The Hindu : Business : Avenues to recast public finances

Online edition of India's National Newspaper
Monday, Apr 26, 2004

Business

Business

Avenues to recast public finances

THE TWELFTH Finance Commission set up under Article 280 of the Constitution has been asked to submit its report by July 31, 2004. One of the terms of reference is to suggest a plan for reconstruction of the public finances restoring budgetary balance, achieving macroeconomic stability and debt reduction along with equitable growth. Reconstruc- tion implies deficiencies in the existing model and the need for alteration for improvement. This is an attempt to identify the major fiscal problems of the Centre and the States, possible improvements and the Commission's role in drawing up the plan.

Major deficiencies

The main fiscal deficiencies at present are: The annual budget is not set against a background of projections for the medium term of at least two years following the budget year. The result is frequent changes in tax and revenue measures, difficulty in funding of even committed expenditures in the post budget years and spiralling budget deficits.

Revenue mobilisation has been poor and suffers from a narrow base and lack of efficient collection. Non-tax revenue is neglected with poor coverage and inadequate user charges. Arrears in recovering loans advanced by government are not known. Capital expenditure for asset creation as a percentage of GDP shows a declining trend; even the limited funds allotted are not fully spent.

Revenue deficit and fiscal deficit estimates in the budget are invari- ably exceeded in the revised estimates and further in the actual accounts due to overstatement of tax revenue and understatement of expenditure in the original budget estimates. The budget is not supported by a cash flow state- ment. The increase in fiscal deficit and the resultant huge public debt are a matter of concern. Interest charges pre-empt more than half of the annual revenue. Serious doubts arise about the ability to service the growing debt. Much of the borrowing goes to fund current consumption expenditure and non-priority, unproductive and inefficient expenditure. The fiscal deficit ignores borrowings by public sector undertakings. Expenditure policy and management have not addressed basic issues. Role and functions of government have not been redefined so that the government can withdraw from unnecessary functions and outsource even in areas where it has to continue.

Discussions on subsidies ignore basic policy and management issues. For example, food subsidy can be cut only through a review of the food policy on guaranteed procurement and reducing the cost of operation of the Food Corporation of India. Cost reduction is rarely discussed as a means of reducing the subsidy.

Public sector undertakings continue to be a burden on government budgets. Privatisation has been an excruciatingly slow process. The Railways continues to rely on the Government for capital funding and defaults even on paltry dividends to the Government. The State governments additionally suffer from the burden of bankrupt electricity boards.

There is no awareness of the need for austerity. Accountability for expenditure is still in terms of spending budget allocations and not for achieving targeted output and outcomes. Modern manage- ment accounting is not in place. Time and cost overruns on projects are endemic; some Central projects from the First Five Year Plan have spilled over to the Tenth. The focus is on expenditure and ignores contingent liabilities of Government which are growing rapidly. There is no institutional mechanism to initiate, sustain and monitor fiscal reconstruction.

Plan for reconstruction

Any plan for reconstruction of public finances should aim to remove the deficiencies pointed out earlier. The essential elements of such a plan can be:

A medium term fiscal policy (MTFP) with a three year projection of revenue and expendi- ture estimates covering the budget year and the two following it.

Statement of fiscal policy objectives, quantified where possible, and specific taxation and expenditure measures to achieve these. A comprehensive and quantitative macroeconomic framework based on explicit assumptions and parameters such as like growth rate, inflation rate and exchange rate.

Reliable estimates based on realistic economic and cost assumptions. Identification of major risks and provision of contingent reserves. Supporting the budget with cash flow statement.

Extension of tax and non-tax base, reduction of the cost of collection and keeping the arrears in collection to the minimum with data on demand, collection and balance of all dues to the Government.

Elimination of unnecessary functions and activities of government with a new role of facilitation. Providing a list of schemes and activities weeded out with data on savings thereby.

Tackling subsidies through a review of underlying policies and reducing the cost of providing the subsidised goods and services.

Prioritisation of expenditure with the thrust on essential, productive and efficient expenditure. Trans- parency of expenditure priorities through data on sector allocations as percentages of the budget and the GDP instead of a percentage increase over previous year's revised estimate.

Accountability for output and outcome in addition to financial accountability and strengthening the accounting and data base.

Better control and monitoring of guarantees given by the Govern- ment. Budget transparency of performance against contingent liabilities. Action plan to reduce the burden of PSUs, the Railways and statutory bodies on the budget.

Strengthening of the institutional support to initiate and oversee fiscal reconstruction.

The Finance Commission cannot draw up a comprehensive and detailed fiscal reconstruction plan. Many aspects of prudent fiscal policy and management have been highlighted in this paper along with possible lines of improvement. The Commission can make recommen- dations on the improvements needed to correct the existing deficiencies, suggest a code of conduct for sound fiscal policy and management and flag the essential elements in fiscal reconstruction plan with a time frame for achieving fiscal balance.

The central Fiscal Bill 2000 needs resurrection in a more meaningful form with a blend of realistic targets based on a code of fiscal conduct. Recommendations on how the States can be made to follow will be useful. The Commission can suggest a Central government White Paper on fiscal reconstruction.

A. Rangachari

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Consumer involvement, a must

Avenues to recast public finances

Challenges in financial intermediation

Apple bets on consumer electronics business

Relief u/s 54 in the case of development agreement

Stocks close with net gains

Monitoring open source projects