Why The NITI Aayog Lacks Focus

This is an excerpt from ‘Indian Fiscal Federalism’, by YV Reddy and GR Reddy.

It is clear that NITI Aayog is meant to be a replacement of the Planning Commission. In many ways, it is a new incarnation that warrants an initial assessment. It is intended to address the observed weaknesses in the functioning of the Planning Commission.

It is also expected to give a new orientation to the manner in which the developmental process is managed. It seeks to address the most important aspect of the weaknesses in the working of the erstwhile Planning Commission, viz., the management of Union–State relations.

NITI Aayog’s mandate is very broad and sweeping. It has inherited the physical infrastructure as well as the manpower from the erstwhile Planning Commission. (It has, however, taken a number of experts/advisers laterally.) Yet, the underlying ecosystem that governs the thinking has not changed demonstrably. Above all, the Planning Commission had a special stature by virtue of its Deputy Chairman being invited to the Cabinet meetings of the Union Government. The Vice Chairman of NITI Aayog has not been extended such a courtesy. In a way, therefore, NITI Aayog started with some disadvantages.

The Aayog’s performance can be assessed with reference to what was promised when it was established. NITI Aayog was expected to address new realities of macroeconomic management that were missed by the Planning Commission.

The stated objective was that the States would be allowed to implement their plans or functions assigned to them in the Constitution without having to get them approved. To this limited extent of giving up the practice of formal approval of the State plans, NITI Aayog has delivered.

The notification also explained that the nature of the Planning process would be changed to align with the shifts in the economy. From the Annual Reports available, it is not very clear in what manner the process has been improved.

The notification also mentions the importance of making States the actual drivers of national development. However, most of the programmes initiated in the recent past were conceived and initiated by the Prime Minister and the Central Government, and the States have been more or less persuaded to implement them. It is difficult to find evidence that policies and programmes have evolved out of consultations between the Union and the States. On the contrary, many flagship schemes carry the ‘prefix’ ‘Pradhan Mantri’, and are declared as Central Government schemes.

The major complaints of States in regard to the functioning of the Planning Commission remain unaddressed. The complaints have largely been on the perception that the Centre is encroaching upon the States’ responsibilities; imposing its own priorities while funding; assuming, without basis, that governance in States is weak despite the Union’s own dismal record in administering Union Territories; taking credit for schemes that are jointly funded; and continuing to advocate a one-size-fits-all approach in administration.

The CSS had to be reformed in the light of the recommendations of the Fourteenth Finance Commission. Though the NITI Aayog was involved in the process, the manner in which these schemes were modified shows that the effort was only to shift greater responsibility onto States in terms of financing. The reform does not in any manner reflect the qualitative change in the design and implementation of the Central schemes that was promised when the Planning Commission was wound up.

A second opportunity arose when the distinction between Plan and non-Plan was removed. At that point, the organization had an opportunity to insist on taking a sector-wise comprehensive view of capital and revenue expenditures. However, that has not been done.

Complementing The Finance Commission

The primary objective of the arrangement for fiscal transfers is to correct the horizontal and vertical imbalances in fiscal management at the Union and State levels. The First Finance Commission confined itself to the revenue account, leaving the capital needs to be met out of borrowings.

Consequently, the Planning Commission had to deal with fiscal transfers on account of capital needs, and access to borrowings by States and loans to them from the Centre became part of the remit of the Planning Commission. With the abolition of the Planning Commission, there is no evidence that its successor, NITI Aayog, is performing this role.

Successive Finance Commissions have recognized the fact that the budgetary situation of the Union Government had a direct bearing on State finances, but could not impose any conditions for its reform.

They also could not evolve a system under which the Union Government adhered to its commitment to fiscal responsibility. As revenue account transfers from the Union to the States constitute more than one-third of the total revenue resources of the States, if the Union’s revenue performance declines, States also get affected. To ensure prudent management of State finances, the Eleventh Finance Commission had suggested the creation of an incentive fund; the twelfth Commission had proposed the linking of States’ debt relief to fiscal responsibility; and the thirteenth Commission had recommended incentive grants.

Currently, the challenges of fiscal consolidation predominantly relate to Union finances. The Fourteenth Finance Commission emphasized the importance of establishing fiscal councils with a mandate to make ex-ante assessments of budget proposals. A weak fiscal position of the Union not only affects macroeconomic management and stability, but also has bearing on State finances.

NITI Aayog has an opportunity and, indeed, an obligation to contribute to fiscal responsibility in both the Union and State Governments consistent with developmental priorities and sound fiscal federal relations. It is in a position to contribute to these objectives, as it is a continuing body and can play a critical, though advisory, role in regard to Union finances, State finances, and transfers from Union to States on a continuous basis.

The Fourteenth Finance Commission suggested a new institutional mechanism for transfers outside the recommendations of the Finance Commission in the interest of sound fiscal federalism. NITI Aayog could take advantage of the underlying logic of such institutional mechanisms and devise its methods in a manner consistent with the spirit of the recommendations. For sectors and activities for which Union transfers to States should take place, the design of schemes and the distribution of resources among the States will have to be worked out in a forum that has representation from the Union, the States, and domain experts.

The Fourteenth Finance Commission has eschewed prescribing conditionalities or policies that are considered desirable at a national level. It has addressed some of the overlap between the Finance Commission and the Planning Commission by relinquishing most of the State-specific or project-specific grants-in-aid and associated conditionalities in its recommendations.

Areas under Schedule VI of the Constitution in the northeastern States remain outside the ambit of the measures recommended by Finance Commissions for Panchayats and Municipalities and have been excluded from its ToR. This was necessitated by the fact that the Constitution mandates the Union Government to play a direct role in supporting the development of these areas.

However, the quantum of assistance given over the years to these regions by Ministries in the Union Government has been very limited.

NITI Aayog could consider larger assistance and more effective intervention for the upgrade of administration as well as the development of these areas.

The ToR, barring the core ones, of the Finance Commission, have been expanding over a period and have also been varying. Many of them had overlap with the work of the Planning Commission, while a few others related to tax reforms, expenditure reforms, public enterprise reforms, pricing of public utilities, etc. Further, the recommendations in regard to other ToR have often been treated as mere suggestions and seldom acted upon vigorously. At the same time, the other ToR reduce the focus and the attention that the Finance Commission could give to its core ToR.

NITI Aayog may legitimately address on a continuous basis the undeniably important policy issues often incorporated in other ToR of the Finance Commission, thus reducing its need to address such issues in an ad hoc and often arbitrary manner. This initiative will relieve the burden on the Finance Commission in meeting some of the controversial ToR.

It may be fair to conclude that many irritants in Union–State relations that arose in the functioning of the Planning Commission have been removed with its abolition. However, NITI Aayog has not been able to come forward with anything positive in that sphere. The scope and the remit of NITI Aayog has been expanded and its stature reduced, with the result that there is little evidence of a focus in its working. This has resulted in a vacuum of institutional and procedural arrangements for interaction between Union and States. That vacuum has been unfortunately occupied by the Ministries in the Union Government.

Excerpted with the permission of Oxford University Press, from ‘Indian Fiscal Federalism’.

YV Reddy was Chairman, Fourteenth Finance Commission, and Governor, Reserve Bank of India. GR Reddy is Adviser (Finance) to the Government of Telangana.

The views expressed here are those of the authors and do not necessarily represent the views of Bloomberg Quint or its editorial team.