New Delhi: The government may do away with Plan and non-Plan expenditure and replace them with a single category while formulating India’s annual budgets, ending a decades-old method that India has used to allocate money for its various programmes.
The move could make India’s central planning process more efficient, focus it on long-term objectives, and also ensure that the money involved in various programmes is better spent.
A committee headed by C. Rangarajan, chairman of the economic advisory council to the Prime Minister, has recommended scrapping the two heads of expenditure.
“With a more holistic view, the committee has suggested that there should be a shift in budgetary approach from a one-year horizon to a multi-year horizon and from input-based budgeting to one based on output as also outcomes,” Rangarajan told reporters on Thursday.
Rangarajan, however, dismissed a growing perception that this will diminish the role of the Planning Commission to that of a think tank and make the finance ministry more powerful in the allocation of resources.
“I would say this would re-orient the work of the Planning Commission as it will take a bigger picture view of the five-year planning process and take inputs from the finance ministry,” Rangarajan said.
Currently, based on what ministries ask for (for programmes under the Plan head), the Planning Commission assesses and makes recommendations to the finance ministry on setting aside resources. It also approves central support to state annual plans.
As far as annual budgets go, Rangarajan said it was up to the Planning Commission and the finance ministry to share tasks once the single head of expenditure is implemented. Finance minister Pranab Mukherjee’s budget for the fiscal year provided for Rs 4.4 trillion under Plan and Rs 8.1 trillion under non-Plan expenditure.
Plan expenditure is spent on productive asset creation through centrally sponsored programmes and flagship schemes, while non-Plan refers to all other expenditure such as for defence, subsidies, interest payments and expenditure on establishment and maintainance activities including salaries. Around 30% of the Union government’s spending is Plan expenditure.
The committee was set up last April to study options for better management of public expenditure. The Planning Commission will now look at the recommendations and ask states for their views, an integral part of the planning process.
Once accepted by the Planning Commission and a majority of the states, the government will take a call on how and when the recommendation should be implemented.
Deputy chairman of the Planning Commission Montek Singh Ahluwalia didn’t give a definite timeline, but said the committee’s recommendation could be implemented during the 12th Five-year Plan period beginning next April.
“Convincing the states will be a major task, though,” Ahluwalia added.
The notion that Plan expenditure is good and non-Plan expenditure is bad has encouraged governments to show higher Plan size both at the central and state levels, said Ahluwalia.
“There are practical difficulties also. When the Planning Commission recommends more schools and hospitals it involves two elements—infrastructure as also more qualified doctors and teachers with better salaries. While the former becomes a part of Plan the latter goes into non-Plan,” he said.
The emphasis should be on developing sectors vertically than on matters such as cutting non-Plan or adding to Plan expenditure.
The Planning Commission had in the 11th Plan document prepared in 2007 proposed abolishing this “illogical and dysfunctional” distinction.
Rangarajan said one way to do this was to continue with the existing revenue and capital classification.
“Capital expenditure should relate to asset creating and revenue to transfer of resources. Besides, grants should be broken into normal revenue grant and capital grant,” said Rangarajan. Currently, grants are built on revenue expenditure.
The committee has recommended an adjusted revenue deficit for the purpose of fiscal responsibility and budget management compliance because of this change.
For better transparency in centrally sponsored schemes, the committee has recommended a treasury mode of transfer of central Plan funds besides the existing society route, where funds are transferred to implementing agencies.
“Treasury mode will build transparency in transfer of resources for centrally sponsored schemes. Funds can (be) put in the state government treasury and from there they can be transferred to district and local bodies,” said M. Govinda Rao, director, National Institute of Public Finance and Policy, a New Delhi-based think tank, who is also a member of the committee.
To check loopholes in central schemes the committee has recommended a website to track stages of transfer of resources and their use.