Government Decides to Do Away With Plan and Non- Plan Classification

On March 1, 2016, the government announced to do away with Plan and Non-Plan classification of expenditure from 2017-18.  Plan and non-plan classification was a major exercise in planning era. Plan expenditures were done as per planning and were also called development expenditures. Generally they produced some tangible assets such as roads, bridges or improvement in social indicators (this was not always through). The two kinds of expenditures were further divided into plan revenue and capital expenditures and non-plan revenue and capital expenditures.

With the end of 12th plan, and with the Union Budget 2017-18, the practice of classifying the expenditures into plan and non-plan was put to rest. With this, the focus is now solely on revenue and capital expenditure; and the way the ministries put their demands in demand for grants in budget papers.

What were major issues with plan and non-plan expenditures?

The basic idea of previous classification was that the state can direct resources in planned expenditures during the period of five year plans over and above what was necessary for its regular expenses. But this classification was clumsy. Over time, the plan revenue expenditures increased drastically and plan capital expenditures reduced. Thus, the capital expenditures were actually overtaken by 70% revenue expenditures in plan components by the end of 11th five year plan. This apart, the use of maximum money for revenue expenditure would mean that the money was not resulting in tangible assets and thus was a major roadblock in outcome based budgeting. Due to this reason, the C Rangarajan committee had also called that practice a “dysfunctional and an obstacle in outcome based budgeting”.

How it affects planning exercise?

The revenue expenditures are routine expenses while capital expenditures are on long term investments such as infrastructure. During the planning commission era, that body was able to decide on allocation of funds in the plan component of the budget. Now, that onus is on finance ministry. What allocation is to be made to the ministries will now will be solely defined by the finance ministry. The ministries in turn would be submitting the proposals on a four-fold classification viz. central government projects, establishment and obligatory expenditures, expenditure on autonomous bodies/implementing agencies, and expenditure on centrally sponsored schemes.

What are possible outcomes?

Firstly, the shift away from plan-non-plan to revenue-capital classification is expected to improve efficiency of the budgeting exercise and will take it more towards outcome based budgeting rather than input based budgeting. Secondly, the revenue versus capital expenditure would also help the government to follow a golden rule of public finance – that revenue expenditure should be financed from revenue receipts; and the government borrowing be only for capital expenditure (i.e. only for long-term investments).