Plan and non plan Expenditure in India


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Analyzes the pernicious Plan and non-Plan divide and how it is ruinous for our national capital assets. The illogicality of this divide is brought out with a palliative suggestion.

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Plan and non plan Expenditure in India

  1. 1. Plan or Non-Plan: The Pernicious Divide<br />Shantanu Basu<br />The Democratic US Senator from Colorado, Michael Bennet, recently remarked, “I say we have not even had the decency to maintain the assets that our parents and grandparents built for us - our roads, our bridges, our wastewater systems, our sewer systems; by the way, those weren't Bolsheviks, those weren't socialists that built those things for us - much less build the infrastructure we need for the 21st century.” These words ring true for most capital assets built or acquired from public funds in India in the last six decades or so. Leaking dams, crumbling roads and bridges and dank office buildings with nesting pigeons is how most of our public assets figure in the public mind unmindful of the fact that an artificial divide between Plan and non-Plan funds by successive governments in India is the root cause for their deterioration.<br />What is the distinction between these two pernicious categories? The Bhakra Beas Project is an outstanding example of capital Plan expenditure. However, its maintenance and upkeep, if not paid from its own earnings, is treated as non-Plan, budgeted and expended as revenue expenditure. Again, if the same project has more generating capacity added to it, such expenditure is capitalized but its maintenance is not. Not just this, but also mostly maintenance charges are pegged at fixed percentages of the capital cost and seldom, if ever, revised. When a new highway develops potholes, 2-5% of the total capital cost is hardly enough to fill craters and macadamize the affected portions afresh. Why must the Railways buy synthetic emulsion paint at Rs. 60-70 a liter while the market price is over Rs. 200? India Infrastructure Report, 2007 states India requires about $320 billion in 2007-12 to repair and add to its physical infrastructure. Similar moneys are required for capacity enhancement of our energy sector to meet a 55 billion unit energy shortage in 2006-07. Is there something we can do about it? <br />In the last four decades, the Govt. of India has expended Rs. 17,48,444 crore or US$ 388.54 billion on Gross Capital Formation, of which it has delivered directly Rs. 620393 crore and assisted states and their autonomous agencies, local bodies etc. with another Rs. 1128051 crore. Yet, in the absence of a National Asset Register, most such moneys cannot be identified. Assuming an average of even 5% of historical capital cost, a paltry Rs. 87500 crore would be annually available for maintenance and upkeep of capital assets. Although this figure may have the trappings of a king’s ransom, yet these are spread over several thousand kilometers of highways, ports, railways, water supply, irrigation channels, rural electrification, hospitals and school buildings, et al. Every year governments show capital surpluses (surrenders in government accounting parlance) totaling a staggering Rs. 920000 crore from 2000-01 to 2008-09 (in nominal terms) against capital assets of Rs. 917000 crore created in the last decade, a ratio of 1:1 between assets created and those not created, although budgeted. A paradox thus emerges – capital funds are available for at least 50% of maintenance costs of existing projects but are denied as new populist projects must necessarily take precedence, justifying an artificial but illogical and ruinous classification between Plan and non-Plan, revenue and capital.<br />Simultaneously, there are several hundred, maybe thousands, of capital projects that have remained at foundation stone level for decades together but yet are provided token budget provisions. Equally, there are several hundred projects that have stalled mid-way, and less, and remained in that shape for decades together but are, nonetheless, required to be provided routine maintenance and watch and ward, etc. Now add political on-the-spur-of-the-moment projects, such as in the Railways, and even more capital moneys are blocked by way of ‘token’ budget provisions. Total these up and you will find the cost of fully maintaining operational assets is substantially lower than capital moneys committed to projects fated to remain in the woods. Finally, add the surpluses mentioned in the preceding paragraph and you stare at a mind-boggling figure of available resources, a large share of which could be applied to preserving existing projects.<br />It is not that all capital assets are created from the Plan budget of governments. Some major projects too are created from non-Plan funds. Thus minor works of modification and repair of government properties, often running into several crore Rupees in individual cases, are classified as non-Plan revenue expenditure although these extend the life and/or capacity of such installations. Several major projects and purchases of strategic Ministries/Departments fall in this category. Allied oddities are staff salaries and running establishment costs of such projects that remain in the non-Plan domain as revenue expenditure. By conventional accounting standards these too should be capitalized but are not. Neither will they figure in any future National Asset Register as they are not treated as capital assets nor will they be privy to adequate maintenance funds, only further replacement. To that extent the value of the nation’s assets would forever remain understated and in poor physical condition, a far cry from their future bankability. Then why are such projects treated as non-Plan when they are essentially no different from Plan capital projects? <br />What is the effect of this ruinous dichotomy that classifies a plant as Plan capital but its operator as non-Plan revenue expenditure? The artificial constraint of maintenance funds caused by this pernicious Plan and non-Plan divide invariably has an adverse bearing on maintenance of capital projects. Highways and roads repeatedly cave in because public works agencies have inadequate funds to excavate afresh and put in place supporting underground structures in affected areas. Or a thin layer of bitumen poured and broken bricks to fill a life-threatening pothole. Rules written around budget constraints often provide Re. 0.75 per sq. ft. for color washing a government building, of which Re. 0.60 per sq. ft. is on labor charges alone. Needless to add, the building’s exterior does not survive a full monsoon with such a water wash that also compromises the projected original life span of this building. Is this not penny wise and pound foolish?<br />Capitalization of all operation and maintenance expenses over the life cycle of all projects may be an apt solution to save our deteriorating capital assets, more so with large unutilized capital budgets being available annually. By abolishing the Plan and non-Plan distinction, adequate maintenance moneys would flow into our existing assets and enforce greater levels of accountability while sanctioning untenable and even wholly unnecessary populist projects. With greater flow of funds, however, there would be a need for enhanced oversight of such expenditure. Going a step further, a National Assets Register needs to be created without any further delay, initially valued at current market cost, and subsequently revalued every three years at the then prevailing market cost. Capitalization of operation and maintenance costs would not only more accurately reflect the real value of our national assets but also enhance their value in international money markets as collateral security, should the Government of India choose to raise funds from the international and/or domestic capital markets in the future. The nation’s financial credibility too would rise in the perspective of prospective lenders and the nation would be able to leverage its assets to project India as a safe investment destination. With the Census 2001 projecting an accretion of 400 million more heads to India’s population by 2026, there would be invariably more pressure on existing assets, hence the need to preserve and add to their capacity.<br />While populism and the media have caused a popular perception of non-Plan expenditure being non-developmental, even anti-national, nothing is further from the truth. Perpetuating the myth of non-Plan being non-developmental expenditure has most to do with congruence of the state planners’ career prospects and vote-catching populism than national interest. Governance and accountability of our national interest are the need of the hour, not patronage and populism, as Richard Cobden (during the debate in the House of Commons on the India Bill on 27 June, 1853) famously remarked, “This great oracle (Director Mr. Halliday) of the East India Company himself admits that, if there is no power vested in the Court of Directors but that of the patronage, there is really no government vested in them at all.” <br />The author is Director General of Audit under the Comptroller & Auditor General of India. The views are personal.<br />