Thursday, October 7, 2004

Planning in a Market Economy

Some people have asserted that the Planning Commission is redundant and should be abolished. To the extent that there is some logic to this assertion, the argument applies to virtually all ministries of the central government barring, defense, home, external affairs and finance. These ministries are not likely to be abolished during my lifetime. The proper question to ask therefore is, ‘What is the appropriate role of the Planning Commission in a market economy? In my view there are four areas that the Planning Commission is best positioned for, among all government institutions:
(1) The Planning Commission is the only institution that has the formal task of interacting with the States in virtually all areas of government functioning. Traditionally it has also had a measure of independence from the Central government and been viewed as an honest broker between the Center and the States. It is therefore uniquely positioned to deal with issues of co-ordination between the Center and the States.
(2) The Central government continues to invest in and spend money on a host of sectors and sub-sectors. The ideas of the fifties that this allocation would be based on comprehensive social benefit-cost calculations remained a gleam in the eye of theoretical economists. The Planning Commission is, however, the only body that can, in principle, objectively determine the optimal allocation of resources among competing uses. This is a difficult and highly challenging job, which would require enormous upgrading.
(3) Large lumpy infrastructure projects require co-ordination. Because different agencies are responsible for different areas (e.g. ports and railways) the Planning commission can ensure that the completion timings are coordinated to maximize the overall benefit-cost ratio.
(4) The Planning Commission can act as a think tank for policies and reforms, either by hiring and empowering internal experts or by sponsoring external research or both. There is great dearth of rigorous empirical research on the effect of different policies and of exogenous shock (e.g. oil prices). The PC can play an important role in promoting intellectual excellence and generating ideas for national development.

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