Finance Ministry to do away with plan, non-plan classification by FY'18

New Delhi: With a view to improve expenditure management, Finance Ministry is contemplating doing away with the distinction between 'plan and non-plan' expenditure by 2017-18 and replacing it with 'capital and revenue' spending.

At a meeting with his state counterparts, Union Finance Secretary Ratan Watal said the classification is losing its significance after abolishing the Planning Commission and states could also deliberate on the same.

He said a committee headed by a Special Secretary level officer has been set up in the Finance Ministry to look into the transition.

"In the backdrop of the abolition of Planning Commission and setting up of NITI Aayog, the classification of expenditure as plan and non-plan is in the way of losing its relevance. If the accounting of expenditure is classified broadly under revenue and capital...I think this is where the focus is," Watal said in his address.

In 2011, an expert committee headed by C Rangarajan had proposed that the distinction between plan and non-plan expenditure be abolished for both the Centre and the states.

Also the Expenditure Management Commission, headed by Bimal Jalan, has recently suggested that all expenditure be classified as revenue and capital.

Watal said: "This classification will facilitate linking expenditure to outcome and better public expenditure management. Simplification of accounting heads and routing of heads of expenditure as revenue and capital could reflect the direction of public expenditure in a better way.

"We still have time left for the 12th Plan (2012-17) for which we will continue with this, but perhaps this (capital and revenue expenditure) is something which you could also look at the state level. This will give the right direction in simplification of accounts and also how we focus on expenditure."

It was also emphasised during the meeting that States should use the tax devolution proceeds for increasing capital expenditure, financial inclusion and endeavour to control unauthorised deposit taking by private entities.

"The conference was held with the idea of enhancing capital expenditure and social sector expenditure without losing sight of the underlined mantra of fiscal consolidation," Watal said.

During the conference, Minister of State for Finance Jayant Sinha underlined the need for increasing social sector spending and enhancing capital expenditure while remaining on the path of fiscal consolidation.

He further said that the macro-economic indicators have shown positive trends and the structural reforms undertaken by the government have started contributing to sustainable growth through participation of the states.

On the impact of Pay revision on state finances, Watal said they have relaxation of 0.5 per cent in the FRBM framework for next year, though a decision in this regard has not yet been taken.

Watal, who is also the Expenditure Secretary, said it was necessary for the Centre and the states to work in tandem for better public expenditure management and fiscal consolidation.

He said the government will be able to meet the fiscal deficit of 3.9 per cent of GDP for 2015-16.

"It is imperative to rationalise expenditure to remain within the available resources. Rationalisation of expenditure on subsidies, cutting down certain expenditure of revenue nature and improvement in revenue cannot be overemphasised," he said.

The meeting also discussed decentralisation and devolution. Watal noted that the cess based schemes, like education or Swachh Bharat mission, may undergo some kind of change if the GST comes into play, when all these may have to be phased out. "So we have to see how best we can manage these schemes," he said.

Besides, expenditure management, liquidity and fund flow planning which impinge on financial management has also been discussed. He also suggested that devolution of states shares in Union taxes be done by the 8th of each month.

Principal Secretaries or Secretaries Finance of 29 states and two UTs participated in today's conference, which was convened in the backdrop of 14th Finance Commission recommendations which are being implemented from April 1, 2015 and will continue till March 31, 2020.

The Conference touched upon the issues of fiscal consolidation at state level, finance commission's fiscal glide path for 2015-20, transfer of resources to states, devolution of central taxes.

Also linkages with Expenditure Management, states borrowing and cash management, funding pattern of Centrally Sponsored Schemes (CSS); and expenditure pattern in States were discussed.

"It was felt that states need to be sensitised on implications of Finance commission recommendations, CSS convergence, increased tax devolution to states be used more for capital expenditure, financial inclusion and control of unauthorised deposit taking," an official statement said.

The conference would help Centre calibrate their policies further and help run the schemes in a manner which could lead to better expenditure management, fiscal consolidation and achieve true spirit of cooperative federalism, Watal said.

The meeting was attended by Economic Affairs Secretary, Financial Services Secretary, Chief Economic Adviser, among others.