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Post-reform planning

Post-reform planning
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First Published: Sun, Jul 25 2010. 07 22 PM IST
Updated: Sun, Jul 25 2010. 07 22 PM IST
The National Development Council met on Saturday for a mid-term appraisal of the 11th Plan. The focus was the rate of growth during the Plan and constraints to achieve the ambitious 9–10% target during the 12th Plan.
Notwithstanding the fact that in all Plans, except the first, the growth target has never been met, the obsessive preoccupation with the aggregate rate of growth continues. The entire Plan gets formulated on the basis of this number.
There is a need to decisively change the manner in which the Plans are formulated, financed and operationalized. A change in the approach is needed because the entire fiscal regime, and indeed the overall economic one, has undergone fundamental changes. Yet the Plan process has continued in the earlier mould.
In terms of formulation, the most important change is to move away from output to employment as the critical policy variable. All our 11 Five-year Plans have focused on aggregate growth of output. While the focus on output is important, there have been changes in the structure of the economy and its growth, which have resulted in the serious issue of employment generation.
It has always been assumed that growth will generate employment, but the fact is that neither the expected level nor the kind of employment that is required has been forthcoming. On the contrary, the employment elasticity has over the years declined from 0.6 to 0.15.
Employment growth needs to be factored in as a key target variable and not as a derived variable. The way to do this is to allocate Plan expenditure across sectors, on the basis of their employment intensity. This will then be supplemented by the kind of direct interventions that are already in place.
If we continue to formulate Plans in terms of gross domestic product and its rate of growth, no matter how sincere the efforts at implementing direct interventions such as the Mahatma Gandhi National Rural Employment Guarantee Scheme are, these will not deliver the desired results. In the absence of an organic process of employment generation, these inorganic measures will always be add- ons. So shift from output to employment as the frame of reference is essential even for these schemes to have meaning.
The basic approach should be to maximize the employment elasticity in each growth scenario. It may well turn out that growth at 7.5% is more meaningful than at 9%. There will be trade-offs, but some decisive choices have to be made.
The analytical point is that more than the rate of growth, it is the structure of growth that is more important to target and achieve. Incidentally, it is the composition of growth that is also more relevant for the government’s big agenda of inclusive growth and financial inclusion (this was discussed in Method and Manner on 12 July).
The existing system of determining the size of the state plan and its financing also needs to be overhauled. The Planning Commission should not micromanage and take it upon itself to determine the size of the state plan for every state. If need be, it can do so only for the special category states where the institutional capacity for plan formulation and financing is limited. For all others, it should just focus only on the size of Central assistance to state plans that the Central government is able and willing to give.
The manner in which Central assistance to state plans is decided today does not bear any relationship with the investment requirements of the states. On the other hand, the plan size desired by the state governments has nothing to do with the absorptive capacity of their economies. All states tend to propose an inflated plan size not linked with their own resource availability. The result is that the two estimates never meet and fudged balancing is resorted to.
To increase the pool of resources available to the Planning Commission for transfers to states, it is important to work out a creative solution to the issue of Centrally sponsored schemes. It may be time to redesign not the schemes, but how the resources flow to the states. Clubbing them together, as has been done to form flagship schemes, is a move forward; but a more basic change is needed.
It may be worthwhile to explore the possibility of having a “vanilla state plan”, which is entirely based on the state specific priorities. The size of this plan should be increased to allow states to decide on their specific priorities. This done, there can be a top-up through a Central plan for the state by merging the Central plan schemes and Centrally sponsored schemes into one kitty meant to finance the Central interventions in the states. The design of this plan will be on the basis of national priorities.
At present, in most states, the state plan is predetermined because of tied grants and institutional borrowings. The “free plan”—unencumbered by any specific scheme, project or conditional financing—is as low as 30% in some states. The net result is that state governments have been reduced to mere disbursing agents of the Central government: glorified drawing and disbursing institutions.
Haseeb A. Drabu is chairman and chief executive of Jammu and Kashmir Bank. He writes on monetary and macroeconomic matters from the perspective of policy and practice. The views are his own and don’t necessarily reflect the views of the organization he works for.
Comment at haseeb@livemint.com
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First Published: Sun, Jul 25 2010. 07 22 PM IST