GS3 PYQ 2019 (Mains Answer Writing): Public Expenditure - Indian Economy for UPSC CSE

The public expenditure management is a challenge to the Government of India in context of budget making during the post liberalization period. Clarify it. (UPSC MAINS GS3 2019)

The public expenditure management (PEM)is an instrument of state policy and 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.
Various challenges faced by the government with regard to PEM

• 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.
• 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.
• Less capital expenditure: 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.
• Populist tendencies: This leads to unproductive spending of the scarce government resources. For eg. giving tax sops, farm loan waivers in the pre-election period.
• Fiscal deficit: Keeping the deficit within the desired limit is essential for maintaining the fiscal prudence.
• Managing public debt: It is essential to ensure that the burden of the current generation’s needs doesn’t fall on the next generation.
• Trade deficit: It should be reduced in order to have healthier global trade and improve market competitiveness.
• Containing inflation: It is one of the most important objectives of monetary policy which is also impacted by the revenue and expenditure policies of 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 with regard to public expenditure management is to ensure equitable development across the regions.
• Inadequate capacity and efficiency of public institutions: Substantive 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.

Government measures for effective PEM

• FRBM (Amendment) Act: 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 allocation of more resources for creation of capital assets which in turn will help in improving the efficiency of 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).

With the 1991 reforms, the Indian economy was linked with the global economy. The effective PEM becomes more essential in this globalised era to meet various objectives of state policy. Various fiscal targets should be followed prudently and monitoring of resource utilization should be made robust.

Topics covered - public expenditure