A mixed bag

In 2007, the economist R. Chelliah, in an article titled “Strategy for Poverty Reduction and Narrowing Regional Disparities”, wrote that the Planning Commission should take up the role of developing backward States through increased public investment and policy initiatives instead of doling out funds for small and inconsequential projects across all States. The article was written when the 11th Five-Year Plan period was just beginning. The issue of widening disparities in economic growth across States was a focal point of discussions around planning in policy circles then. In another article titled “Role of Planning and the Planning Commission in the New Indian Economy: Case for a Review”, published in the same year, Amaresh Bagchi noted that the ratio of per capita gross State domestic product (GSDP) of the highest to the lowest income States had increased from 2.5 at the time of Independence to nearly five. He observed that the “objective of planned growth had eluded the planners”.

Though the issue of unequal economic growth was discussed and debated at the time of formulating the 11th Five-Year Plan, the disparities among the States continued to increase.

The steady increase in Budget support for the Plan expenditure of the Central government Ministries since the Eighth Five-Year Plan only led to a further concentration of power at the Centre and did not contribute in any substantial way to removing the disparities among the States. This was on account of the practice of releasing funds under Centrally sponsored schemes directly to autonomous institutions at the district level, bypassing the State governments. This did not allow State governments to decide their priorities for development. Successive Central governments, including United Progressive Alliance (UPA) governments, have utilised Centrally sponsored schemes to gain political mileage while the autonomy and specific developmental concerns of the States were ignored. The Planning Commission, as an institution responsible for devising allocations for the States, has been criticised time and again for not being able to make the Centrally sponsored schemes respond effectively to the needs of the States.

Also, the mechanism of granting higher Plan assistance to special category States, though well-intentioned, has not worked as intended in the past decade, with the Central Plan funds allocated for special category States remaining constant.

The decision of the Narendra Modi-led National Democratic Alliance (NDA) government to replace the Planning Commission with a new institution has evoked mixed responses from critics and commentators. While one cannot deny the significant role the Planning Commission as an institution has played in addressing regional imbalances, this is also a time to scrutinise whether it has fulfilled its mandate. It is significant to note in this context that a re-evaluation of the role of the Planning Commission was happening within the Commission itself, culminating in a set of recommendations prepared in January this year. These recommendations focussed, among other things, on faster and inclusive development of all States.

It is learnt from members of the Planning Commission that the set of recommendations they made were accepted by Manmohan Singh when he was the Prime Minister but were not implemented. Yet, in his final meeting with the members of the Planning Commission, the Prime Minister raised the issue of the relevance of the institution once again.

Speaking to Frontline , former Planning Commission member Arun Maira said: “It is not merely the ‘fair’ distribution of money amongst the States that will enable the less-developed ones to catch up. It will happen much more, and in a sustainable manner too, through the architectures of policies. I think the role of the Planning Commission, or any new body in its place, in the allocation of money to the States is being overemphasised. What is required in this body is the ability to shape strategies and to architect policies that will enable faster and more inclusive development in all States.”

Special Category States

At present, there are 11 special category States in India. This includes all the eight States of the north-east, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand. Special category States were determined by the Planning Commission on the basis of a range of criteria, including low population density, hilly terrain, lack of infrastructure, and considerable tribal populations. The idea of creating special category States was aimed at providing enabling circumstances for these States to grow, through the transfer of Central funds. The benefits to special category States are determined on the basis of the Gadgil-Mukherjee formula, under which 30 per cent of the total Central assistance for State plans is distributed to special category States, after putting aside funds for externally aided schemes, special area programmes and the North Eastern Council.

However, the transfer of funds through this route has remained stagnant. In a paper titled “Special Category Status: Will It Actually Benefit Bihar?” Govind Bhattacharjee notes that though the number of special category States increased from three to 11 between 1969 and 2013, the outlay of 30 per cent of Central Plan funds has remained unchanged. As a result, there has been a decline in the share of individual States within the category.

A panel set up last year under former Chief Economic Adviser and present RBI Governor Raghuram Rajan proposed a multidimensional index (MDI) for allocation of funds to States, based on indicators, including per capita consumption, education, health, household amenities, poverty rate and connectivity. This report classified Bihar and Odisha as the least “developed States”.

The Planning Commission focussed on boosting tourism infrastructure and small enterprises in the north-east. In June 2012, a report of the working group of the Planning Commission on the improvement and development of transport infrastructure in the north-east highlighted the need to improve roads, construct new railway lines, bring in private-public partnerships (PPPs) for developing a viable civil aviation network across the sector, and proper use of inland water transport. During the 10th Plan period, the north-eastern region received a total of Rs.80,943 crore of Plan funds. This increased to about Rs.1.2 lakh crore during the 11th Plan period.

In more recent times, the Planning Commission also had specific plans focussing on the development of the north-east. Maira said: “One of the proposals was to encourage cluster development for tourism which would provide employment for locals and facilities for both local and international tourists. This would include enhancing local tourism infrastructure and not just developing five-star hotels. The approach was to develop through coordinated efforts of Central Ministries and local stakeholders.”

In recent times, some States have demanded special category status, making it a politically sensitive issue. On June 21, Bihar Chief Minister Jitan Ram Manjhi met Prime Minister Narendra Modi and demanded special category status for Bihar, saying it would stimulate growth in the underdeveloped State. Former Bihar Chief Minister Nitish Kumar had also persistently made a similar demand.

In the recommendations about reforming the Planning Commission, finalised earlier this year, there was an emphasis on rethinking strategies of urbanisation and manufacturing to address regional imbalances. Maira said, “New strategies for urbanisation will ensure greater parity between growth and development of the States. For instance, there was a suggestion to alter the architecture of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) of the UPA government, to address more equitable distribution of funds between larger cities and small towns. Under the JNNURM, the focus was on larger cities. Cities that were already large were getting assistance, whereas smaller cities were left out. This was sought to be remedied through assistance to about 5,000 small towns across States, which would be eligible for assistance under JNNURM, contingent on their meeting some basic criteria of local governance such as water, sanitation and public transport. The local stakeholders would be involved in this plan. This proposal was initially mooted two years ago. The States would have the freedom to decide which towns would be eligible for grants. It was not implemented by the UPA government because it reduced the power of the Centre to call the shots.”

Speaking about some of the changes that the Planning Commission had suggested in the manufacturing sector, Maira said: “The policy of creating large national manufacturing investment zones in corridors where transport is available leaves out States such as Odisha and those in the north-east and further aggravates regional imbalances. Jobs need to grow all over the country, as people need jobs where they live. The small and medium enterprises are the engines of job growth as they create more jobs per unit of investment. Therefore, the principal thrust of the manufacturing policy must be to stimulate the growth of small enterprises in all the States as well as to enable business-friendly regulatory environment, availability of credit, etc. At present, there is no incentive for small enterprises to grow big as subsidies are allocated only if you remain small. An alternative architecture would include providing subsidies for a period of time, say three to five years, contingent on the ability of the small industry to grow. The emphasis on large national manufacturing zones is premised on the trickle-down theory, which assumes that when the already affluent regions grow, it will have a positive impact on the growth of more backward regions. However, there will be a timeline during which regional disparities will increase.”

Some economists have also highlighted the risk of regional imbalances increasing if a body similar to the Planning Commission does not address this issue. Subrat Das of the Centre for Budget Governance and Accountability said: “The Planning Commission provided an institutional framework which had counterparts at the State and district levels. For greater devolution of power to the States, the capacity of State- and district-level planning boards needs to be strengthened. In the absence of the Planning Commission, the future of these bodies is not clear.”

Das also pointed to the need for re-activating the role of the Inter-State Council to address regional disparities. He said, “In the absence of a strong Inter-State Council, the Central Ministries will have an absolute say in channelling resources.”

Centrally sponsored schemes

The large-scale transfer of funds through Centrally sponsored schemes directly to institutions at the district level has meant that the role of the State governments in effectively utilising these funds is curtailed. This has led to further centralisation of power and a weakening of the federal architecture. The Planning Commission has been criticised for not being able to address regional imbalances and over the issue of avoiding greater devolution of powers to the States in the way in which allocations were made for Centrally sponsored schemes. Subrat Das said: “The Planning Commission has been drawing a lot of criticism for imposing uniform norms and guidelines through Centrally sponsored schemes, which is a major drawback of the public provisioning architecture. Even in the present Union Budget, only 10 per cent of the total funds allocated for Centrally sponsored schemes are given as flexible funds to the States. The rest of the funds are still under the control of the Central Ministries.”

In 2011, a committee headed by Planning Commission member B.K. Chaturvedi recommended a reduction in the number of Centrally sponsored schemes from 147 to 59. He also proposed giving greater flexibility to the States in the utilisation of funds and implementation of schemes so that the States could modify schemes to suit their specific needs. In the absence of a policy direction from the Planning Commission, the Centrally sponsored schemes will be continued to be used as instruments to gain political mileage by the Centre at the cost of fiscal decentralisation.

In the post-liberalisation era, when the benefits of liberalisation and rapid industrialisation have accrued mostly to the already affluent States, an institution like the Planning Commission has significant relevance to provide enabling conditions to the States that have been left behind. The Planning Commission’s well-intentioned interventions to help out special category States through the allocation of funds have only had limited success in removing regional imbalances. This is not to suggest that the institution has lost its relevance in policy-making.

However, there has been a need for reform of the institution to meet current challenges of unequal growth and to devise new strategies to spur development and economic activity in backward areas. In the absence of the Planning Commission, the major challenges facing the new body which is set to replace it will be to boost State-level planning, ensure fair distribution of resources amongst the States, enhance job creation across the States and promote infrastructure development and urbanisation in small towns. It remains to be seen if the proposed new body, the composition and functions of which are still being worked out, will be able to meet the institutional mandate of the Planning Commission.