Planning commission of India

History
The Planning Commission was set up by a Resolution of the Government of India in March 1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community. The Planning Commission was charged with the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. Jawaharlal Nehru was the first Chairman of the Planning Commission. The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969. The Eighth Plan could not take off in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies. For the first eight Plans the emphasis was on a growing public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has become less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature.

Role and relevance of Planning Commission

The Planning Commission has now prepared the draft XII Five-Year Plan for 2012-17 with revenue and expenditure projections of the Central and State governments over the five years. After Independence, the government undertook the responsibility for economic development. The concept of welfare state instead of merely a law and order state took hold. More importantly, the primary if not the sole responsibility for economic development was considered to be that of the government. Socialistic State became the model. As the one-year horizon of the annual government budget was considered too small as tool for long-term development, five-year plans were drawn up. The Planning Commission is a separate organisation in the Central Government with a whole-time Deputy Chairman and the Prime Minister as the part-time Chairman. Its budget for the current year is Rs.92.98 crore. The Ministry of Planning has a budget of Rs.1,676 crore with a staff of 1,833 (1,184 in 2009-10). This is the time to examine the role of the Planning Commission in the light of developments since the era of planning began in 1950 and its current relevance.

The significant feature is the evolution of mixed economy with both government and private sector participation. The latest venture is public-private participation in major projects such as infrastructure development. Fiscal management The growing importance of prudent fiscal management as a tool for economic development has been recognised. The one-year span of the annual budget was found to be inadequate to reflect reforms in government revenue and expenditure which take longer time to devise and execute. Bringing budget deficits to acceptable level and achieving fiscal stability needed a longer time span. At last, Fiscal Responsibility and Budget Management Act, 2003, was enacted by the Central Government followed by State government Acts. This prescribed a Medium Term Fiscal Policy statement to be submitted with the annual budget. While the one-year budget is approved, the projections for two following years are shown in the statement. After 2003, five-year plans are not the only long-term projections. One more noteworthy development is the volatility in the economies all over the world with repercussions on Indian economy. Fiscal stimulus and later its withdrawal when not needed require planning beyond the annual budget. While the need for looking beyond the budget is well accepted, there are many factors raising doubts on the efficacy and relevance of the five-year plans as the instrument. The division of expenditure between Plan and non-Plan is artificial and creates problems. Plan expenditure tends to get priority especially when austerity and expenditure reduction has to be done periodically for fiscal consolidation. Non-Plan expenditure gets the cut even if it is vitally needed for economic development. An example is budget provision for maintenance of assets such as hospitals, schools and irrigation dams already created under Plan but whose maintenance is treated as non-Plan. The dichotomy results in dual and confusing responsibility of the Ministry of Finance and the Planning Commission and adversely affects the whole budget process, formulation and implementation. The Ministry of Finance is responsible for fiscal consolidation. Containing the budget deficit and implementation of FRBM Act, 2003, is its task. But in formulating the budget its role in Plan expenditure budgeting is diluted by the discussions which the ministries have with the Planning Commission. The finalisation of Plan allocations for the State budgets also suffers from this weakness. Ultimately, the Central Government has to fix the market borrowing by the State governments taking the overall sustainable borrowing limits, including the needs of the Central Government. The Planning Commission tends to have a more optimistic estimate of resources likely to be available for financing the Plan expenditure as fiscal deficit management and control is not its direct responsibility. Review of schemes Review and implementation of schemes is another area of direct responsibility for the Ministry of Finance and the Ministry of Statistics and Programme Implementation. The Finance Minister himself had, in the budget speech for 2005-06, promised to ensure that programmes and schemes were not allowed to continue indefinitely from one Plan period to another without an independent and in-

depth evaluation. The Planning Commission, serving as the focal point for Plan allocations, dilutes the role of the Finance Ministry. Output and outcome budgeting was introduced by the Central Government from the budget for 2005-06. Non-Plan expenditure seems to be out of its purview. This means the outcome of expenditure on running schools and hospitals will not be evaluated. This again is another fallout of the artificial division into Plan and non-Plan. In sum, the distinction should be between development and non-development expenditure. It should be recognised that the ultimate responsibility for achieving and maintaining fiscal health and implementing the FRBM Act, 2003, is with the Finance Ministry which has to ensure compatibility of fiscal policy with monetary policy of Reserve Bank of India to generate investor and consumer confidence. It should, therefore, be the nodal ministry for the budget formulation and implementation covering development and non-development expenditure. The discussions and finalisation of State government Plan allocations have to be in consultation with the Finance Ministry. It has Budget, Plan Finance and Economic divisions. It can also have inputs from the Ministry of Statistics and Programme Implementation. The rationale for continuing the Planning Commission as a separate organisation outside the Finance Ministry is doubtful. If considered necessary, technical inputs can be transferred to the Finance Ministry where needed. The Medium Term Fiscal Policy Statement under the FRBM Act, 2003, can serve as the perspective beyond the annual budget. Its formulation suffers from many weaknesses which can be set right as dealt with in these columns earlier at length. This write-up and conclusions are no reflection on the technical competence of the Planning Commission under its renowned Deputy Chairman. These are made to rationalise the organisation and methods of budget formulation and implementation.

Finance Commission in India

The Indian Finance Commission came into existence in 1951and was established under the article 280 of the Indian Constitution of India by the President of India. The Indian Finance Commission Act was passed to give a structured format to the Financecommission of India as per the world standard. The necessity for the Finance Commission was first expressed by British for guiding the finance of India. The structure of the modern Act was laid in the early 1920's. The FinanceCommission functions to define the financial relations between the center and the state. The Finance Commission Act of 1951 tells about the eligibility criteria of the FinanceCommission. Functions of the Finance Commission The Finance Commission's duty is to recommend the President for:

The distribution of net proceeds of taxes between the Union and the States. To evaluate the increase in the Consolidated Fund of a state to affix the resources of the Panchayat in the state.

To evaluate the increase in the Consolidated Fund of a state to affix the resources of the Municipalities in the state.

Powers of the Finance Commission The Finance Commission has the following powers:

The Commission shall have all the powers of the Civil Court as per the Code of Civil Procedure, 1908. It can call any witness, or can ask for the production of any public record or document from any court or office. It can ask any person to give information or document on matters as it may feel to be useful or relevant. It can function as a civil court in discharging its duties.

Composition of the Fourteenth Finance Commission Chairman - Dr. Y.V.Reddy Former Governor Reserve Bank of India Member(Part Time) - Prof Abhijit Sen Member, Planning Commission Member - Ms. Sushama Nath Former Union Finance Secretary Member - Dr. M.Govinda Rao Director, National Institute for Public Finance and Policy, New Delhi Member - Dr. Sudipto Mundle Former Acting Chairman, National Statistical Commission Secretary - Shri Ajay Narayan Jha

The grounds of conflict between Finance Commission and Planning Commission of India
There has been serious debate in the country regarding the role of the Finance Commission vis-a-vis the Planning Commission. Finance Commission is a Constitutional body whereas the Planning Commission is a non-statutory institution. Over a period of time, the working of both the institutions led to friction among them due to lack of clear-cut guidelines demarcating their areas of work. Scrutiny of plan expenditure and transfer of capital to the states have been left to the Planning Commission. This has led to a number of practical problems. The relative roles of the Planning Commission and Finance Commission have come to be demarcated in the terms of reference of the Finance Commission. The Finance Commission assesses the non-plan requirements of the State Governments and recommends a share in the net yield from the Central and Grants-in-aid. The divisible sum of Central taxes is distributed inter se among the states based on independent criteria.

This lead to a situation where many states experience non-plan revenue surplus after receiving the devolution and that surplus is supposed to be used by them for plan purpose. But that is not the job of the Finance Commission. It is left to the planning Commission to take it into account while assessing the states resources for state plans. The Planning Commission finds it very difficult to fill the shortfall in the states financial resources for plan purpose because of the limited budgetary support provided by the Central Government for the total public sector plan. Consequently, the plan expenditure becomes a casualty. The various Finance Commissions have generally adhered to the criteria, for grants-in-aid to the States, that this popularly come to be known as the Gadgil formula (after the name of former Deputy Chairman of the Planning Commission), that takes into account in variable proportions the population of the State, developmental performance, budgetary deficit etc. The Ninth Finance Commission in its first Report for 1989-90 recommended a modified Gadgil formula whereby income tax and union excise duties may be distributed among States in accordance with this ratio: (1) 20% on the basis of population; (2) 50% on the basis of distance of the per-capita income of a State from the highest per-capita-income State multiplied by its population; (3) 12.5% on the basis of a State's per capita income multiplied by its population; and (4) 12.5% on the proportion of poor people in the State to the total poor population nationally. However, in the formula for Central assistance to the State recommended by the Planning Commission and approved by the NDC in December 1991 population continues to be given more weight age, alongside, of course, some other criteria: population (60%), per capita (25%) and performance (7.5%). Moreover, of the 25% weight age given to per capita income was made to conform to the 'deviation method' such that higher the allocation of Central assistance, lower the per capita income of a State than the national average. In the meeting of the Inter-State Council which was held in Delhi in July 1997, it was decided that 29% share in Central taxes be given to the States as suggested by the Tenth Finance Commission. As per the Commission's recommendation, this arrangement should be suitably provided for in the Constitution and reviewed once in fifteen years. The Commission also recommended that the Centre should continue to have the power to levy surcharges for the purposes of the Union and these should be excluded from the sharing arrangements with the States. Performance Evaluation of 11th Finance Commission (1) Status-quo-ism: Marginal increase in total central tax revenue to States from 29 to 29.5 percent. (2) fixed a ceiling of 37.5 per cent of the transfer of Centre's gross revenue receipts to the states. (3) The criteria have favoured the northern states in comparison to the Southern States. (4) It has penalised better performers and has rewarded, "laggards". (5) "Gap-filling" approach still continues. (6) Revenue-raising weight age has been accorded low priority.

(7) The recommendation, that the local bodies be given power to collect and regain agriculture will definitely be a difficult task.

Terms of References for 14th Finance commission

The Commission shall make recommendations regarding the sharing of Union taxes, principles governing Grants-in-aid to States and transfer of resources to local bodies. Terms of Reference and the matters that shall be taken into consideration by the Fourteenth Finance Commission in making the recommendations are as under : 1. (i) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds; (ii) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues under article 275 of the Constitution for purposes other than those specified in the provisos to clause (1) of that article; and (iii) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State. 2. The Commission shall review the state of the finances, deficit and debt levels of the Union and the States, keeping in view, in particular, the fiscal consolidation roadmap recommended by the Thirteenth Finance Commission, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth including suggestions to amend the Fiscal Responsibility Budget Management Acts currently in force and while doing so, the Commission may consider the effect of the receipts and expenditure in the form of grants for creation of capital assets on the deficits; and the Commission shall also consider and recommend incentives and disincentives for States for observing the obligations laid down in the Fiscal Responsibility Budget Management Acts. 3. In making its recommendations, the Commission shall have regard, among other considerations, to (i) the resources of the Central Government, for five years commencing on 1st April 2015, on the basis of levels of taxation and non-tax revenues likely to be reached

during 2014-15; (ii) the demands on the resources of the Central Government, in particular, on account of the expenditure on civil administration, defence, internal and border security, debt-servicing and other committed expenditure and liabilities; (iii) the resources of the State Governments and the demands on such resources under different heads, including the impact of debt levels on resource availability in debt stressed states, for the five years commencing on 1st April 2015, on the basis of levels of taxation and non-tax revenues likely to be reached during 2014-15; (iv) the objective of not only balancing the receipts and expenditure on revenue account of all the States and the Union, but also generating surpluses for capital investment; (v) the taxation efforts of the Central Government and each State Government and the potential for additional resource mobilisation to improve the tax-Gross Domestic Product ratio in the case of the Union and tax-Gross State Domestic Product ratio in the case of the States; (vi) the level of subsidies that are required, having regard to the need for sustainable and inclusive growth, and equitable sharing of subsidies between the Central Government and State Governments; (vii) the expenditure on the non-salary component of maintenance and upkeep of capital assets and the non-wage related maintenance expenditure on plan schemes to be completed by 31st March, 2015 and the norms on the basis of which specific amounts are recommended for the maintenance of the capital assets and the manner of monitoring such expenditure; (viii) the need for insulating the pricing of public utility services like drinking water, irrigation, power and public transport from policy fluctuations through statutory provisions; (ix) the need for making the public sector enterprises competitive and market oriented; listing and disinvestment; and relinquishing of non-priority enterprises; (x) the need to balance management of ecology, environment and climate change consistent with sustainable economic development; and (xi) the impact of the proposed Goods and Services Tax on the finances of Centre and States and the mechanism for compensation in case of any revenue loss. 4. In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971. 5. The Commission may review the present Public Expenditure Management systems in place including the budgeting and accounting standards and practices; the existing system of classification of receipts and expenditure; linking outlays to outputs and outcomes; best

practices within the country and internationally, and make appropriate recommendations thereon. 6. The Commission may review the present arrangements as regards financing of Disaster Management with reference to the funds constituted under the Disaster Management Act, 2005(53 of 2005), and make appropriate recommendations thereon. 7. The Commission shall indicate the basis on which it has arrived at its findings and make available the State-wise estimates of receipts and expenditure. 8. The Commission shall make its report available by the 31st October, 2014, covering a period of five years commencing on the 1st April, 2015.