NITI Aayog “Planning Commission Model”

Context

• The draft “Three Year Action Agenda” of the NITI Aayog has been circulated recently to its governing council.
• This will be finalised after reflecting on the comments and concerns of state governments.
• After allowing for the 12th five-year plan to phase itself out, the transition is now complete.
• Five-year plans are reminiscent of centrally planned economies; most such countries, like the Soviet Union, China and Romania, had similar planning horizons.

Background

• There are two other documents in the pipeline, namely, the seven-year policy strategy and the 15-year long-term vision.
• The NITI Aayog’s governing council, which is currently reviewing the “Three Year Action Agenda”, comprises all chief ministers, mirroring the erstwhile National Development Council.
• The “Three Year Action Agenda” seeks to embark on “a path to achieve all-round development of India and its people” through concerted action, outlined in seven parts covering multiple facets of the Indian economy.
• However, there are core issues which need to be addressed.

 What are the issues to contemplate?

Is the present shift better designed to suit our development challenges? What are the advantages of a three-year timeline?

• Apart from outgrowing the legacy of central planning, there are other advantages.
• Given India’s democratic cycle, accountability in a five-year timeline was opaque and diffused.
• Electoral cycles do not synchronise with five-year plans; quite often, this entailed outcome accountability to rest with a successor government.
• But a “Three Year Action Agenda” makes the government in office more directly accountable for the implementation of its plans.
• It gives the government an improved prospect to make corrections and adaptations during its own term in office.
• Also augmenting the “Three Year Action Agenda” with a seven-year implementable policy strategy and a 15-year vision allows adaptation to changing times and exogenous variables — it enables us to look into the future, particularly at evolving technology, demography and ecology, and accordingly align our policies.
• The 15-year vision is also somewhat coterminous with the Sustainable Development Goals (SDGs) of the United Nations (UN). The new format thus combines domestic aspiration with global aims.

Are the forecasts of macro variables realistic?

• The agenda projects three scenarios for nominal GVA (Gross Value Added), namely, low growth, baseline and high growth.
• The nominal GVA is expected to increase by 11.6 per cent, 12.3 per cent and 13 per cent in the next three years under the baseline scenario, which implies that inflation would be range-bound and in consonance with parliamentary sanction.
• This further signifies that real GVA growth per annum would be in the range of 7.6 per cent to 9 per cent.
• Broadly speaking, these growth forecasts are aligned with recent trends and expectations of both national and international agencies.
• Relying on the proposals forwarded by the Fiscal Responsibility and Budget Management (FRBM) Review Committee, the action agenda estimates a fall in the share of non-development revenue expenditure, both as a proportion of total budget expenditure and GDP.
• It rightly emphasises the need for optimal utilisation of resources and regular monitoring of progress.
• An obscurantist — and ill-advised — distinction between revenue and capital expenditures has spurred a misallocation of resources. A functional classification of public expenditure would indeed prove to be more meaningful.
• The Gross Tax Revenue (GTR) forecasts under the “low growth” scenario closely resemble the rolling targets outlined in the Medium Term Fiscal Policy Statement of Budget 2017-18.
• The direct tax to GDP ratio is expected to increase by 5.8 per cent, 6.0 per cent and 6.3 per cent in the next three years, as compared to 5.6 per cent in 2016-17 (BE).
• Recent path-breaking reforms to curb black money, the amendments in the Direct Tax Avoidance Agreements and the signing of Advance Pricing Agreements would definitely augment personal income and corporate tax collections.

How likely are we to achieve these targets?

• Given the healthy state of the Indian economy, downside risks to achieving growth targets largely emanate from exogenous factors: Unfavourable monsoons, global protectionist trends and spikes in oil prices could impinge our twin deficits.
• The continued pursuit of an unconventional monetary policy approach by advanced economies could limit the manoeuvrability of our monetary authority.
• More importantly, assuming a tax buoyancy rate of 1.42 is unduly optimistic. This is notwithstanding credible efforts at enhancing tax compliance and realisation, deeper penetration of the digital economy and medium-term gains from the GST.
• Non-tax revenues, particularly from spectrum sale, necessitate structural changes in telecom policy.
• Fortunately, a more robust approach on disinvestment and seeking strategic alliances is a positive factor.
• The public listing of PSUs will enable improved price discovery.
• If the expected level of tax buoyancy does not materialise, many other macro variables may need recalibration.
• We, therefore, must hasten the formulation of the seven-year implementation strategy and the 15-year vision.
• Forecasting key variables like ICOR (Incremental Capital Output Ratio), the trend of domestic savings and trade-related indicators, to name a few, would enhance the credibility of the macroeconomic assumptions embedded in the action agenda.
• In essence, therefore, this is an endeavour well begun, but it is work still in progress.

How can we ensure effective implementation of the action agenda?

• The proposed plan needs broader support. Parliamentary engagement with the erstwhile five-year plans was next to negligible. There was not a single occasion when Parliament devoted time and attention to the eleventh or twelfth five-year plans.
• Part of the problem is the current design of parliamentary processes and the milieu in which standing committees of Parliament examine various ministries.
• More specifically, the Standing Committee on Finance examines matters related to three separate ministries, namely, finance, corporate affairs and statistics and programme implementation, along with the erstwhile Planning Commission.
• Experience suggests that given the Ministry of Finance’s significant legislative agenda, the standing committee is principally engaged in examining the ministry’s legislative proposals.
• There was scant attention given to or time available for analysing the broader issues of the five-year plans.
• We must prevent the NITI Aayog from meeting the same fate. It would be advantageous to constitute a separate parliamentary committee on planning, which could meaningfully engage with the NITI Aayog’s policy prescriptions.
• Delinking planning from finance has distinct advantages as functions of the treasury are neither symmetric, nor co-terminus with broader development issues. Such separations would also be in line with best global practices.
• The Niti Aayog’s Governing Council is designed to foster cooperative federalism. Earlier, each state government used to have state planning boards to assist state five-year plans and support the analytical content of state-level annual economic surveys.
• It would be desirable to create state-level bodies, to be called Sub-National Institutes for Transforming India (SuNITI), in formulating and expediting state-specific policies; this should enable state assemblies to discuss state-level plans in sync with the “Three Year Action Agenda” articulated by the NITI Aayog.
• In the notification constituting the NITI Aayog, there is a provision to form “Regional Councils to address specific issues impacting more than one state or a region”. This is the right time to implement this enabling mandate.

Way forward

• India is on the cusp of robust macroeconomic fundamentals with the renewed political vigour to pursue difficult reforms.
• The “Three Year Action Agenda” augurs well for a better India.