1. Column: Leveraging NITI Aayog for federalism

Column: Leveraging NITI Aayog for federalism

NITI Aayog must help states evolve modern budgeting, monitoring and evaluation practices

Published: January 29, 2015 2:25 AM

Critics have been complaining about the slow pace of economic reform in India since the new government took over, but scrapping the Planning Commission must rank as a potentially a major institutional reform. Institutional reforms are, in some ways, more difficult and more important than policy reforms, because new or revamped institutions can be the basis for multiple policy reforms.

Simply the name change, getting rid of the word “planning,” signals what might be a significantly different approach. The rhetoric of the reform has focused on the idea of a new “think tank,” and promoting “cooperative federalism.” But what are the key ways in which NITI Aayog should be different from its predecessor? My own take is that the Planning Commission was generating plenty of good thoughts—the example of the venture capital and angel investment committee, discussed in my last column (goo.gl/Sesckz), is a good example. Many of the problems have been in implementation of reforms, and here the issue is not the structure of this specific part of the government, but the web of interests and incentives that make up the many line ministries responsible for large programmatic expenditures, as well as interest groups outside government that may influence whether reforms are undertaken or not. From this perspective, the critical condition is the management of these varied interests by the executive branch: the previous government’s problem was not lack of ideas, but institutional paralysis.

Of course, it is important to have technical inputs that are high quality, and the appointment of Arvind Panagariya as the first head (as a technicality, the vice-chairman) is a huge positive signal of intent. Panagariya has written a definitive study of India’s economy, followed it up with numerous additional analyses, and brought analytical rigour and clarity to conceptualising many aspects of India’s needed path of economic reform. Again, however, there are numerous potential pitfalls, and it is important to think about what can and should be done to make sure that high quality technical economic inputs lead to beneficial actions.

One obvious step is to get rid of Plan transfers. Many have argued that the plan–non-plan distinction in budgeting has become meaningless and even inimical to efficient expenditure budgeting. If the Finance Commission makes tax-sharing and other equalising transfers, while individual ministries make discretionary transfers based on national priorities, there is no need for a third transfer channel. The NITI Aayog does not need to coordinate ministry budgets and expenditures: that can be left up to the finance ministry. That shift had already begun under the previous government.

Second, it is not clear that ministries should be handling such large discretionary transfers, especially for state or concurrent subjects under the Constitution. It would be more efficient to increase the level of non-categorical transfers through the Finance Commission, rather than channeling money through central ministries that can be clueless as to whether the money actually gets well-spent.

The second recommendation implies a critical third reform. The NITI Aayog should do everything in its power to increase governance capacity at the state level, helping to introduce modern budgeting practices and monitoring and evaluation mechanisms at the state level. This is where the greater weakness lies, and where the potential pay-off from internal governance reforms will be highest. It is encouraging that Panagariya has led a major academic study on state-level reforms, and been involved in reforms in his home state of Rajasthan. Arguably, the plan-transfer apparatus had evolved in ways detrimental to sensible budgeting, introducing uncertainty, costly political bargaining, and distortions of expenditure priorities.

A fourth task for the NITI Aayog has to be to provide a quality benchmark for state governments. Introducing rigorous project design standards, benefit-cost analysis and post-project evaluation for national-level investments has to be the core task of the new institution. These are areas where the Planning Commission perhaps did not keep up with the times completely, and represent a natural focus area for its successor.

Improving the quality of these decisions will also provide new benchmarks for the states, as they also have enormous infrastructure needs and responsibilities within their loci of expenditure authority.

There are other things the NITI Aayog can help with, such as creating a common market by pushing for removal of internal barriers to trade, but the key ideas above get to the heart of needed reforms of Indian federalism. It is not just about who sits at which table, but rather a question of making clear assignments of expenditure authority to correspond to comparative advantage at different levels of government, building supporting governance capacity at sub-national levels, keeping intergovernmental transfers simple and transparent, and setting standards at the national level that can be followed at sub-national levels. Once the right structural and process reforms are made, policy reforms have a better chance of going from good ideas to beneficial actions. Having a new institution provides space for this new approach, but no guarantee that it will come about. As with many other aspects of reform, one will have to wait and see.

By Nirvikar Singh
The author is professor of economics University of California, Santa Cruz

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