COMMENTARY
Role and Functions of
NITI Aayog
M Govinda Rao
The architecture, engineering and
management aspects of the new
institution, NITI Aayog, will have
to be crafted carefully, if it is to
serve as an institution to impart
dynamism to the developmental
process in a harmonious manner.
Its effectiveness will depend on
how it charts out a course for
itself. An important question
is whether the Aayog will have
influence when it does not have
the power to give grants and does
not have the powers to make plan
allocations to different ministries
and departments.
M Govinda Rao (mgrao48@gmail.com)
was a Member of the Fourteenth Finance
Commission; he was earlier Director of the
National Institute of Public Finance and Policy.
Economic & Political Weekly EPW JANUARY 24, 2015
1 Demise of the Planning
Commission
T
here have been wide-ranging dis-
cussions on the role and remit of
the new institution to replace the
Planning Commission ever since the
prime minister in his 2014 Independence
Day address declared that the Planning
Commission would be replaced by a new
institution. In the cabinet resolution pas-
sed on 7 January, the government has
come out with the broad contours of the
new institution, National Institution for
Transforming India (NITI). The remit and
functioning of NITI Aayog will become
clearer as it evolves over time. This note
analyses the possible role it can take and
the challenges it is likely to face in carry-
ing out remit assigned to it.
Not many will shed tears on the aboli-
tion of the Planning Commission. In
fact, the previous prime minister him-
self had called for redefining its role to
suit changing realities. The planning
exercise that was followed had hardly
any relevance for the market economy. It
did very little to plan and implement
even public sector investments for infra-
structure and its role in promoting public-
private partnership was mostly seen as
obstructive. The whole exercise of giving
approvals to state plans smacked of
dispensing patronage. The proliferation
of various centrally-sponsored schemes
(CSS) with “one size fits all” design and
conditionality contributed to severe dis-
tortions in public spending. Often, the
Planning Commission came up with dis-
cretionary transfers to states to meet
non-plan revenue deficits negating the
norms set by the Finance Commissions.
The presence of a member of the Planning
Commission as a part-time member of
the Finance Commission did very little
to correct this anomaly.
There were two contradictions bet-
ween the Indian development strategy and
the institutional framework constraining
vol l no 4
economic environment over the years.
The first is the contradiction bet ween
the planning framework and the role of
the market. The initial years after Inde-
pendence required a planning frame to
allocate the low levels of savings to invest
in much needed infrastructure and pri-
ority sectors to overcome severe infra-
structure deficits and the lack of com-
petitiveness of the economy. However,
the framework failed to adapt to the
transition after the liberalising reforms
were initiated. With fiscal constraints
becoming more and more binding and
political economy factors crowding out
infrastructure spending with subsidies
and transfers, the planning exercise lost
much of its relevance.
The second contradiction was bet-
ween the centralised command over
resource allocation and the develop-
mental role of the states in a federal pol-
ity. The end of single party rule and the
emergence of coalition governments
and regional parties as members of the
central coalition brought to the fore the
contradiction between centralised plan-
ning in a federal framework. The re-
sponse of the central government was to
further centralise even by intruding into
the legislative domains of the states by
various means including the prolifera-
tion of CSS. The consequence of the
above was that the two important sourc-
es of economic dynamism, the private
sector and the states, had to function in
a constrained environment.
The architecture, engineering and ma-
nagement aspects of the new institu-
tion, NITI Aayog, will have to be crafted
carefully, if it has to serve as an institu-
tion to impart dynamism to the devel-
opmental process in a harmonious man-
ner. First, economic liberalisation has
created a vibrant private sector and the
new institution should assist in policy-
making to enable private entrepreneurs
to unleash their animal spirits and not
to constrain them. Second, horizontal
and vertical competition in a multilevel
fiscal system can be an important source
of economic dynamism so long as a cer-
tain measure of “competitive equality”
and “cost-benefit appropriability” are
ensured and predatory competition is
prevented. “Laboratory federalism” can
13
COMMENTARY

be a source of innovations, imitations
and learning and facilitating this is
­important. Third, coordination costs
are higher when there are coalition gov-
ernments and the parties in power in
the states are different from that of the
centre. There is an urgent need for an
institution to promote h­ eal­thy intergov-
ernmental competition while prevent-
ing the “race to the bottom”. All these
underline the need for an institution to
promote “Coasean bargains” in the
­spirit of cooperative federalism and
­ensure resolution of issues when such
bargains fail.
2  NITI Aayog: Role and Remit
The cabinet resolution lists 13 different
tasks to it which may be grouped under
four major heads, namely: (i) fostering
cooperative federalism by providing
stru­ctured support to states on a contin-
uous basis; (ii) formulation of a strategic
vision and long-term policies and pro-
gramme framework both for the macro­
economy and for different sectors;
(iii) ac­ting as a knowledge and innova-
tion hub and providing research inputs
by undertaking and accessing globally
available research; and (iv) providing a
platform for interdepartmental coordi-
nation. Each of these functions is dis-
cussed here in some detail.
(i)  Cooperative Federalism: Platform
for Interface between the Centre and
States: The most important responsi­
bility of NITI Aayog relates to promoting
“…cooperative federalism through struc­
tured support initiatives and mecha-
nisms with the States on a continuous
basis”. The Seventh Schedule to the Con-
stitution demarcates the legislative do-
mains and functional responsibilities of
the union and states in terms of union,
state and concurrent subjects. However,
there is considerable overlap in the func-
tions requiring coordination between the
union and the states and among the states
inter se. Carrying out stable and sustain-
able developmental agenda requires
­fostering the spirit of cooperation and
cementing the federal structure.
The areas of coordination needed are
many and some of them may be listed
here. First, there is considerable overlap
in carrying out legislative and executive
functions in concurrent subjects. Recent
years have shown the need for coopera-
tion in areas such as energy and envi-
ronment, education and poverty allevia-
tion where the need for coordinated ac-
tion and speedy decisions are critical for
pursuing the developmental agenda.
Second the union government may have
to intervene in the national interest even
if they are in the State List or Concurrent
List. There may be some public services
in the State List, which, for reasons of
nationwide externalities or for redistri-
bution require coordinated action to
­ensure minimum standards throughout
the country. The examples include
healthcare, urban development and
poverty alleviation. In these cases, the
state ­governments are the partners in
achieving a common goal. Third, In the
case of union subjects too, the states
may be invol­ved in implementation as
agencies due to their proximity to the
people. In addition, NITI can facilitate
exchange of ­information and experi-
ences and promote heathy intergovern-
mental competition through monitoring
and regulation.
The most important issue which the
NITI Aayog will have to deal with is the

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rationalisation of CSS as there is consid-
erable resentment by the states on them.
In 2011, there were over 147 schemes
which have since been consolidated into
66, but a close examination shows that
these have been retained as sub-schemes
even in the new arrangement. The “one-
size fits all” design of the schemes do not
take account of varying local conditions
and institutions, The large counterpart/
matching fund requirements distort pri-
orities of the states, conditionalities in
availing the grants make them restric-
tive and the final distribution of trans-
fers is very different from the original
design. Finally, when the schemes are
discontinued, they leave large commit-
ted liabilities on the states.
There is certainly a case for having
specific purpose transfers for ensuring
minimum standards of services which
are considered to be of national impor-
tance. Given the collaborative nature of
such schemes, they should be designed
and implemented in the spirit of cooper-
ative federalism. The schemes should be
holistic with scope for flexibility in im-
plementation depending on the varying
local conditions and they should be lim-
ited in number (not more than 10). They
should have considerable scope for flexi-
bility in implementation. The new insti-
tution could provide a platform for de-
signing the schemes, implementation
systems, monitoring and evaluating
them in a collaborative framework.
In order to enable NITI Aayog to play a
constructive role in fostering coopera-
tion, it is necessary to place the Inter-
State Council, properly empowered un-
der Article 263 of the Constitution, in
the Aayog. This institution should be the
nodal agency for negotiation, discus-
sion, bargaining and resolution of all
major issues. It should have the required
expertise on intergovernmental relations,
fiscal federalism and constitutional law.
(ii) Strategic Planning: One of the ma-
jor tasks assigned to NIti Aayog is strate-
gic planning at both macro and sectoral
levels. Perspective planning helps to
make projections on the macro variables
and keep the policy perspective in view.
The strategy and policies required to
improve the standard of living of the
Economic & Political Weekly EPW JANUARY 24, 2015
projected population and improve
human development to empower the
people to productively engage them in
economic activities over a long-term
horizon are important. These should be
constantly revisited to ensure their
relevance.
The cabinet resolution also speaks
about planning at the grass-roots level
which implies that the exercise of medi-
um-term planning could be continued,
but in a different manner. It could be in-
dicative planning to provide satisfactory
levels of social and physical infrastruc-
ture for meeting the growing needs of
the economy, with the roles of public
and private sectors clearly defined.
Grass-roots planning entails building up
of the plan right from the village level
based on the resource envelop, with
each higher level aggregating the plans
and adding the investment require-
ments for the category. In other words,
the planning should be built right from
the village, block and district levels and
these should be harmonised with plan-
ning at the state level. Similarly, nation-
al planning should be the consolidation
of state-level plans along with the plan-
ning infrastructure and service require-
ments for the country as a whole worked
out at the union level. NITI can provide a
framework for preparing the plans to
the states and the latter, in turn, to the
lower levels of government. It should
also have a unit to advise and guide if
any state is in need of such assistance.
(iii) Innovation and Knowledge Hub:
Closely aligned to strategic planning is
the role of NITI Aayog as a think tank
facilitating partnerships between the
stakeholders. Formulation of strategic
vision and policies and programmes
aligned to it as well as initiating and
monitoring them requires state of the
art research, technology upgradation
and capacity building. As a major think
tank of the government working on var-
ious developmental policies, it should
not only have basic research capabilities
but also should access and outsource re-
search on relevant subjects globally. It
should have a strong data bank consoli-
dating data and information on eco-
nomic, demographic, geographic and
vol l no 4
COMMENTARY
social variables relevant for research
and policy. Among other functions,
the institution should also provide a
platform for experience sharing among
the states.
(iv) Coordination: The fourth impor-
tant task of the Aayog is to ensure inter-
governmental and interdepartmental
coordination. The disastrous conseque-
nces of lack of coordination between the
infrastructure, including environmental,
ministries on economic growth were
clearly evident in the last years of the
previous government.
3 Conclusions
The cabinet resolution lays down only
the broad framework for the Aayog. The
effectiveness of the NITI Aayog in trans-
forming India will depend upon the clar-
ity in the functions assigned, the status
and power given and the quality of the
people who will steer the institution. In
fact, the first Aayog will have a tremen-
dous responsibility of carving out a
niche for itself, setting the pace and
steering the transformation.
Thus, the effectiveness of NITI will de-
pend on how it charts out a course for it-
self. Despite the claims of a marked de-
parture from the past, the institution has
to function in the prevailing milieu and
deal with the burden of legacy. The im-
portant question is whether the Aayog
will have influence when it does not
have the power to give grants and when
it does not have the powers to make plan
allocations to different ministries and
departments.
The abolition of the Planning Com-
mission paves the way for restoring the
role of the Finance Commission to as-
sess the total requirements of the states
in the revenue account without making
a distinction between plan and non-
plan spending. However, the Finance
Commission does not have a compara-
tive advantage in recommending spe-
cific purpose transfers unless it is made
a permanent body. Of course, the con-
stitutional provision does not require
it to be a temporary body – Article 280
simply states that the commission should
be appointed every five years or earlier;
the appointed commission can continue
15
COMMENTARY
until the new commission is appointed.
However, so long as the Finance Com-
mission continues to be a temporary
body, the NITI Aayog will have a role
in designing and implementing these
programmes.
The legacy issues do not end merely
with the abolition of the Planning Com-
mission. There are parallel institutions
in the states and it is important to trans-
form them to meet the new require-
ments. Similarly, the Constitution
requires the establishment of district
16
planning committees and metropolitan
planning committees. Their role in the
new environment needs to be specified.
Although the cabinet resolution states
that NITI Aayog will facilitate grass-
roots planning, how exactly this will be
carried forward needs to be seen.
The success of the institution in achi-
eving interministerial, interdepartmen-
tal coordination will depend on the trust
and cooperation it receives from them
and the harmony with which the Aayog
and various ministries work. There could
JANUARY 24, 2015
be tensions between the technocrats in
the Aayog and various ministers on the
one hand, and between the technocrats
and bureaucrats on the other. There is
also the danger of bureaucratisation of
the Aayog. Similarly, success in fostering
cooperative federalism will depend on
the trust of and cooperation from the
states. In particular, the first Aayog will
have a tremendous task of shaping the
character and charting a course to make
it an important institution in Indian fed-
eral polity to transform India.
vol l no 4 EPW Economic & Political Weekly