The Fourteenth Finance Commission (FFC) has done away with the distinction between Plan and non-Plan while formulating its recommendations and as a follow up, it is essential to the delink ‘Plan’ classification in budget documents and accounts so that intended benefits accrue, said its Chairman Y. V. Reddy.
“The Plan mindset should be replaced with a development mindset, of which government budgets are one element,” Dr. Reddy said while delivering the Raja Chelliah Memorial Lecture at the Madras School of Economics.
This is Dr. Reddy’s first public appearance post the commissioning of the report and acceptance of the recommendations by the Narendra Modi government.
“Actually, the recommendation of the FFC in this regard is to make such a distinction redundant and irrelevant, but the Union and any State could choose to retain the distinction if they find any use for it,” Dr. Reddy said.
There are two components of expenditure — Plan and non-Plan. Plan expenditures are estimated after discussions between each of the ministries and the Planning Commission (which is now dismantled and replaced by NITI Ayog). Non-Plan expenditure comes in the form of interest payments, subsidies (mainly food and fertilisers), and grants to States, among others.
“The Union Government may have to consult the Comptroller and Auditor General on this matter, though the proposed change will not be inconsistent with globally accepted budgeting and accounting practices,” said Dr. Reddy, who was also the former RBI Governor.
He also said a delinking of Plan from budget document and accounts would facilitate assessment, scrutiny and approval of all expenditures in a sector or activity or department in a comprehensive manner and not only incrementally.
“It will facilitate greater attention to maintenance expenditure, and, hopefully, reduce incentives to boost capital works and show large sized plans. The provision of some public goods, such as police and judicial services, may attract the attention they deserve.”
Through the delinking process, the planning process would also be liberated from its close association with the budget, Dr. Reddy said. “….reflecting the new realities, namely, that the process of development requires significantly more than investments by government in development activities, and actions by the regulators, private sector and financial markets are at least equally important. A planned approach in the current context involves actions in multiple areas, as well as by several institutions and layers of government,” he added.
Dr. Reddy also said FFC took of advantage of the fact that the terms of reference does not bind it to look at only non-plan revenvenue expenditure of the states.
“The absence of reference created an opening to the FFC, if it is so desired, to dispense with the distinction between Plan and non-Plan”.
“Unlike, many of its predecessors, the FFC was emboldened to pursue this idea since it was formally recommended by Dr. C. Rangarajan in his capacity as Chairman of the High Level Committee on Efficient Management of Government Expenditures, but not acted upon by the Union Government. The FFC seized the intiatiative and worked on operationalising the recommendation,” he added.
