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Home > Business > Columnists > Guest Column > Kirit S Parikh

The role of planning

July 21, 2007

Govinda Rao's article on the 'role of planning in a market economy' raises some very important issues. Everyone will agree that the role should be different from the days of allocative planning.

However, much of his criticism does not refer to today's Planning Commission, but to one of his imagination. What does the Planning Commission do?

The Planning Commission no longer sets sector-wise targets as it used to. However, it does provide a broad picture of the economy, its likely direction and pace, a consistent macro-picture, the plans for the development of infrastructure and the provision of public goods and services. All these help private entrepreneurs in their decisions.

Even in a market economy governments continue to spend substantial amounts, and inclusive development requires government programmes and projects to deliver public goods and services to all people and regions. This calls for allocating public investment, designing implementation strategies to see that outcomes are realised cost-effectively and monitoring them to see that targeted outcomes are in fact realised.

How much should we spend for Sarva Shiksha Abhiyan and how much for the Rural Health Mission are questions that cannot be avoided nor can they be left to the market. Similarly, infrastructure has to be planned. Should we build rural roads or super highways? What is the best way to reach the poor? How to pull up backward regions? How to help Scheduled Castes, Scheduled Tribes and the lagging minorities, to catch up?

If an employment guarantee scheme is being implemented how should it be operationalised? Individual ministries dealing with such schemes have their own ideas but we need some organisation which questions what ministries propose and also adjudicates between alternative demands.

The commission does very little modeling work itself and certainly no "elaborate investment planning exercise using sophisticated planning models". The in-house macro-model is maintained and run by an effort of around two person years per year.

Models, however, help in assessing alternative policies. One also needs to understand the impact of government programmes on the economy and the welfare of people. Policy analysis involves asking an if-then question. One can answer it by a mental model or a formal one. A formal model has the advantage that it forces one to make explicit the assumptions which others can question.

Thus, there is a need for policy models and so the commission has outsourced these to a number of institutions to get certain redundancy and competition. Having more than one modeling group provides a more nuanced understanding. During the preparation of the Approach to the 11th Plan, scenarios from four external models were used to examine the feasibility and implications of attaining 9 per cent growth.

In order to develop policy modeling in the country, the Planning Commission is providing sustained support to some modeling groups.

As the present Deputy Chairman of the Commission, Montek Singh Ahluwalia has observed, we need a system for policy planning and critiquing public policy. An important role that the Planning Commission plays is in policy reforms and advocacy. It also takes initiatives in suggesting policy reforms.

The Integrated Energy Policy is an example. Minerals policy is another. The Planning Commission also gives its views on important policy matters that come up. Unlike other ministries, it does not have a vested interest and so can be expected to give an unbiased opinion. Whether or not its advice is accepted by the government, the need for such advice cannot be doubted.

Planning is also needed for the co-ordination of large projects even when one depends on private sector investment. For example, hydroelectric projects in the north-east would not come up unless a transmission line is built.

The development of the two needs to proceed somewhat in a phased manner. The transmission line would remain underutilised till all the plants come on stream. Since large economies of scale are involved in transmission lines, it would be needlessly expensive if they are built in step with the power plants.

A mechanism has to be evolved to ensure that these come in time and that risks of underutilisation are minimised and, if necessary, shared by the government. The development of coal mines, power plants and railways also needs co-ordination. Effective co-ordination can reduce costs by reducing idle capacity.

Even in the development of infrastructure, the Planning Commission has actively promoted public-private partnership (PPP).

We recognise the need for planning infrastructure but we also realise that not all infrastructure has to be built by the government. Mobilising the private sector in a competitive and transparent manner can bring in efficiency and reduce the cost of service to people. The tariff-based bidding for ultra-mega power projects concluded last year--with the very low realised prices--is an indicator of these possibilities.

Also, model concession agreements have been prepared by the Planning Commission in consultation with the line ministries and stakeholders to facilitate PPP and minimise disputes.

Govinda Rao suggests that instead of the Planning Commission, the constitutionally mandated Finance Commission, which decides every five years how much of the central tax revenue should be transferred to states, should also have the grant-giving role.

To do this effectively, Govinda Rao suggests the Finance Commission would set up a permanent technical secretariat. So we would close one Planning Commission and set up another! More importantly, the Finance Commission is meant to deal with unconditional transfers. I doubt if anyone would want Plan-related transfers to be made unconditional so that states can do whatever they want.

The Planning Commission approves the states' annual plans. Govinda Rao wants all decisions to be left to the states, yet he laments that the Planning Commission does not go into the economic viability of investment projects of the states!

The need for the approval of state Plans arises from the need to maintain fiscal discipline and bring some accountability. The fiscal deficit in the country has to account for the fiscal deficits of both the centre and the states. The annual plan discussion with the states help us put a cap on their borrowings.

This is particularly necessary following the Twelfth Finance Commission suggestion according to which states are now required to access funds mainly from the market. Also during these discussions the states' performance and Plans for Scheduled Castes and Scheduled Tribes are reviewed.

In any case the centre's contributions to states' Plans is small. In the Plans for 2007-08, the gross budgetary support provided by the centre for the non-special category major states, constitutes only 16 per cent of their total Plan size. This support, provided mainly through Centrally Sponsored Schemes (CSS) and Centrally Assisted Schemes (CAS), is critical and emphasises programmes for the inclusion and development of the poor.

CSS and CAS are instruments that help us incentivise states to undertake projects and programmes that may not otherwise get undertaken. The differences in the development of various states are due not just to historically given initial conditions but also due to the policies they have followed over the years.

Leaving all development to them is not the best way to bring about balanced development. After all, as Prof Lakdawala, a former Deputy Chairman had observed, the Planning Commission is the only lobby for the poor in the government.

The author is a member, Planning Commission.

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