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January 14, 2015

Indian Economy

Reviving Development

By Nitin Desai


We now have a successor to the Planning Commission with a carefully contrived acronym as its name, perhaps to signal what the institution is expected to do. What a pity they did not call it National Institute for Transforming the Indian Nation, for then I could truly have rejoiced in the acronym!

The name chosen and the initial appointments of the Vice-Chairman and full time members suggest that the Government's principal concern is the reform of the institutions, regulations and policies that control the process of economic development in a relatively freer market environment.

How would the products of a Commission operating in a freer market environment differ from the Five-Year and Annual Plans that we are used to? Basically one can expect a shift from quantitative targeting and public investment planning to indicative projections and policy guidelines. Five year plans would not have any role in this though this should not preclude a medium term fiscal framework for budgeting. One could call it planning without targeting.

However this is not the signal so far from the pronouncements of the Government. What we have had is targeting without planning. Bold goals like 100 GW of solar energy by 2022,  a pucca house for everyone by 2022, Swachh Bharat by 2019 are announced with little analysis of resource requirements, intersectoral linkages and the needed policy changes. Hopefully the Niti Ayog will change this.

But will the Ayog have sufficient weight in the policy making process? The doubts on this score arise from the elimination  of a role for the Ayog in Centre-State fiscal transfers and how that affects its role in the internal dynamics of policy formulation in the GOI.   Let me suggest that the answer to this also depends   on whether the Government accepts the proposal to eliminate the Plan/Non-Plan budget classification as recommended by the Rangarajan Committee and its response to the reported recommendation of the 14th Finance Commission  that all non-tax transfers from the Centre to the States should be delinked from schemes. These two changes, if implemented, would be a seismic change in the dynamics of policy influence.

The flow of funds from the Centre to the States falls into three broad streams. First is the flow that arises from the award of the Finance Commission in the form of shares in taxes and grants for specific purposes. Second is the flow of discretionary block grants for Plan expenditures that are based on the Gadgil-Mukherjee formula except for Special Category States where the flow is based on an assessment of need. These two streams of funds flow are essentially unconditional. The third is the flow of funds for Central and Centrally Sponsored Plan Schemes implemented by the States. This third stream is essentially a conditional transfer tied to particular uses and with various associated policy conditionalities. The Rangarajan Committee recommendation would eliminate the distinction between the the first stream and the other two. The 14th Finance Commission recommendation on delinking non-tax transfers from schemes would merge the second and the third stream into one block grant stream.

The two recommendations in themselves do not require the Ayog to give up its role in the fiscal transfers to the States for development purposes. That is an independent decision which the Government has made. Will this reduce the policy leverage of the Ayog?

Not necessarily. The erstwhile Commission's financial clout vis-a-vis the States had already been greatly reduced with the the proliferation of Centrally sponsored and Central schemes which are projected to account for 76 per cent of the gross fiscal transfer to the the States for the Twelfth Plan. In these schemes the policy leverage rested largely with the concerned sectoral ministry, for instance the Ministry of Rural Development for MGNREGA. If the reported recommendation of the 14th Finance Commission is implemented  the locus of influence could shift to the Niti Ayog which provides a space for "cooperative federalism" and could bring the States together on policy guidelines for reaching agreed sectoral goals. Something like this has been attempted in the implementation of the GST.

In an open economy relying substantially on private investment and enterprise the Government had to exercise influence through its policies rather than through spending programmes. A Niti Ayog that has the active support of a powerful Prime Minister could well be more effective than a Commission caught up in the nitty-gritty of scheme-wise budget allocations.

The Niti Ayog can transform the ecosystem of development policy. But the gains from this would be lost if the rising tide of religious intolerance and obscurantism is not countered. The government has performed better than expected in foreign policy and seems to be getting up to speed on economic issues. However both of these could be endangered if the narrow and intolerant social agendas of some extremist MPs and fringe groups politically associated with the ruling party are not visibly restrained by the PM.

India is a country of many communities (4653 according to the Anthropological Survey). With development, these communities will inevitably move into each other’s social and geographical spaces. The project report for the Delhi Mumbai corridor, for instance, projects the in migration of nearly 100 million persons into the project area. This will not happen peaceably, unless political process fosters a climate of tolerance of “different diets and incompatible gods” (from Partition by W.H.Auden).

Majoritarian aggressiveness will also have its international impact if it leads to civil strife, disruptions and violence and undermine the PM's potential to be a global leader. Moreover it will complicate matters in relations with neighbours as critical border areas like the North-east, Punjab and Kashmir are populated largely by minority groups.

The PM and his team must echo what a senior colleague, Sushma Swaraj, said in a recent speech “The genius of India lies in its ability to absorb and encompass many cultures with whom it has come in contact. At the same time it has allowed these cultures to flourish as distinct entities based on the principle of unity in diversity.”   The aspiring youths who voted for Modi need an India that cherishes and enjoys the diversity of language, culture, cuisine, religion and ethnicity with which it is blest and not one mired in social strife.

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