OutlayAndhra Pradesh 6155.49 1333.73 1098.03 1448.68 1420.72 1689.01 1512.86 2066.72 1786.73 2641.05Arunachal Pradesh 35636.14 6195.49 4870.88 6488.76 5883.88 6968.55 6010.35 8706.67 7496.35 9678.16Assam 3121.52656.95533.88668.21546.71816.49674.221126.191126.191425.76Bihar 2533.82357.68266.25400.58316.97482.63385.68643.07571.37995.43Chhattisgarh 5289.49 844.88849.911122.81 1155.99 1597.65 1362.16 2055.69 1969.13 2586.11Goa 23809.564360.13 3148.894836.24 4223.22 6572.41 5705.44 7626.50 7626.50 8928.58Gujarat 7906.99 1502.07 1067.89 1553.45 1499.04 1683.541502.70 2174.04 2174.04 2471.19Hariyana 4878.34 964.76842.48980.89884.97 1093.64 999.98 1422.95 1451.12 1565.24Himachal Pradesh 16948.46 3027.69 3374.22 2196.72 2149.99 2304.30 2427.50 2632.77 2756.18 2961.87Jammu and Kashmir 14399.32 2249.42 2049.99 2482.64 2335.77 2987.14 2819.23 4170.84 4170.84 4317.48Jharkhand 5437.76985.511039.281091.01658.371527.421111.601676.041679.522415.51Karnataka 8259.99 1632.84 1548.13 1824.25 1634.52 2336.81 2254.47 2570.45 2437.29 3065.58Kerala 7538.02 1264.50 1238.74 1391.39 1136.24 1523.94 1116.301686.32 1682.60 1950.46Maharashtra 6886.87 1195.01 799.881245.45 846.25976.381014.70 1136.92 1136.92 1532.68Madhya Pradesh 4337.15 798.38 882.64 944.44 842.49 1111.19 1094.71 1237.23 1378.65 1493.75Manipur 11738.932302.57 874.062470.03 1199.93 3297.78 2343.18 4125.24 4155.47 4856.33Meghalaya 13048.182363.331734.732406.692108.183106.332559.203469.113135.643902.75Mizoram 25812.124825.72 4719.89 5386.85 6185.90 6918.97 6176.25 7687.49 8223.71 8506.74Nagaland 11201.902132.111852.632514.292409.042709.342328.883117.713400.573821.71Orissa 5176.14844.53674.02871.77663.88681.07746.11817.28817.28953.50Punjab 7681.16 1149.89 727.241161.83 652.881432.65 805.26 1461.55 1461.55 1646.82Rajasthan 4837.35 913.71784.63 753.991070.31 1203.67 1167.02 1478.58 1416.60 1505.39Sikkim 30633.886475.57 6290.00 7493.16 6806.01 9085.59 8631.93 9250.81 9456.18 10175.89Tamil Nadu 6440.10 925.76 940.42 1127.02 1141.24 1288.18 1334.04 1465.12 1467.31 2012.53Tripura 14101.421958.53 1851.27 2036.87 1805.01 2194.40 1814.73 2519.45 2374.43 2976.97Uttar Pradesh 3595.72 436.61 398.54 465.39 369.25 581.83 507.52 812.99 817.76 1144.21Uttarakhand 8998.11 1808.03 1709.33 1857.41 1978.63 2135.02 2260.42 3184.13 3221.99 4717.22West Bengal 3570.25 786.20 333.23 485.41 315.31 625.72 532.06 807.27 752.02 1000.28Source: Planning Commission.

SPECIAL ARTICLEEconomic & Political Weekly november 3, 200799expenditures” – it was felt, was better dispensed by the PC as the planning agency would be in a better position to assess the requirements of each state in this regard. The requirements for meeting the non-plan revenue expenditures would be met out of transfers recommended by the FC. While the transfers flowing fromtheFC’s recommendations have been equalising, studies show that the equalisation does not go beyond a point. Despite some modification in the Gadgil formula that governs them, the plantransfers do not contribute significantly to equali-sation either.18 Then there were implicit transfers in various forms such as subsidised lending by public sector banking and financialinstitutions at low interest rates for specified activities, etc[RaoandSingh 2005: 214]. While many of these transfers have largely disappeared now, a new one has cropped up in the shape of “viability gap grant” for investment undertaken by the private sector. What is the share of the poorer states in these grants is not known. What is more, even with all the transfers from the centre, the capacity of the poorer states to undertake development as reflected in their per capita plan expenditure remains too low compared to that of better off states, to make a dent on the regional divides. In 2005-06, per capita plan outlay was Rs 571 in Bihar as against Rs 2,174 in Gujarat, Rs 1,461 in Punjab, and Rs 1,682 in Kerala (vide Table 6). This has been the picture throughout. The shortcomings of the transfer system have been discussed extensively in the literature on India’s fiscal federalism and are not repeated here. Two important suggestions in this context have been (i) to bring all transfers to states for ena-bling them to meet the plan and non-plan expenditures under the purview of the FC, and (ii) to reconstitute the PC as a body to dispense funds for public investment and work like a development bank for both the centre and the states [Srinivasan 2006]. The implications of these suggestions need to be more widely debated than has taken place so far. In any case, the issues will presumably come up for consideration by the next Finance Commission which is to be formed shortly and are not taken up here.5 InsumIf public resources are to be used optimally to advance growth and welfare of citizens, planning is needed even in a market economy. However, the function of planning in a predominantly market-driven economy has to be indicative, co-ordinative and prescriptive. There is also need for a central agency to perform these functions. That provides the justification for India’s Plan-ning Commission to engage in the task of preparing development plans for the economy periodically even after liberalisation. However with control over investment in the private sector beyond its purview such planning can at best be indicative. Planners in India seem to be well aware of this reality. The FYPs now drawn up seek to provide an indicative path of deve-lopment by setting out the imperatives for alternative growth scenarios in terms of macro-variables like saving and investment (broken down under public and private), current account balance, projected government revenue and expenditure, and soon.However, the plans also provide requirements of invest-ment for the centre sectorally worked out through elaborate exercises done by working groups set up specifically for the purpose. Even if these exercises are left to be undertaken by the ministries, it would still be necessary for an agency like the PC to integrate and coordinate the plans of different ministries and undertak-ings of the central government, and bring them in line with the medium and long-term goals while keeping within the budget constraint. However for coordination to be meaningful, budgets must be tailored to the FYP by appropriate yearly phasing of outlays planned. That calls for moving over to a system of multi-year budgeting on a rolling basis. This has acquired urgency in the context of resource constraints imposed by the fiscal responsibility laws. The plan/non-plan distinction in government expenditures has lost its relevance and should go. With the dwindling flow of central assistance for state plans and the cessation of on-lending to the states by the centre the system of Annual Plan approval with the states has lost its signifi-cance and should be done away with. The system of transfers from the centre needs to be reformed. There should be some rethinking on the relative roles of the PC and the FC. Issues involved in these are not gone into in this paper. The PC also performs a prescriptive function by making recommendations covering a wide area of public policy. There are a number of other agencies as well to make policy recom-mendations to the government, like the RBI, the Economic Advisory Council to the prime minister, and the think tanks financed by government. Even so, there can be a prescriptive role for the PC but there should be better networking among these agencies. The interface between the PC and the MoF in particular should be strengthened if the FYPs are to be made really operational.Email: amaresh_23@yahoo.comNotes 1 Planning Commission had held a meeting of senior economists in May 1994. 2 After noting that investment requirements for infrastructure during the Eleventh Plan is estimated to be around $ 320 billion, the Economic Survey for 2006-07 avers that nearly 60 per cent of these resources would come from the public sector (para 1.29). 3 This has in the past caused unconscionable delays in the implementation of projects. 4 How else does one explain the government’s failure to bring about much needed reforms touted in the Plan documents in Plan after Plan? A glaring example is the continuance of the numerous hurdles in the operation of the common market within the Indian Union which is guaranteed under Article 301 of the Constitution. In many areas it is the court’s fiat that helps to implement public policy, e g, enforcing the use of CNG in motor vehicles. 5 ‘A Note on Economy-wide Modelling and Sectoral Outlays’ by Adviser, PPD, quoted in Shourie (2004), pp 103-05. 6 Going by past experience, this is unlikely to be spelled out even in the Plan when it is formulated. 7 The allocation for Sarva Shiksha Abhiyan was raised in the 2006-07 budget by Rs 2,885 crore whereas in the 2007-08 budget the increase works out to only Rs 630 crore. 8 For an account of how defence budgets are made in India, reference may be made to Ghosh (2005) and a review article thereof [Bagchi 2006]. 9 A telling evidence of this is provided by the exchange between the deputy chairman and the finance minister that surfaced in the press last year over the PC’s idea of changing the FRBM targets (“the goalposts”) to cyclically adjusted deficits (Financial Express, August 28, 2006).10 Premchand (2001), p 21.11 The indicators chosen are: revenue deficit, fiscal deficit: gross tax revenue and to-tal outstanding liabilities. No break-up is provided for the projected expenditures, ministry or departmentwise.