The finance minister faces difficult choices in expenditure management in the forthcoming Budget.
The four-year fiscal period ended 2008 saw a remarkable buoyancy of revenues on the back of high rates of growth. This allowed significant fiscal consolidation at the level of the Centre and even more so at the state level, where the enhanced award of the 12th Finance Commission and the introduction of value-added tax gave a considerable boost to state finances.
It is well established, however, that the fiscal consolidation was primarily revenue-driven, with little priority given to expenditure rationalization. In fact, the reduction in the Centre’s fiscal deficit achieved over this period was also partly due to a significant reduction in capital expenditure—hardly a desirable development in an infrastructure-deficient economy.
On the Plan side, there has been an unprecedented rise in gross budgetary support (GBS) since 2004 to fund various government schemes. Some of the existing schemes, including a few on the anvil, are in the nature of legal entitlements, and, therefore, constitute committed expenditure, which cannot be easily withdrawn.
Almost two-thirds of revenue expenditure is accounted for by interest payments, defence, salaries and pensions, and subsidies. Barring subsidies, where any attempt at rationalization or reform seemingly confronts an insurmountable political barrier, the government has little room for manoeuvre relating to the other expenditures.
The ballooning oil and fertilizer subsidy bill, resulting from the steep oil price rise preceding the global downturn, was partly settled by the somewhat questionable device of so-called below-the-line adjustments through the issuance of bonds, which served to maintain the facade of adherence to a path of fiscal responsibility. Thus, while the budgets presented a comforting picture of progressive fiscal consolidation up to 2007-08, even before the global downturn, the economy had little fiscal headroom available to respond to adverse shocks.
The fiscal stimuli initiated in response to the 2008-09 slowdown to an extent made a virtue out of a necessity. While there were indeed substantial tax reductions and exemptions as a part of the stimulus packages, other measures such as additional allocations for Mahatma Gandhi National Rural Employment Guarantee Scheme, pay revisions on the basis of the recommendations of the Sixth Pay Commission, farm loan waiver and additional provision of funds for food and fertilizer subsidies were more the result of prior commitments and political imperatives than pure stimulus considerations.
While the fiscal loosening of the last two years constituted an easy progression from the fiscal profligacy of the pre-election year budget, a return to the path of fiscal prudence and consolidation presents hard political choices which so far had been put on the back burner simply because there was no compelling reason to do otherwise.
Good times rarely bring forth serious economic reform—hard budget constraints usually do. The finance minister is faced precisely with such a situation with diminishing freedom for fiscal manoeuvre.
It would not be unrealistic to assume that revenue growth will continue to remain below the levels achieved before the slowdown for some time. Though the disinvestment programme restarted by the government has potential for revenue generation, there remain genuine uncertainties concerning its political sustainability. Also, the government may have tied itself in knots by stipulating that the proceeds from disinvestment can only be used for capital investment in the social sectors, where absorption capacity remains a major issue.
In sum, there seems to be no getting away from hard-nosed expenditure management involving tough political choices which cannot be put off for much longer.
It is evident that given the limited fiscal space available, the finance minister currently faces an impossible trinity in expenditure management: it is not possible to maintain an acceptable size of the GBS to fund the politically mandated priorities of the government, continue with the present dispensation of subsidies for food, fertilizer and petroleum without resorting to the subterfuge of off-budget borrowings, and also seriously pursue the path of fiscal consolidation, all at the same time.
Since any rational legislation that succeeds the Fiscal Responsibility and Budget Management Act is unlikely to condone off-budget borrowings, reforming the subsidy regime should be a priority area for the finance minister.
Subsidy reform is an issue that has been analysed to the point of saturation by several expert committees with very little tangible progress. Some of these workable blueprints need to be put into operation expeditiously.
Another neglected area is the low priority that has been given to improving the quality of expenditure in terms of outputs and outcomes. Though outcome budgets of ministries and departments are routinely presented in Parliament during the budget session, this remains largely a perfunctory exercise since budgetary allocations are largely unrelated to performance, nor are the accountability mechanisms linked to achievement of outputs and outcomes. Without these essential linkages, the actual translation of budgetary outlays into the provision of public goods and ultimately their impact on public welfare would remain largely an unknown.
Sanjiv Misra is a former expenditure secretary in the finance ministry and a former member of the 13th Finance Commission.
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