In his maiden Independence Day speech, Prime Minister Narendra Modi clearly indicated that the Planning Commission will cease to exist. It is likely to be replaced by a new institution with adequate representation to the states. Careful academic research has clearly shown that resource allocations made through the commission tend to have political overtones and favour states which are politically important to the ruling dispensation. Therefore, this is one measure about which even the opposition parties have little to complain about.
Stuti Khemani, who works with the development research group of the World Bank, in her scholarly article published in the Journal of Development Economics, investigates if the fiscal transfers made by the Centre via planning commission are politically motivated. She studies such transfers for a period spanning 23 years, between 1972 and 1995. Such transfers are extremely critical to the states because in the period under study, central government transfers constituted nearly a third of state revenue. Transfers made through the Plan panel constitute 6% of the total revenues of the states and 51% of the state borrowings. The paper shows that “affiliated states”, i.e., states ruled by the same party that rules at the central level, receive a higher proportion of the resources that are directed through the Planning Commission. Interestingly, states where the ruling party at the Centre enjoys a thin margin get an even higher proportion of resources. The difference pointed out by the author is approximately 30%, which is both economically and statistically significant. Some politically-important states, where the ruling party at the Centre faces stiff fight, receive upto 50% higher grants and loans.
To attribute any political motive and claim any kind of causality, one must clearly understand the institutional set up in India and also the econometric framework used. In India, the central government collects the bulk of the taxes. A large part of the state government expenditure is funded by general purpose transfers made by the Union government. Two institutions play a crucial role in determining the amount to be transferred to each state—Finance commission, a Constitutional body, and the Planning Commission, which is populated by political appointees. It is important to note that transfers done through the Planning Commission pertain to central government schemes such as universal education schemes, employment schemes, etc, which are well-advertised by the central government. People associate these schemes with the central government. In short, the central