Expenditure management: yet to happen

The coming Budget is likely to be centred around tax reforms. Expenditure reforms are unrelenting and full of drudgery. On the other hand, tax reforms are exciting; they could even be popular, with visible outcomes. Tax reforms began with Dr Manmohan Singh?s successive budgets in moderating and rationalising rates. They got an impetus in Chidambaram?s Dream Budget of 1997. Based on subsequent recommendations, he will hopefully complete the residual measures.

Expenditure compulsions are mounting ? the ongoing commitments of the X Plan and the new commitments on health, education, agriculture, the rural sector, the Employment Guarantee Scheme, to name a few. The XII Finance Commission entails inescapable and large commitments. There are also pressures for enhanced gross budgetary support (GBS) for plan expenditure. Add to this the contingent liabilities from any clever financial engineering, through special purpose vehicles (SPVs), for infrastructure. Between accommodating the government?s Common Minimum Programme (CMP) and the GBS, pursuing fiscal rectitude must be a daunting challenge. Announcing new tax breaks with multiple expenditure largesse makes compliance with the fiscal responsibility law elusive.

An inescapable conclusion is that expenditure reforms are, at least for the present, not in fashion. Past discussions on improved expenditure management have resulted in cosmetic changes. The recommendations of the expenditure commission and earlier specialised reports had centred around evaluating activities and even their modest recommendations remain largely unimplemented. This is a time when everybody believes the electoral mandate favours large public outlays in social and physical infrastructure. Expenditure reform, however, must entail some basics.

First and foremost, it must entail an objective evaluation of the ongoing portfolio, plan and non-plan. When the X Plan began, there were efforts to end unnecessary programmes, but the savings were negligible. It was resisted by line departments, because staff maintenance connected with project activity has become an end in itself. Second, expenditure evaluation is largely about physical and financial targets. There is little emphasis on evaluating ?expenditure quality,? more so the sustainability of activities once the project life cycle has been completed.

Third, for over a decade we have recognised irrationalities in the expenditure classification on plan versus non-plan and revenue versus capital expenditure. While asset maintenance is non-plan (and the money available meagre), creation of new assets is plan spending. Yet, if past assets deteriorate as rapidly as we create new ones, society remains impoverished. Or, though capital expenditure is preferred, devolution to states for health and education are part of the not-so-desirable revenue expenditure! Successive finance ministers have commented on these ambiguities and done nothing.

Fourth, our expenditure management is only about keeping allocations constant in real terms, not on examining the rationale and quality of ongoing portfolios. Zero-based budgeting has become a statistical compliance, divorced from the aim of subjecting the activity to a rigorous evaluation. Fifth, project-related activities require medium-term planning. Annual budgetary appropriations mitigate against the pursuit of activity on an ongoing basis.

Sixth, expenditure control also involves calibration of subsidies, ensuring improved targeting to intended beneficiaries. A credible beginning could be made in this Budget. Seventh, reorganisation of government has been postponed for long. Coalition politics and the need to accommodate more ministers inhibits action. How else can we explain the presence of a separate department for mines which does not include coal, or petroleum which does not include petro-chemicals, or industry which does not include steel or textiles and transport which does not include roads or shipping, to name only a few anomalies.

Downsizing government has also lost favour. The previous government made a feeble attempt by restricting new recruitments at levels lower than annual attrition. There is talk of constituting a new Administrative Reforms Commission, but there have been many earlier commissions, whose recommendations gather dust. If there is to be a new commission, it must be an empowered one, whose recommendations are generally binding on the government.

Finally, expenditure management requires a holistic approach. The expenditure department is preoccupied in managing the non-plan expenditure and containing pressures for higher GBS. The reputation of the Planning Commission, on the other hand, has come to rest on the maximum GBS it can extract. These demarcations detract from sensible expenditure management. Many countries have innovative arrangements here. The Office of Management and Budget in the US, headed by a director with Cabinet rank, reports directly to the White House. In many other countries, expenditure provision and management are not treasury functions. The annual turf war between Yojana Bhawan and North Block, requiring the Prime Minister?s mediation, is a byproduct of institutional infirmities. As the economy grows more rapidly and there are changes in expenditure patterns, with emphasis on social and physical infrastructure, and as public-private partnership grows, we need innovative institutional responses.

Expenditure reforms have long been postponed on one pretext or the other. Any fiscal management strategy cannot ignore this. Expenditure outcomes must result in achievement instead of activity. By seeking a holistic approach, is one asking for too much?