Public expenditure management poses a formidable challenge to the Government of India, particularly in the post-liberalization era, as it navigates the complexities of budget formulation. The shift towards a more open and market-oriented economy has ushered in a dynamic economic landscape, demanding adept financial planning and resource allocation. In this context, the intricacies of managing public expenditure become pivotal, as the government strives to strike a delicate balance between fiscal responsibility and the imperative to meet the diverse needs of a rapidly evolving society. The post-liberalization period has witnessed an increased emphasis on efficiency, transparency, and accountability in public spending, necessitating a reevaluation of traditional budgetary processes. As India grapples with the dual objectives of economic growth and social development, the task of crafting budgets that align with these goals becomes intricate. This challenge is further compounded by the diverse array of sectors and programs that require financial support, ranging from infrastructure development to social welfare initiatives. The government must grapple with competing demands for resources while ensuring that public funds are utilized judiciously and yield optimal outcomes. Effectively managing public expenditure in this context demands a comprehensive understanding of the intricacies of budget-making, strategic resource allocation, and a keen awareness of the socioeconomic landscape. As the Government of India navigates the complexities of public expenditure management, it faces the imperative of fostering financial prudence while addressing the multifaceted needs of a nation in transition. In essence, the challenge lies in crafting budgets that not only fuel economic growth but also contribute meaningfully to the overarching goal of inclusive development in the post-liberalization era.
Tag: Indian economy and issues related to planning, mobilization of resources, growth development and employment. Government budgeting.
Decoding the Question:
- In the Introduction, try to define Public Expenditure Management (PEM).
- In Body,
- Explain how PEM is a challenge when it comes to budget-making after a post-liberalized period.
- Try to conclude with the significance of PEM.
Answer:
Public expenditure management (PEM)is an instrument of state policy and a mechanism for good governance. The broad objective of PEM is the achievement of overall fiscal discipline, strategic allocation of resources, operational efficiency and macro-economic stability.
In the aftermath of the LPG reforms in 1991, the management of public expenditure is facing challenges on the following fronts:
- Global Shocks: Global slowdown, Federal rates (for eg. reversal of quantitative easing), Trade wars, Oil prices, etc. impact the budget estimates which in turn impacts the subsidies allocation and tax revenue collection.
- Populist Measures: Vote bank politics has created a lot of pressure on wise public expenditure.
- For example, in 2009 the Government in power announced 75,000 crore farm loan waivers.
- Narrow tax net: More reliance on indirect tax makes the taxation policy more regressive. It also constrains the government to increase its social spending, which is low in India as compared to other major global economies.
- Pandemic: During the pandemic, all economic activities were shut down, and the revenue of government fell drastically to revive economic activities the government has announced a stimulus package. This has led to a government fiscal deficit in double digit.
- Less capital expenditure: The Budget’s capital expenditure is essential to ensure inter-generational equity and competitiveness of the economy. It has remained around 10%-12% of government expenditure.
- Unchecked Subsidies: A substantial amount of subsidy has been rising in government spending again every time elections come or making government policies populist. The government announces subsidies on LPG, kerosene, food grain subsidy, housing subsidy, etc. which create budgetary pressure on the government.
- Unchecked Subsidies: A substantial amount of subsidy has been rising in government spending again every time elections come or making government policies populist one. The government announces subsidies on LPG, kerosene, food grain subsidy, housing subsidy etc. which create budgetary pressure on the government.
- Estimates of revenue and expenditure: In order to have effective PEM, comprehensive and realistic estimates of revenue and expenditure are essential. Currently, there is uncertainty in providing correct budget estimates.
- Ensuring equitable development across regions: One of the pressing challenges faced by the government about public expenditure management is to ensure equitable development across the regions.
- Inadequate capacity and efficiency of public institutions: Substantial portion of budget allocation towards various schemes remains unutilized and underutilized due to poor implementation and structural bottlenecks. It leads to poor efficiency and cost overruns. For e.g. stalled road projects.
To tackle this problem and manage public finances with economic prudence government has taken various steps such as:
- FRBM (Amendment) Act: The government has targeted to reduce the fiscal deficit gradually and stabilize it by 2023 to 2.5%.
- Removing Plan/Non-plan distinction: Removing plan/non-plan distinction and instead adopting the revenue-capital classification of public expenditure will help in the allocation of more resources for the creation of capital assets which in turn will help in improving the efficiency of the economy.
- Monetary policy framework: Inflation targeting by the Monetary Policy Committee has helped in price stability, which is key to effective PEM.
- Deepening of Fiscal Federalism: More tax revenue has been devolved to states from the divisible tax pool. It would help in better allocation of scarce resources based on the needs of states.
- Monitoring system framework: It has been developed at the central level to enable the outcome budgeting. Also, it enables the timely assessment of resource utilization. E.g. Public Financial Management System (PFMS).
The element of prudence is essential in the management of public finances. Achieving it through rationalizing subsidies, sticking to the fiscal path, and raising tax revenues is needed. The answer is in Public Expenditure Management. Therefore, short-sighted populist budgetary exercises can take a back seat for long-term sustained economic growth.
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