Developmental and Non-developmental Expenditure

Total expenditure incurred by the government is classified into two segments

—developmental and non-developmental. All expenditures of productive nature are developmental such as on the heads of new factories, dams, bridges, roads, railways, etc.—all investments.

The expenditures which are of consumptive kind and do not involve any production are non-developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc.

This classification is not used in the Indian public finance management now (see Plan and Non-Plan Expenditure, in the next entry).6

Plan and Non-Plan Expenditure

Every expenditure incurred on the public exchequer is classified into two categories—the plan and the non-plan. All those expenditures which are done in India in the name of planning is the plan expenditure and rest of all are non-plan expenditures. Basically, all asset creating, and productive expenditures are planned and all consumptive, non-productive, non-asset building are non-plan expenditures and are developmental and non- developmental expenditures, respectively.

Since the financial year 1987–88, there was a terminology change in Indian public finance literature when developmental and non-developmental expenditures were replaced by the new terms plan and non-plan expenditures, respectively. (It was suggested by the Sukhomoy Chakravarti Committee.)7

Meanwhile, a high-power panel headed by Dr. C. Rangarajan (Chairman, Prime Minister’s Economic Advisory Council), in September 2011 suggested for redefining Plan and Non Plan expenditures as Capital and Revenue expenditures, as the former set of terms ‘blur the classification’ —this will facilitate linking expenditure to ‘outcomes’ and better public expenditure, the panels suggested. Major suggestions of the Panel are:

(i) Plan and Non-Plan distinction in the Budget is neither able to provide a satisfactory classification of ‘developmental’ and ‘non-developmental’

dimensions of government expenditure nor an appropriate budgetary framework. It has therefore become ‘dysfunctional’,

(ii) Suggests for redefining the roles of the Planning Commission (PC) and the Finance Ministry (FM). According to which the PC should be responsible for formulation of the five-year plan and the task of firming up the annual budgets should be entrusted to the FM.

(iii) The PC should dispense with the exercise of approving annual plans of states and it could hold a strategy or review meeting with representatives of the states.

(iv) Public expenditures should be split into capital and revenue

expenditures.

(v) Public expenditure should have ‘management approach’ based on measurable ‘outcomes’, indicating that the reponsibility should be assigned to the FM.

Analysis of the Situation: While the need for looking beyond the budget is well accepted, there are many factors raising doubts on the ‘efficacy’ and ‘relevance’ of the five-year plans as the instrument. The division of expenditure between Plan and non-Plan is artificial and creates problems, such as :

(i) Plan expenditure tends to get priority especially when austerity and expenditure reduction has to be done periodically for fiscal consolidation. Non-Plan expenditure gets the cut even if it is vitally needed for economic development, an example is budget provision for maintenance of assets such as hospitals, schools and irrigation dams already created under Plan, but whose maintenance is treated as non- Plan.

(ii) Review and implementation of schemes is another area of direct responsibility for the Ministry of Finance and the Ministry of Statistics and Programme Implementation. The Finance Minister himself had, in the budget speech for 2005–06, promised to ensure that programmes and schemes were not allowed to continue indefinitely from one Plan period to another without an independent and in-depth evaluation. The Planning Commission, serving as the focal point for Plan allocations, dilutes the role of the Finance Ministry in this case.

(iii) ‘Output’ and ‘Outcome Budgeting’ was introduced by the Central Government from the Budget for 2005–06. Non-Plan expenditure remains out of its purview. This means, for example, the outcome of expenditure on running schools and hospitals will not be evaluated. This again is another fallout of the artificial division into Plan and non-Plan.

This classification used to adversely affect the whole budget process, formulation and implementation. Looking at this anomaly, the Government switched over from the ‘plan’ and ‘non-plan’ classification of expenditure to ‘revenue’ and ‘capital’ since the fiscal 2017-18 (as announced in the Union Budget 2017-18).