The Planning Commission has now prepared the draft XII Five-Year Plan for 2012-17 with revenue and expenditure projections of the Central and State governments over the five years. After Independence, the government undertook the responsibility for economic development. The concept of welfare state instead of merely a law and order state took hold. More importantly, the primary if not the sole responsibility for economic development was considered to be that of the government. Socialistic State became the model. As the one-year horizon of the annual government budget was considered too small as tool for long-term development, five-year plans were drawn up.
The Planning Commission is a separate organisation in the Central Government with a whole-time Deputy Chairman and the Prime Minister as the part-time Chairman. Its budget for the current year is Rs.92.98 crore. The Ministry of Planning has a budget of Rs.1,676 crore with a staff of 1,833 (1,184 in 2009-10).
This is the time to examine the role of the Planning Commission in the light of developments since the era of planning began in 1950 and its current relevance.
The significant feature is the evolution of mixed economy with both government and private sector participation. The latest venture is public-private participation in major projects such as infrastructure development.
The growing importance of prudent fiscal management as a tool for economic development has been recognised. The one-year span of the annual budget was found to be inadequate to reflect reforms in government revenue and expenditure which take longer time to devise and execute. Bringing budget deficits to acceptable level and achieving fiscal stability needed a longer time span. At last, Fiscal Responsibility and Budget Management Act, 2003, was enacted by the Central Government followed by State government Acts. This prescribed a Medium Term Fiscal Policy statement to be submitted with the annual budget. While the one-year budget is approved, the projections for two following years are shown in the statement. After 2003, five-year plans are not the only long-term projections.
One more noteworthy development is the volatility in the economies all over the world with repercussions on Indian economy. Fiscal stimulus and later its withdrawal when not needed require planning beyond the annual budget.
While the need for looking beyond the budget is well accepted, there are many factors raising doubts on the efficacy and relevance of the five-year plans as the instrument. The division of expenditure between Plan and non-Plan is artificial and creates problems.
Plan expenditure tends to get priority especially when austerity and expenditure reduction has to be done periodically for fiscal consolidation. Non-Plan expenditure gets the cut even if it is vitally needed for economic development. An example is budget provision for maintenance of assets such as hospitals, schools and irrigation dams already created under Plan but whose maintenance is treated as non-Plan.
The dichotomy results in dual and confusing responsibility of the Ministry of Finance and the Planning Commission and adversely affects the whole budget process, formulation and implementation. The Ministry of Finance is responsible for fiscal consolidation. Containing the budget deficit and implementation of FRBM Act, 2003, is its task. But in formulating the budget its role in Plan expenditure budgeting is diluted by the discussions which the ministries have with the Planning Commission. The finalisation of Plan allocations for the State budgets also suffers from this weakness. Ultimately, the Central Government has to fix the market borrowing by the State governments taking the overall sustainable borrowing limits, including the needs of the Central Government. The Planning Commission tends to have a more optimistic estimate of resources likely to be available for financing the Plan expenditure as fiscal deficit management and control is not its direct responsibility.
Review of schemes
Review and implementation of schemes is another area of direct responsibility for the Ministry of Finance and the Ministry of Statistics and Programme Implementation. The Finance Minister himself had, in the budget speech for 2005-06, promised to ensure that programmes and schemes were not allowed to continue indefinitely from one Plan period to another without an independent and in-depth evaluation. The Planning Commission, serving as the focal point for Plan allocations, dilutes the role of the Finance Ministry.
Output and outcome budgeting was introduced by the Central Government from the budget for 2005-06. Non-Plan expenditure seems to be out of its purview.
This means the outcome of expenditure on running schools and hospitals will not be evaluated. This again is another fallout of the artificial division into Plan and non-Plan.
In sum, the distinction should be between development and non-development expenditure. It should be recognised that the ultimate responsibility for achieving and maintaining fiscal health and implementing the FRBM Act, 2003, is with the Finance Ministry which has to ensure compatibility of fiscal policy with monetary policy of Reserve Bank of India to generate investor and consumer confidence. It should, therefore, be the nodal ministry for the budget formulation and implementation covering development and non-development expenditure. The discussions and finalisation of State government Plan allocations have to be in consultation with the Finance Ministry. It has Budget, Plan Finance and Economic divisions. It can also have inputs from the Ministry of Statistics and Programme Implementation. The rationale for continuing the Planning Commission as a separate organisation outside the Finance Ministry is doubtful. If considered necessary, technical inputs can be transferred to the Finance Ministry where needed.
The Medium Term Fiscal Policy Statement under the FRBM Act, 2003, can serve as the perspective beyond the annual budget. Its formulation suffers from many weaknesses which can be set right as dealt with in these columns earlier at length.
This write-up and conclusions are no reflection on the technical competence of the Planning Commission under its renowned Deputy Chairman. These are made to rationalise the organisation and methods of budget formulation and implementation.