Column: After the plan panel goes

Aug 26 2014, 01:31 IST
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SummaryThe Finance Commission should determine the allocations to the states, but as unrestricted funds

More than two decades after India began to introduce market-oriented reforms, the country’s new leader has taken one of the most symbolically significant steps in that process—announcing the abolition of the Planning Commission. That institution will be replaced by some sort of “think tank,” with the goal being to give the states more room to move forward economically. In fact, the previous Prime Minister had mooted the idea of replacing the Planning Commission with a Systems Reform Commission, and the director-general of the new Independent Evaluation Office, appointed by the previous government, had made the same recommendation as the decision announced on Independence Day. Almost a decade ago, TN Srinivasan and I had made recommendations for reforming or replacing the Commission. The 2011 Rangarajan committee on public expenditure management had also recommended significantly reducing the Commission’s scope.

The Prime Minister has begun soliciting ideas from different sources, including the public, on what the new think tank should look like. To formulate an answer, one has to sort out what the Planning Commission has been doing. The Commission makes five-year plans, of course, and this process involves technical analysis, political bargaining, determining allocations of funds, coordinating across individual ministries, and, after the money has gone out the door, trying to figure out how it was spent and whether it made any difference.

Despite the parallels with, and inspiration from, the Soviet planning model, in practice India’s plans were never like that—planning and government control were not pervasive, and India never had a command and control economy. Given how badly the Soviet model turned out to perform, this was for the best. Instead, much of India’s planning mechanism was indicative, not command and control. Ultimately, the states and the central ministries found ways to do what they wanted, subject to the additional constraints imposed by the planning process. This was the fundamental flaw in Indian planning—it never quite came to grips with incentives, with what gets different economic and political actors to behave in ways that a policymaker might want, in the absence of Soviet-style execution (pun intended).

Indian planning also became less and less clear in its goals. Initially, the vision of development involved a rather simple idea of modernisation—build infrastructure and factories, in other words, physical capital. But over time, it was realised that development requires much broader kinds of investments, in health, education, and institution-building. The economic distinction between plan and non-plan

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