Preconditions for the XI Plan

Before Parliament meets for its winter session, the Approach Paper to the XI Five-Year Plan would have been endorsed by the National Development Council. Historically, Parliament has been a recipient, not a forum for discussing five-year Plans. Nor our medium-term economic strategy, which the Plans are designed to articulate. The Plans do not require parliamentary approval and no legislation is involved, but they increasingly signal our policy directions. Sectoral issues are sometimes discussed in standing committees. The general debate following the presentation of the Budget focuses primarily on the annual budgetary appropriations, though sometimes broader issues do come up. These are not a substitute for more searching discussion on key economic issues and choices.

So let me, in a two- part article, pose some issues which deserve broader attention. The first part deals with preconditions, while the second concerns policy options.

The Approach Paper, titled ?Towards faster and more inclusive growth,? makes many statements on the role of the states and the Centre, leading to an impression that the states will be asked to take more ownership and be more accountable for their programmes, while ?backward? areas will be brought into inclusive growth. This is an important direction, and we have to think of the structure of fiscal incentives to create this shift.

On the whole, a rethink of the transfer system is needed to reconcile performance-linked transfers and inclusive growth, the two priorities mentioned. Performance-linked transfers reward good performance and good performers. On the other hand, inclusive growth needs to ensure the bad performers are not permanently left behind. How to motivate the lagging states? This is a complex task with many interested parties, and incremental steps could be taken to at least create more transparency in the fiscal transfers.

Second, the XI Plan expects an overall yearly GDP growth of 8.5%, which implies even high-er growth in the terminal years, necessitating the investment gearing ratio to in-crease from 31% to 38%. This entails increase in the domestic savings rate, as well as access to external resources, including sharp increase in direct foreign investment. Alternative op-tions and growth targets need to be spelt out, both in terms of its consequences on poverty reduction and job generation.

Third, the disability facing five-year Plans is that given the present electoral cycle, each commences at the mid-point of the government in office. Given the anti-incumbency factors, a mid-term appraisal, which basically outlines the altered priorities and strategies, creates discontinuity. Hardly have departments begun serious implementation of the Plan than electoral change and revised mandates lead to new approaches and strategies. Poll cycles can neither be retarded nor advanced to synchronise with five-year Plans, and yet these Plans are designed as politico-economic statements of the government in office.

Besides, if governments do not complete their full term, fine-tuning these Plan cycles cannot be easy. One alternative, an extreme one, is not to have five-year Plans at all, but to articulate a medium-term strategy and move to a ?rolling plan? regime, in which priorities and stra-tegies are easier to alter. Besides, project implementation is an ongoing process and while annual budgetary appropriations can be predicted, it can?t be assumed.

Fourth, syn-chronisation of five-year Plans with recommendations of the Finance Commission (FC) is another contentious issue. States find it difficult to foresee the available resources, given the multiple sources of resource flows, where the Planning Commission?s recommendations are made one year, the FC?s in another year and centrally sponsored schemes have their own time frame for resource flows.

The Planning Commission and FC disconnect is specially worrisome, as the total resources available to states under the Plan depends on their own contribution, which comes partly from the FC and partly from their resources. The least we can do is to synchronise the Plan with the cycle of the FC. The latter is constitutionally mandated and their recommendations viewed as awards, and there may be multiple advantages in linking the Plans and commencing these immediately after FC recommendations.

Fifth, another issue raised by the Planning Commission is the irrational distinction between revenue expenditure and capital expenditure. It has brought out clearly that such a distinction (particularly the target to eliminate revenue deficit completely by 2008) is flawed, since spending in the critical social sector, which has a multiplier effect on development, is classified as revenue expenditure. And, indeed, far from being eliminated, should be strengthened.

While this dichotomy is certainly flawed, so is the distinction in many areas between Plan and Non-Plan. Several items booked under Non-Plan spending have beneficial consequences in improving the overall investment environment. Reclassification of government accounts must be a critical starting point and this would require coordinated effort by the comptroller and auditor-general, controller of civil accounts, the ministry of finance, as well as the Planning Commission. The exercise will not be easy. There may be merit in a panel with a former CAG, expenditure secretary and Planning Commission representative to make recommendations which can be reflected in the XI Plan itself.

We must learn from the past. Devoting attention to these preconditions will lay the foundations of successful five-year Plans. Nobody wants an 11th version of the same Plan.

?The second part of this article will be carried next week