The Fourteenth Finance Commission has formulated its recommendations without any reference to the distinction between Plan and non-Plan outlays. This will facilitate greater attention to maintenance expenditure, and reduce incentives to boost capital works and show large-sized plans, said YV Reddy, Chairman of the Commission and former Governor of the RBI.

Delivering the Raja J Chelliah Memorial Lecture at the Madras School of Economics on Monday, Reddy said it was essential to delink Plan outlays from classifications in Budget documents and accounts. “This will facilitate assessment, scrutiny and approval of all expenditures in a sector or activity or department in a comprehensive manner, and not only incrementally,” he said.

The Plan mindset should be replaced with a development mindset, of which government budgets are one element, he said.

New paradigm

The Commission’s recommendations are meant to change the fiscal relations between the Centre and States. First, the Constitution does not confer overriding responsibilities to national governments on the economic and fiscal management of State governments, he said.

Every tier of government should be regarded as equally accountable and responsible for the functions assigned to it. At the same time, existence of overlapping responsibilities should be recognised and mechanisms put in place for their discharge, said Reddy.

Clarity with regard to respective jurisdictions, including overlapping responsibilities, will add to healthy Centre-State relations. He said State governments, being closer to the people, have an increasingly important role to play in view of the greater fiscal freedom that has been accorded to them.

The quality and credibility of fiscal management requires to be critically examined, he said. In this regard, the relationships between government, public enterprises and regulators are still treated with a ‘joint family approach’, where contributions, burdens and financial linkages are seldom clearly accounted for.

Bigger role for States

On the way forward, it may be appropriate to consider inter-state exchange of information and even expertise on public fiscal management and public expenditure, said the former RBI governor.

“States will have a critical role to play in maintaining growth momentum at a time when the Union Government will be focusing on fiscal consolidation.”

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