Macroeconomics

In lieu of the Planning Commission: Part IV

  • Blog Post Date 30 September, 2014
  • Perspectives
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In this post, Pronab Sen – former Principal Adviser, Planning Commission of India – provides his perspective on some of the issues involved in replacing the Planning Commission. In his view, none of the functions that were performed by the Planning Commission are entirely dispensable for any central government in a federal democratic system; the issue is the manner in which they are performed and who performs them.



In his address to the nation, from the ramparts of the Red Fort on India´s 68th Independence Day, Prime Minister Modi announced his government´s decision to abolish the Planning Commission:

“I believe that when Planning Commission was constituted, it was done on the basis of the circumstances and the needs of those times…but the prevalent situation in the country is different, global scenario has also changed, governments are no longer the centre of economic activities, the scope of such activities has broadened... therefore within a short period, we will replace the planning commission with a new institution having a new design and structure, a new body, a new soul, a new thinking, a new direction, a new faith towards forging a new direction to lead the country based on creative thinking, public-private partnership, optimum utilization of resources, utilization of youth power of the nation, to promote the aspirations of state governments seeking development, to empower the state governments and to empower the federal structure.”

The planning commission performed the following functions;

  1. Preparation of the Plan Document
  2. Allocation of funds between:
    • states and centre
    • Central ministries
  3. Appraisal of all expenditures of the central ministries
  4. Mediating between states and central government
  5. Providing independent opinion on all project/ programme proposals of central ministries
  6. Monitoring progress of central government schemes
  7. Mediating between central ministries on issues of a crosscutting nature

In view of the above,

Q. Which of these functions are obsolete and could be dispensed with, and why?

None of the functions listed are entirely dispensable for any central government in a federal democratic system. The issue is the manner in which they are performed and who performs them. Consider, for example, the preparation of the Plan. It does not matter whether it is called a Plan or a Poverty Reduction Strategy Paper (PRSP) or a Reform Agenda or anything else for that matter. Every country, especially developing countries, needs a medium- to long-term vision document which outlines the measures necessary to attain the vision, and the roles expected to be played by the various agents in and outside the country. It does, however, matter a great deal who prepares this document. For such a document to be effective, it not only has to have ownership at the highest political level, it must be seen to consider and reflect the diversity of interests that exist within any democratic polity. At a technical level, the function can indeed be performed by a non-governmental entity such as the World Bank (which does PRSPs for a number of countries) or high quality think-tanks. But in neither case will the document possess the same cachet as one produced within the government with direct and visible involvement of the political leadership.

Insofar as the other functions are concerned, a prime consideration governing who carries them out needs to be objectivity and avoidance of conflict of interest. Most democratic governments also work on the basis of a healthy system of checks and balances which prevents excessive concentration of authority. This problem is particularly acute in the case of the allocation and mediation functions.

Q. Of the functions which need to continue to be performed which should be retained in the new institution and which can be located in other existing bodies? Reasons may please be provided.

Clearly, the core function of the new institution must be the vision-cum-strategy role. In order to perform this function, it must have three attributes: (a) high level of intellectual and technical expertise; (b) no administrative or delivery responsibility whatsoever in order to avoid any conflict of interest; and (c) an economy-wide mandate. Given these attributes, and the fact that the skill sets necessary to carry out this function are not very easily available, it appears natural that the mediation functions, whether between the centre and the states or between central ministries, should also be located in this institution. The reason is that these functions require an economy-wide perspective that is usually not available in any other body.

The appraisal and monitoring functions can easily be located elsewhere, assuming of course that the outputs arising from these activities are readily available to the new institution for its strategising purposes. For instance, the main customer of the appraisal function is the Department of Expenditure in the Ministry of Finance, which is responsible for according financial approval to all proposed government expenditures. A unit can easily be created within the Department itself for this purpose. The monitoring function is a little trickier since the principal responsibility for monitoring vests in the concerned line ministry itself, and the arm’s length monitoring is carried out primarily because there is a potential conflict of interest in having the same body doing both implementation and monitoring where public funds are involved. Such oversight is therefore hugely resented by the line ministries. The entity carrying out this function will thus have to be one which either has a status that over-rides individual ministries or has a direct locus standi in the effective implementation of all government schemes. The only two entities which meet either one or the other of these characteristics are the Cabinet Secretariat and the Department of Expenditure respectively.

The really problematic function is allocations. There is a view that this function can easily be carried out by the Finance Ministry, which is after all the custodian of the Budget. A little thought should convince one, however, that there are problems of both conflict of interest and absence of checks and balances in this view. The primary responsibilities of any Finance Ministry are: (a) fiscal rectitude; and (b) short-run macroeconomic stabilisation. Both these responsibilities can potentially be in conflict with the needs of growth and development, and there is thus a need for an institutional mechanism through which a balance is maintained. Moreover, since the Finance Ministry is the final authority on the contents of the Budget, it is probably preferable for it to be an appellate body for allocations rather than the principal allocator. This does not of course mean that the allocation function should then naturally devolve on the new institution, but it hard to see which other body can take up the role.

Q. Are there other (new) functions that should be performed by the new institution? Please specify with reasons.

One of the biggest problem areas in government is that every line ministry tends to have tunnel vision, and is incapable of realistically assessing the economy-wide ramifications of its policies and programmes. This is entirely apart from issues of inter-ministerial dispute, which is covered in the mediation function. The new institution should therefore be empowered to assess all policy proposals of government in terms of their broader implications and to suggest alterations and/ or complementary measures for consideration of the final decision-making authority – the Cabinet.

Another new function, in some sense related to the first, would be for the new institution to be charged with assessing the impact of any government decision on the state of competition in the economy. India is already in the process of formulating a Competition Policy, but a major stumbling block has been to identify the right institution for implementing the policy. The new institution is a natural choice.

Similarly, there is no agency today which is charged with assessing the impact of international developments on the country. This includes not only external developments, but also of international treaties and agreements that India is considering. At present these functions are carried out by ‘nodal’ line Ministries, which rarely have the economy-wide vision to do justice to these issues. The new institution could weigh in on these.

Q. In order to perform the functions envisaged for the new institution, what should be its legal position, character and structure?

There is a strong view that the new institution should be a statutory body, if not a Constitutional one. This is, however, problematic. Consideration of the functions that are being proposed for the new institution suggests that this body’s principal role is to assist the Cabinet in taking reasoned decisions and to exercise some limited delegation of the Cabinet’s powers. A statutory character would run contrary to this intent, and would introduce a rigidity that would not be desirable in a democratic system. The mode of creation of the Planning Commission through a government resolution has much to commend itself in this context. This method creates a direct link between the Cabinet and the new institution, which can help the system evolve through changes in government. Whether it should be headed by the Prime Minister or by any other Cabinet Minister is open to question, and may be left to the best judgement of the government of the day.

Q. What should be the composition and staffing of the new institution?

Given the functions being proposed, the new institution will have to be a highly professional and independent body. It should also have a judicious mix of continuity and change. Keeping this in mind, it is clear that it should not be manned at all by career government servants who carry with them the baggage and loyalties of their previous postings within the larger government. There should be a core cadre of economists and public policy specialists who can provide the continuity and the institutional memory. This would be overlaid with high calibre subject area specialists who would be recruited for fixed-term appointments for addressing specific areas of concern. At the very top there would be a small group of experts who would be in tune with the political leadership of the day, and whose term could be co-terminous with the government.

This is the fourth part of the series "In lieu of the Planning Commission", as part of which we are presenting views of experts from various stakeholder groups - academia, private sector, media, government and civil society - on some of the issues involved in replacing the Planning Commission of India.

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