Tag: Planning Commission

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 liberty – and 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.

BFN did not focus on India's Planning Commission, which was incidental to my overarching message of liberty. But I do have more thoughts on the Planning Commission. Some of these were clarified during the discussion yesterday at the Australia India Institute.

Key questions that need to be addressed include:

1) From where does the Planning Commission get its mandate? It is clearly not a constitutional body, nor is there any statutory act that establishes the Commission. Yes, there is a Planning Minister, but the Commission itself is is not accountable to anyone.  [Prof. Mattoo's question]

2) How are Planning Commission members selected? Where does their authority or mandate come from? [Prof. Mattoo's question]

3) Why is a body that has no constitutional authority allowed to intervene so significantly in policy making and allocation of funds? This makes it a hugely conflicted organisation. It is not good enough to say that the recommendations of the Planning Commission are not binding. What has happened is that the Cabinet accountability for policy has been over-ridden by this side-organisation which "binds" the hands of Ministers and prevents them from being held to account for policy failures. [Sanjeev's question]

4) Why is the Planning Commission 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? [Sanjeev's question]

5) Why has no formal review been conducted of the Planning Commission by an independent systems expert? [Sanjeev's question]

And many others.

But first, let me outline the history of planning in India. Then I'll outline some key suggestions made by others. Finally, I'll propose my own thoughts.

The following article shows clearly and unambiguously that the idea of "planning" had STRONG socialist foundations. Even in capitalist nations, its use was founded on Keynesian (Fabian Socialist) ideas.

EXTRACT

From Raghabendra Chattopadhyay, An Early British Government Initiative in the Genesis of Indian Planning, Economic and Political Weekly, Vol. 22, No. 5 (Jan. 31, 1987), pp.19-29.

Roots of planning "ideas" in India

Gokhale in 1903, and K T Shah and Visvesvaraya himself, during the early twenties, had stressed upon the importance of economic planning.

The so-called "success" of soviet planning

It is widely acknowledged that the success of the first plan in Soviet Russia during 1928-33, in sharp contrast to the crisis of the Great Depression in the capitalist world, made the entire world 'plan-conscious'. That success [Sanjeev: !!] led many of the non-socialist nations to take up planning as a serious measure to develop their economies and to attempt to solve their economic problems through planned state intervention.

The aspect of Soviet planning which attracted the non-socialist nations was not its function as the means to achieve a comprehensive social transformation but its mechanics, that is, planning as a technical economic method divorced from politics and intended chiefly to bolster capitalism through state-intervention. Planning, treated as an economic exercise could help to maintain the stability of a capitalist economy. [Sanjeev: Clear flavour of Keyensian ideas – that were still being formulated.]

The Fabian Socialist origins of planning in UK

The British economic advisory council was formed in January 1930 by the second Labour government in Britain soon after Ramsay MacDonald and his party had been elected to office in 1929.

Planning in India as a colonial tool

It also enabled, the colonial power in India to attempt a planned economic management to serve their own purpose of political legitimisation of the Raj through economic measures.

In 1930, George Schuster, the then finance member of the viceroy's executive council, circulated a paper, 'Notes on Economic Policy'' within the different departments of the government of India. The idea of planning was mooted for the first time in the official circles in India in these 'Notes'.

In the following paragraphs [writes Schuster] I set out certain general ideas which have been the subject of conversations between myself and several of my colleagues—principally the Hon'ble Member of Commerce and the former Hon'ble Members of Education, Health and Lands, and Industries and Labour. These conversations led to the preliminary discussion of a proposal for constituting in India something on the lines of the economic advisory council which has been created by the British government.

Crescendo of demand for state intervention in economy from Indians

In the early years of the thirties, people like Visvesvaraya, Mitter, Birla and Sarkar were enthused by the de facto recognition by the British rulers of the age-old Indian demand for a positive role of the state in organising socio-economic development of the country. This allowed them to formulate the blueprints of plans and appeal to the colonial regime to implement them.

Harsh Shrivastava gave a talk yesterday, entitled, "Does India really need a Planning Commission?"

I won't go into details of this talk. The general sense I get is that the Planning Commission is now a place where free market ideas are not just tolerated, but welcomed. That's a good thing.

However, the very idea of Planning Commission is wrong. It is also incompatible with basic principles of accountability.

Let me first recap writings from BFN on this subject.

Extract from the MAIN book, BFN

The timelines and deliverables for Phase 1 are outlined below. The month in the sub-headings refers to the time when an activity will be completed:

• Month 1: The Planning Commission will be shut down from day one. Its policy analysis functions will be transferred either to existing departments or to the IPO. All commitments made under the Five-Year or other Plans will be scrapped. All previously committed funding will be up for review at the time of renewal or extension of funding on a case-by-case basis. Files of the Planning Commission will be sent to the National Archives for recording and open access to researchers.

EXTRACTS FROM BFN Online Notes

If you've read BFN you'll know that a significant amount of material is online, not in the main book. The reason is that the publisher asked me to splice off nearly one-third of the book at the last minute. Being busy, I slashed and burned (condensing is hugely expensive in terms of time), and put out the slashed portions online as "Online Notes". It is my hope one day, when I find time (and a publisher who is interested), to bring BFN together into one piece again. But that's not the topic for now. Let me extract the discussion on planning that should have formed part of the main book, BFN.

Unplanned planning

One of the implications of the way free markets work is that planning for the future of an entire nation is not only futile, but badly counter-productive. We can plan our own little projects and even chart the uncertain course of our lives. And yet we know that we mould our future only to the extent we control it: there are too many factors outside our control. But shaping the future of a country is a different kettle of fish. It is impossible, and is best left to the freely adjusting forces of markets to create. A free society’s government leaves its citizens entirely free to do whatever they think is best for them. It doesn’t tell them what to produce or how to use their money. Given that free markets are perfectly capable of handling the most unanticipated changes and are beautifully ‘designed’ for change, why would anyone want to plan an entire country’s economy, anyway?

We must learn to let well enough alone. A free society can put in place a good regulatory regime. A free society can even try to forecast what could happen in the future (see box below). But for a government to actually start doing something on the basis of such forecasts is dangerous; particularly if it intends to invest our money into government operated business. Wanting to plan a country’s economic activity and to direct resources based on abstract planning models can condemn resources to destruction. As well, by damaging incentives in the markets, these misplaced resources and actions can drastically impoverish an entire nation.

Box 8 Forecasting and planning models The best possible forecasts made by the most intelligent and capable human minds in the history of mankind have almost always been off-target by huge margins. And yet, tens of economists, like Don Quixotes, keep on forecasting business cycles, interest rates, inflation, and so on. When they are wrong, they write off their forecast as having suffered from an ‘external shock’—a thing not anticipated in the equations of the forecaster.   It is the fate of such folks to get surprised by ‘the East Asian Miracle’ one day and the ‘East Asian debacle’ the next; by the ‘great success of Russian planning’ one day and ‘the sudden collapse of the USSR’ the next. I am a qualified economist, or at least my degree says so, but—or rather therefore!—I wouldn’t wager two paisa on my ability to predict the future except at the broadest, and in a sense, intuitive, level.   Similarly, while computable general equilibrium (CGE) models are commendable works of economic logic which all economists should tinker with and use as an aid to macro-economic forecasting, they are not designed to throw useful light on a society’s investment decisions. A good CGE model tracks what has already happened and even forecasts reasonably well for a year or two. But real economies diverge rapidly from there on. The unseen currents of change and innovation that rush about in a million directions below the surface of aggregated statistical indicators used in these models shift the model parameters in unpredictable ways. Social and political changes taking place outside of the economies being observed shock the models as well. No CGE model of 1990 could have predicted the impacts from the internet. Similarly, a CGE model of 1995 could not have predicted India’s dominance in business process outsourcing, a dominance which arose from the failure of corrupt Indian officials’ to block the export of value-added electrons. And to even dream that these models could have told us that Bangalore would become the hub of this Indian industry is an impossibility not worth considering, leave alone the possibility of these models predicting the dramatic events of September 11, 2001. Human models cannot predict the future. Period.   The problem is that not only past data, but even previous production ‘functions’, quickly become irrelevant. CGE models can supplement the in-depth knowledge of highly competent policy makers. These can assist in infrastructure decisions, for instance. But the blind use of such models to intervene in general investment will waste public resources.   God probably has a set of a billion simultaneous, conditional equations in n dimensions with a million variables each, into which trillions of angels continuously feed data about what each of us is thinking about or dreaming. And so God is perhaps well-equipped to plan an economy. But we don’t have access to God’s model or data sources. So let us stop acting God.

 

Socialists are quite gifted at rushing in “where angels fear to tread”. The erstwhile USSR first started the madness of ‘national planning’ which lunacy then transmitted to India through Nehru. Nehru set up a Planning Commission in India almost immediately after independence, with the aim of orchestrating both public and private investment decisions. But long after USSR got out of its erroneous ways by spitting the dummy and completely collapsing as a nation, India continues to squander precious public funds into this fruitless exercise.

 

Planning is the visible display of socialist arrogance and megalomania. Misguided planners crunch numbers and imagine they see the future of the world in the palms of their hands! I am entitled to comment severely against such delusions of grandeur since I had these myself! In the mid-1980s I became a self-trained economist, having done an MA in Economics from Panjab University through a correspondence course. But there are serious pitfalls of being trained in economics in this manner. No mention was made of Hayek’s significant work, for instance, and I barely internalised what the price system actually does. Mine was an amazingly half-baked degree. The reason I mention this is that as a result of this qualification, I foolishly imagined for a few years that it is quite reasonable to perform uncanny mathematical calculations to plan an entire economy. Very luckily, after learning economics first-hand for five years in the USA from outstanding teachers some years later, and then reviewing that knowledge in my mind from first principles, I have been separated from my delusions—even though I now possess the relevant mathematical training to understand and prepare sophisticated planning models.

 

We need to hark back to Hayek’s paper at this stage. Hayek showed that anyone who tries to interfere with free markets faces a Herculean challenge. How can this person or organisation obtain even a crude approximation of the local knowledge, the detailed knowledge, of what is happening out there in the economy in each person’s head? Planning would need detailed knowledge of the “kind which by its nature cannot be entered into statistics and therefore cannot be conveyed to any central authority in statistical form” (Hayek). As Hayek further explained:

 

The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific [local] decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of the circumstances of time and place. [italics mine]

 

In other words, a central planner cannot even begin to understand what is happening in the real world at the level of detail necessary to plan. And if the planner doesn’t know all the relevant circumstances, how can the planner decide what needs to be done by each of us at each point in time? How can the planner’s decisions possibly be optimal? Instead, these decisions are guaranteed to be misallocations, thus squandering our limited resources. As such, no economist worth his salt should associate with the Planning Commission.

 

The only saving grace is that Mahalanobis, who strongly influenced Nehru’s Planning Commission, particularly its second Five Year Plan, was not an economist, a mere physicist and statistician. It seemed certain to him, with mathematical equations crackling like electricity inside his head, that mathematics would tell him how India should be run. Actual economists like Milton Friedman who tried to advise Nehru were completely ignored.[1] The good economist B.R. Shenoy left the Commission during its early years. The great economist Jagdish Bhagwati who warned against the centrist approaches was also ignored, and so he left India. The Commission’s secretariat then became the citadel of clairvoyant pseudo-economists and ill-trained IAS officers who have been happy to ‘manage’ its astrological functions. They go to work each day and use the services of their local parrot to pick a card from among those laid out on their desks—that is how they decide where to invest public funds.

 

I have two recommendations at this stage. Indian physicists should in future try to focus on physics; and India’s bureaucrats should do bureaucratic things. Neither should dabble in the seemingly obvious area of economics which is surprisingly difficult and takes a lifetime to master—being in the end a specialised art form. Gandhi, with his great intuition about right and wrong, saw through the hoax of planning very early. He wrote in a message to Amrit Kaur on 19 June 1939 on the National Planning Committee set up by Nehru in 1937, as follows: “the whole of planning is a waste of effort… It has appeared to me that much money and labour are being wasted on an effort, which will bring forth little or no fruit”.[2]

 

In supporting socialism and ‘planning’ our Planning Commission has significantly enhanced poverty in India and reduced our freedoms. While Indian socialists are better behaved now after almost bankrupting us in 1991, an end to socialist arrogance is nowhere in sight. I now call upon to our astrological leaders sitting in the Planning Shop in a fairly abrupt manner, thus: Ye Planners of India, shut down your silly Planning Shop and go home! You’ve done enough damage to India to last your lifetime. Go home and rest your feverish brain. [3]A free economy can undertake all the ‘planning’ it needs in the most unplanned and elegant manner through the freely available services of the Invisible Hand.

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[1] See http://www.indiapolicy.sabhlokcity.com/debate/Notes/friedcopy.html

[2] Quoted in S. Gopal (1975). Jawaharlal Nehru: A Biography, vol. I. New Delhi: Oxford University Press. p.247.

[3] I cannot understand why a person of the calibre of Montek Singh Ahluwalia has chosen to support the Planning Commission by participating as its Deputy Chairman. I am also concerned about his perspectives on India (eg, in “Understanding India’s Reform Trajectory: Past Trends and Future Challenges”. India Review. October 2004. pp. 269–277) which seem at times to be rather mechanical, not grounded in arguments of freedom.