Thoughts on economics and liberty

Suggestions for a new role for India’s Planning Commission #4

It appears that some time ago Manmohan Singh asked Montek Singh Ahluwalia to review the Planning Commission, and if necessary rename it into a Systems Reform Commission or something similar. Arun Maira thereafter undertook consultation with experts and the industry (including Nandan Nilekani). However, no report was publicly released on the findings of this review. And no action has been taken to reform the Commission.

The Planning Commission was set up by a Resolution of the Government of India in March 1950. It was a Cabinet decision of Nehru's government, and has never been reviewed. Only its membership keeps changing. The Commission has no constitutional authority, nor any act of Parliament to support it. Although there is a Planning Minister, the Commission (e.g. its Deputy Chairman) itself is is not accountable to anyone. I was not able to find any annual report on the functioning of the Commission that is tabled in the Indian Parliament.

Planning Commission members are selected directly by the Prime Minister. Its wields considerable authority over all departments by virtue of its significant membership (numerous Cabinet Ministers, and chaired by the Prime Minister). Its advice, although not entirely prescriptive, is very hard to change. In effect, the Planning Commission controls all government investment and policy in India.

The way in which the Planning Commission works (as, effectively, a second Cabinet) means that policy making is hugely conflicted in India. The Cabinet accountability for policy is over-ridden by this side-organisation which "binds" the hands of Ministers and prevents them from being held to account for policy failures.

Finally, even assuming the Planning Commission was designed as an Economic Think Tank for government, why is it so heavily populated by "senior" IAS officers? What qualifications or expertise do they have to develop policy? Where are their peer-reviewed policy publications that entitle them to "formulate" policy?

Need for a first principles review of the Planning Commission

To date (since 1950!) no formal public review has been conducted of the Planning Commission by an independent systems expert. I believe such a review is long overdue. By about 60 years!

The Commission, in its current form and shape makes absolutely no sense. Regardless of the obfuscation in Amaresh Bagchi's 2007 article, a Planning Commission is fundamentally inconsistent with libertyand accountabilty.

At Harsh Shrivastava's talk yesterday at the Australia India Institute, I strongly recommended a first principles review of the Planning Commission. I understand that neither Manmohan Singh nor Montek Singh are particularly interested in this issue, but such review is fundamental to reform of India's entire governance system.

Reviewing existing functions

Such review would begin with the basic question, that Harsh raised: does India need a Planning Commission? On the PC's website, the following "functions" are listed:

The 1950 resolution setting up the Planning Commission outlined its functions as to:

  • Make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirement;
  • Formulate a Plan for the most effective and balanced utilisation of country's resources; [Sanjeev: Total Soviet centralisation. It is the market that does these things, not stupid bureaucrats!]
  • On a determination of priorities, define the stages in which the Plan should be carried out and propose the allocation of resources for the due completion of each stage;
  • Indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan; [Sanjeev: The Government is retarding development. That was obvious from 1950 onwards!]
  • Determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of the Plan in all its aspects; [Sanjeev: the market is the machine. Just stay out of the hair of the people!]
  • Appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary; and
  • Make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or on a consideration of prevailing economic conditions, current policies, measures and development programmes or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.

Evolving Functions
From a highly centralised planning system, the Indian economy is gradually moving towards indicative planning where Planning Commission concerns itself with the building of a long term strategic vision of the future and decide on priorities of nation. It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction. [Sanjeev: Keynesian nonsense!]

Planning Commission plays an integrative role in the development of a holistic approach to the policy formulation in critical areas of human and economic development. In the social sector, schemes which require coordination and synthesis like rural health, drinking water, rural energy needs, literacy and environment protection have yet to be subjected to coordinated policy formulation. It has led to multiplicity of agencies. An integrated approach can lead to better results at much lower costs. [Sanjeev: but who is accountable. This is a "kaddu"!]

The emphasis of the Commission is on maximising the output by using our limited resources optimally.[Sanjeev: that's the function of the market!!!!] Instead of looking for mere increase in the plan outlays, the effort is to look for increases in the efficiency of utilisation of the allocations being made.

With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned. It has to ensure smooth management of the change and help in creating a culture of high productivity and efficiency in the Government.

The key to efficient utilisation of resources lies in the creation of appropriate self-managed organisations at all levels. In this area, Planning Commission attempts to play a systems change role and provide consultancy within the Government for developing better systems. In order to spread the gains of experience more widely, Planning Commission  also plays an information dissemination role.

Analysis

These "functions" are confusing and muddled up. The impossibility of many of these goals is self-evident. The meaning of "resources" is entirely confused.

Having said that, the modern Planning Commission is moving more into the economic policy space. This is the key to reform. The Indian government needs strong economic policy capability. Such capability includes ensuring the institutions of liberty are in place, such as:

  • strong rule of law, particularly speedy resolution of contract law,
  • strong (and clear) property rights,
  • strong competitive environment,
  • strong corporate and bankruptcy laws that allow pooling of private resources,
  • restrictions on regulation making that ensure net benefits and cost recovery from users,
  • privatisation of as much infrastructure as possible, and competition for the market where government provides infrstrucutre,
  • decentralisation of decision making at the lowest capable level.

All these are micro-economic or institutional reforms. None requires a "five year" plan!

The main role of economic policy in a free society is to GET THE GOVERNMENT OUT OF THE WAY! – so that people can develop themselves without unnecessary obstacles. The role of a government is to ensure that the economy functions on its own. It is people who create wealth through institutions that facilitate wealth creation, not the government.

This kind of first principles analysis already shows that the Planning Commission is a dinosaur.

The way forward, after a review might be something on these lines (after dissolving the Commission):

1) Legislate an act that requires all regulation and government spending (including infrastructure, "development programs") to be underpinned by an Intervention Impact Analysis (IIA) that would examine the issue from first principles and prove to the people of India that the spending is actually needed. The principles and processes underpinning the IIA are outlined here [FTI's policy framework]. This would include extensive public consultation.

2) Set up a statutory (independent) Governance and Economic Reform Commission (GERC) that would report to the Minister for Finance and Economic Affairs. This Commission would, among other things:

  • Conduct reviews of policy and governance at the request of the Government and provide advice as requested
  • Assess (in detail) the Intervention Impact Assessments for various government programs
  • Provide independent advice on all policy proposals that go to Cabinet
  • Provide independent annual reports on the performance of the central and state governments

GERC members would be appointed by Cabinet on the basis of criteria that are publicly announced, to ensure transparency and minimise nepotism. At a minimum GERC members would have demonstrated competence in economic policy and significant business experience. GERC would have an independent budget and capacity to hire the world's best economists/ governance/ performance reporting specialists at internationally competitive salaries. All IAS officers would be summarily returned back to other departments (if they apply for positions in GERC, they would need to meet the stringent selection criteria applicable for all GERC positions).

3) Transfer sector policy development skills to relevant Ministries.

4) In addition to the GERC, the Government would have its own economic policy area within the department of Finance and Economic affairs to counter-advise on departmental proposals (and GERC advice) to Cabinet.

5) Transfer all funding decisions back to Finance.

This would ensure:

  • Clear line of accountability between Ministers, Cabinet and Government.
  • Extensive public consultation and disclosure on policy making, which would prevent fiascos such as FDI in retail
  • High quality advice to Cabinet from an independent body and internal government experts on all policy issues
  • Business-as-usual negotiation on funding issues between Finance Ministry and other departments.
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Sanjeev Sabhlok

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