Initiate expenditure reforms for budgetary credibility

Live Mint, January 22, 2020

By Pradeep S Mehta

The gross domestic product (GDP) of the state of California in the US is around $3 trillion. Bigger than India’s GDP, it has been growing steadily for a decade now. On 10 January 2020, California’s governor released his budget proposals for the year. Reforms and investments in education, health and housing have been prioritized, and the budget documents put forth in great detail the sources of finance, manner of expenditure and process of reforms.

One would hope for similar finesse in the Union Budget proposals on 1 February. Unfortunately, that is unlikely without institutionalized mechanisms to ensure the credibility of the development and implementation of budget proposals. An attempt was made at the turn of century through the introduction of a legislation on fiscal responsibility and budget management. But its principles have been diluted to a significant extent over the past decade or so.

India is battling a crisis of confidence. While there is broad consensus on the need to enhance consumption, one is not confident if the public sector or private sector or both together will be able to do the needful. We need to turn this crisis into an opportunity. One way to increase consumption is by enhancing public expenditure to enable citizens to be gainfully employed, earn decent incomes, and consequently spur demand. However, limited fiscal space may prevent the government from going down this route. Lack of transparency, consistent off-balance-sheet spending, and contradictory statements have resulted in the absence of credible data on how much fiscal space is actually available. This needs to change and the government needs to find innovative ways of increasing its spending.

As argued by economist Sudipto Mundle in a recent paper, it is possible to create additional fiscal space through savings generated by the rationalization of non-merit subsidies (with no public rationale for under-recovery of cost), revenue foregone from tax concessions as well as exemptions, and funds appropriated for specific purposes but left unutilized. An additional fiscal space of around 12% of GDP is likely to be created should these reforms be simultaneously implemented. Even if half of these are undertaken, more than adequate funds will probably be available with the government to pull the Indian economy out of its current slowdown.

It is thus my first fervent request to the finance minister to lay down a clear road map for public expenditure reforms in the budget. These would include rationalization of subsidies, taxation and cesses through robust and time-bound public consultation, and a transparent cost-benefit analysis of schemes to determine if they should be retained.

At present, there is no requirement for the government to do such deep thinking on public expenditure or other macroeconomic reforms in India. On the other hand, California has institutionalized mechanisms to ensure procedural and substantive credibility in budget proposals and their subsequent implementation. For instance, it follows a balanced-budget principle, pursuant to which, if the proposed expenditures for the year exceed estimated revenue, the governor is mandated to recommend sources for additional funding. In addition, budget proposals must go through a rigorous process of analysis by a joint legislative budget committee, dedicated budget and fiscal review committees of both houses, public consultations and negotiations before they are adopted. Thereafter, monitoring and evaluation of the implementation of budget proposals kick in. These help retain public faith in governance.

The absence of such processes in India has resulted in the government releasing ambitious documents like the National Infrastructure Pipeline (NIP) report. As economist Rathin Roy notes, there is no macroeconomic and fiscal framework within which the NIP exercise is nested. It has no relationship with the medium-term strategies laid out by the NITI Aayog. Also, there is no clarity on how the public sector will mobilize 78% of the ₹102 trillion planned for deployment over the next five years.

It is thus my second fervent request to the finance minister to dedicate the forthcoming budget to improve its credibility by institutionalizing procedural and substantive reforms. As elucidated by Pratap Ranjan Jena and Satadru Sikdar of the National Institute of Public Finance and Policy in a recent paper, this can be done by adopting a medium-term expenditure framework that links plans to budgets, establishing independent review bodies like the Fiscal Council, improving fiscal transparency, and introducing performance orientation in the budget process. These reforms can reduce the uncertainty around resource availability and their utilization.

It is not as if the government lacks the political will to introduce these reforms. The recent opening up of the coal sector for commercial mining by all local and global firms— after easing end-use restrictions and prior- experience norms for auctions—has been a good start, and the finance minister needs to carry the baton forward in the budget.

Introducing public expenditure reforms would be a good beginning. It will signal that the government is willing to put its house in order, and also provide confidence to others to follow suit. The finance minister must seize the opportunity.

Pradeep S. Mehta is secretary general of CUTS International

Amol Kulkarni of CUTS contributed to this article

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