India is struggling with its expenditure management since the Economic crisis of 1991. The fiscal deficit of India had touched unmanageable level at 8.4 per cent of GDP in 1991 and it was panned to bring it down to 4.5 per cent by 1996. Indian government was able to contain the fiscal deficit to the stipulated level in 1996. But after this, once again there was a divergence between the receipts and expenditure and fiscal deficit continuously increased. The combined fiscal deficit of the Central and state governments increased beyond 10 per cent of GDP (Centre about 6-7 per cent and states about 2-3 percent). India decided to evolve a legally binding commitment on the part of government to contain the fiscal deficit at a tolerable level. In the year 2003 India passed an act called Fiscal Responsibility and Budget Management Act (FRBM Act), which was implemented since 2004. In the initial year the FRBM act successfully achieved the fiscal roadmap that stipulate reduction in the fiscal deficit and revenue deficit by 0.3 per cent of GDP and 0.5 per cent of GDP respectively to realize the goal of fiscal deficit to the tune of 3 per cent of GDP and revenue deficit to zero by 2008. But due to the stimulus package that India adopted in 2008 to ward off the adverse effects of the sub- prime crisis on the Indian economy, one again fiscal deficit goals as given in the fiscal roadmap were defied. Later there was an amendment in 2011-12 in the FRBM act to include two new things- a concept of effective revenue deficit was adopted which was to be maintained at zero level while revenue deficit was stipulated to be contained at 2 per cent of GDP level whereas fiscal deficit goal was still kept at 3 per cent of the GDP level to be achieved by 2015-16. Now the target has been extended to 2017-18 in view of the slowing Indian economy in the backdrop of the European Sovereign Debt Crisis and slowing Chinese economy. The amendment also included an escape clause for such exigencies, which made it difficult to achieve the stipulated goals in the fiscal roadmap.
Expenditure Management Commission
In the 2014-15 budget speech, Finance Minister Arun Jaitley announced the constitution of Expenditure Management Commission (EMC). The Commission had been conceived as a recommendation body with the primary responsibility of suggesting major expenditure reforms that will enable the government to reduce and manage its fiscal deficit at more sustainable levels. The EMC was formed as a five-member body composed of the former Reserve Bank Of India (RBI) Governor Bimal Jalan, who has been appointed to Head the Commission, former Finance Secretary Sumit Bose, former Deputy RBI Governor Subir Gokarn and two other members. The commission was mandated to evaluate proposals for reducing the three major subsidies (i.e. food, fertilizer and oil). The commission was to submit an interim report before the presentation of the Budget for 2015-16. The final report was to be submitted before the 2016-17 budget. But the Commission took a little more time.
The expenditure management commission, headed by former Reserve Bank of India (RBI) governor Bimal Jalan, submitted its first interim report in January 2017 to Finance Minister Arun Jaitley. The finer details will take time till Finance Minister and a team of policymakers examine it and make it public. However, the broad proposals suggest ways for the government to reduce administrative costs and disburse funds for various schemes more efficiently.
The commission might submit a few more interim reports to the government, before presenting a final report early next year. The panel, which includes former RBI deputy governor Subir Gokarn and former finance secretary Sumit Bose, is studying various government schemes, programmes, acquisitions and projects for which the Centre is spending substantially.
It is anticipated that the commission might have suggested the Centre not to carry forward pending expenditure from a particular year to subsequent years to show better expenditure or fiscal deficit numbers. The panel, however, for the time being may not be looking on to the allocation of expenditure towards particular schemes. Rather, it may is recommend ways in which the sum allocated can be spent in the most cost-effective manner. The three broad areas the commission has examined are the delivery mechanism of programmes, the technology being used to implement these, and the accounting methods used by the government.
The government follows the cash-based accounting system, through which income is counted when cash (or a check) is actually received, and expenses are counted when actually paid. An alternative method is an accrual-based system, wherein transactions are counted as they happen, regardless of when the money is actually received or paid. The Commission studied the pros and cons of both methods. Their recommendations in this regard, however, couldn’t be ascertained.
The terms of reference of the commission, constituted on September 4 last year, include reviewing all matters related to central government spending, including suggesting space for increased developmental spending and reviewing the budgeting process and norms under the Fiscal Responsibility and Budget Management Act and suggesting ways to meet a reasonable proportion of spending on services through user charges. It is also to recommend ways to achieve a reduction in financial costs through better cash management, greater use of information technology and improved financial reporting systems.
The Commission is anticipated to give following broad proposals in the report
- Ways for the govt to cut administrative costs
- Panel has suggested ways to spend budgetary allocation effectively
- Delivery mechanisms, technology, accounting methods being studied
Major strains on India’s Expenditure Management
The Indian economy is facing demand and supply side shocks due to demonitisation and a sluggish development in exports and Industrial sector which has reduced the growth forecast a little bit for the year 2017 and 2018. Government has implemented and OROP for defence personnel and the seventh pay commission for the government employees, which would have repercussions for the government expenditure. Also government’s announcement of recapitalization of banks in view of mammoth Non- Performing Assets as well proposal of increase in public sector investment in infrastructure, railways as well as rural development would also put pressure on government exchequer apart from various subsidies. The additional proceeds from Public Sector disinvestment is also uncertain.