Planning Differently

from borrowed resources. To the extent that this issue has been formally recognised and the need for corrective action felt, it is a welcome step.

But even though the diagnosis is correct, the prescription is casual. Making the states pay for diversion by deducing the diverted amounts from their plan outlays is at best an administrative solution to what is a essentially a technical problem. It also does not address the other form of diversion from capital to revenue account which is far more hazardous for the fiscal heath of the economy.

In order to prevent such diversion at source, it is important to change the existing method of plan financing. Currently, the overall resources are matched with the overall plan outlay. But the resources on the revenue account are not separately matched with the revenue component of the plan. If this is done, it will be found that the plan resources on the revenue account are not equal to the revenue component of the plan. As a result, there is a diversion from capital to revenue built-in right at the conception of the plan. The solution to this problem is to consider the revenue component of the plan as a separate entity. This ought to be entirely a state plan financed by the states own receipts, its share of central taxes and grants from the Centre. In addition to this there will be a capital budget financed, as at present, out of market borrowings, central loans, and other capital receipts. Once the revenue plan is separated from the capital plan, the procedures for scrutinising and financing the projects

 

to be included under the capital plan should approximate more closely to those of financing institutions and international aid agencies. In that case the commission, in line with the overall tenor of reforms, would deal exclusively with capital expenditure and assist the states in financing the required level of investment. In this framework of plan financing the problem of diversion of resources would be eliminated.