Plan methodology: focus more on employment, not output

The real significance of the 11th Plan will lie neither in its growth estimates nor in its investment allocations. Instead, it will lie in bringing about a change in the process of Plan formulation and financing.

A complete change in approach is needed because the fiscal regime, indeed the entire macroeconomic policy regime, has undergone fundamental changes during the last decade or so. Yet, the Plan process, quite anomalously, has so far continued to remain and operate in the earlier mould: Plans have been designed and carried out in a pre-reform framework for a post-reform economy. The winds of liberalization have completely bypassed the corridors of Yojana Bhavan (the building in Lutyens’ Delhi where the Planning Commission is based).

If the approach paper to the 11th Plan is any indicator of things to come, it does suggest a slightly different course of action. But doesn’t go far enough in doing so. The Planning Commission needs to change decisively the manner in which Plans are formulated, financed and operationalized.

In terms of formulation, the most important change is to move away from output to employment. All the 10 Five-Year Plans so far have focused on aggregate growth of output. This is important but there have been changes in the structure of growth and the economy, which have resulted in the serious issue of employment generation. While policymakers have been hoping and indeed predicting that growth will generate employment, 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 gone down from 0.6 to 0.15.

What is now required is to target employment growth as a key variable and not as a derived variable. In addition to the sectoral allocations, which have to be made on employment intensity basis, direct interventions will be required to redress the situation. If Plans continue to be formulated in terms of the GDP and its rate of growth, no matter how serious and sincere the efforts are at implementing the National Rural Employment Guarantee Act, it will not deliver the desired results. So, a shift from output to employment as the basic frame of reference is essential.

The implication of this change is that the growth scenarios projected by the commission will have to have the structure of growth and desired employment elasticity, in addition to revenue buoyancy estimates. The crucial point will be to maximize the employment elasticity within each growth scenario. If this is done, we may well find that a growth of 7.5% will be more meaningful than a rate of 9%. There will be trade-offs but some decisive choices have to be made.

As far as Plan financing is concerned, the critical issue for the 11th Plan is undoubtedly the Fiscal Responsibility and Budgetary Management (FRBM) Act. If the Centre doesn’t meet the stipulated targets, it will have to reduce its expenditure (which includes non-statutory transfers to the states) to bring the deficit targets in line with the budgeted estimates. If the revenue receipts fall short, as has happened invariably, then the Centre will have to reduce its expenditure and the first item that is likely to be cut will be the Plan and that will mean the Plan assistance to the states. This can play havoc with the state Plan.

In such a situation, it becomes imperative that the existing system of determining state Plan size and financing it be changed.

The broad point is that as a matter of policy, the commission should not micromanage and take it upon itself to determine the size of Plan for every single 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 on the size of Central assistance to state Plans that it is able and willing to give. Otherwise, it is virtually impossible for the states to finance their Plans in a manner that doesn’t add to their fiscal woes.

The manner in which Central assistance to state Plan itself is decided today, it does not bear any relationship with the investment requirements of the states. On the other side, the Plan size desired by the state governments has nothing to do with their absorptive capacity. The state governments tend to propose an inflated Plan size and do not really work out the annual Plan based on the estimated own resource availability. As far as the commission is concerned, these Central transfers to the states for the Plan are not related to the required size or composition of Plan investments. The result is that the two never meet.

As far as size of the Plan is concerned, it may work well to err on the size of conservatism. Given the state of state finances, it may be better to restrict the states to keeping their Plan size constant in real terms. In the face of a situation that can be created by the FRBM Act, it may be desirable to go for smaller but fully funded Plan with a guaranteed minimum devolution so that one side of the Plan is protected.

Whatever additional resources there are with the commission, could be used to restore the fiscal balance of states. For instance, if the commission has additional resources of about Rs10,000 crore over last year’s level, it could be used to write off the existing stock of debt of states in a manner that causes no moral hazard.

This will, in the long run, improve the balance from current revenues of states and enable them to finance a larger Plan on their own.

Another area of reform can be to give states more flexibility to borrow from the market.

Under Article 293, states have no freedom to borrowing and as such, the commission, the Reserve Bank of India and the finance ministry still fix institutional borrowings. We need to examine the possibility of private-public partnership in this arena. If states can be given flexibility to raise borrowings using subclause 3 of Article 293, we may be able to look at market financing a part of the Plan. For instance, in Jammu and Kashmir, a power sub-Plan can be financed through borrowings from banks and financial institutions. The state may like to raise money to create productive assets in the power sector and build a revenue earning hydro-power revenue base for itself.

Last is the issue of the composition of the central assistance to the state Plan. The grant-loan compositions are determined independent of the required or proposed Plan investments, their sectoral composition, and resources available with the states. It is fixed at 70:30 for all the non-special category states. It is possible to make it flexible depending on the composition of the state Plan. If the state Plan is biased towards say health and education, then grant component should increase. If the Plan is more geared towards power, it can live with a higher share of loans. However, in general, with more being spent on health and education, the revenue component of a unit of expenditure is more likely to be 50%. Indeed, in Plan expenditure of states, the revenue component now is higher than the capital expenditure; revenue accounts for 55% and capital expenditure for 45%. This needs to be corrected.

The author is economic adviser to the Jammu and Kashmir government and chairman and chief executive of J&K Bank. He is a member of the Planning Commission working group on states’ resources for the 11th Plan. These are his personal views.