India is struggling with its expenditure management since the Economic crisis of 1991. The fiscal deficit of India had touched unmanageable level at 8.4 per cent of GDP in 1991 and it was panned to bring it down to 4.5 per cent by 1996.
- Indian government was able to contain the fiscal deficit to the stipulated level in 1996. But after this, once again there was a divergence between the receipts and expenditure and fiscal deficit continuously increased.
- The combined fiscal deficit of the Central and state governments increased beyond 10 per cent of GDP (Centre about 6-7 per cent and states about 2-3 percent).
- Later, India decided to evolve a legally binding commitment on the part of government to contain the fiscal deficit at a tolerable level.
- In the year 2003 India passed an act called Fiscal Responsibility and Budget Management Act (FRBM Act), which was implemented since 2004.
- In the initial year the FRBM act successfully achieved the fiscal roadmap that stipulate reduction in the fiscal deficit and revenue deficit by 0.3 per cent of GDP and 0.5 per cent of GDP respectively to realize the goal of fiscal deficit to the tune of 3 per cent of GDP and revenue deficit to zero by 2008.
- But due to the stimulus package that India adopted in 2008 to ward off the adverse effects of the sub- prime crisis on the Indian economy, one again fiscal deficit goals as given in the fiscal roadmap were defied.
- Later there was an amendment in 2011-12 in the FRBM act to include two new things- a concept of effective revenue deficit was adopted which was to be maintained at zero level while revenue deficit was stipulated to be contained at 2 per cent of GDP level whereas fiscal deficit goal was still kept at 3 per cent of the GDP level.
- The amendment also included an escape clause for such exigencies, which made it difficult to achieve the stipulated goals in the fiscal roadmap.
- Since, much of public expenditure is of committed nature such as interest payments for servicing past public debt, expenditure on defence, pensions and wages and salaries of government employees, there is very little room for compression of expenditure in the short run, the objective of accelerating growth and employment generation have to be achieved by raising revenue and improving the quality of expenditure.
- A major bonus for India in coming years can be Demographic Dividend. Since 2018, India’s workingage population (people between 15 and 64 years of age) has grown larger than the dependent population — children aged 14 or below as well as people above 65 years of age. This bulge in the working-age population is going to last till 2055, or 37 years from its beginning.
- It is, however, important to note that this change in population structure alone cannot push growth.
- There are many other factors. In the late 20th century demographic dividend in Asia resulted in a sevenfold increase in the GDP of many countries. In Latin America the growth was only two-fold, Countries can only harness the economic potential of the youth bulge if they are able to provide good education and health to its people.
- Government of India currently spends a little over 1.15% of GDP on health, whereas we need to push this number to 2.5 at least. The combined expenditure on education and health shall be 4-5 percent for government and 10% for country as a whole.
- Global economic shocks: such as the 2008 global economic meltdown, fed tapering, crude oil prices, trade wars etc have much more effect on the domestic economy due to an increasingly integrated global economy.
- Fiscal Policy: maintaining the balance between the demands for increased government spending in sectors such as welfare schemes and infrastructure while keeping the fiscal deficit within 3 per cent of GDP as recommended by FRBM Act, 2003.
- Subsidy burden: has grown exponentially such as fertilizer subsidy at 80,000 crore, MGNREGA at 60,000 crore which creates a shortage for capital investments.
- Banking sector: is facing issues such as Twin-Balance sheet crisis, balance between disinvestment or bank consolidation, NPA crisis, etc.
- Public Sector Enterprises: post-liberalization capabilities of the private sector have grown manifold thus there is a demand for disinvestment or privatization of PSE’s such as Air India, BSNL or other loss-making PSE’s.
- Populist schemes: such as farm loan waiver, giving higher MSP’s for different crops, cutting income tax above the low slabs etc lead to higher fiscal deficit and crowding out of private investment.
- Low tax base: post-liberalization incomes have grown steadily but similar improvement is not seen in income tax base were still only around 4% file income tax while around 1 per cent pay income tax.
- Low Tax to GDP ratio: which has risen from around 7% in 1990 to 10% in 2019 which is not commensurate with the economic growth trajectory of India.
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: and instead adopting the revenue-capital classification of public expenditure will help in the allocation of more resources for creation of capital assets.
- Creation of Monetary Policy Committee for better inflation targeting.
- Deepening of Fiscal Federalism: More tax revenue has been devolved to states from the divisible tax pool.
- Public Fund Management System: is an online platform to monitor the progress of government schemes Public Debt Management Agency: is the proposed agency to manage entire internal and external debts of the government.
- Bimal Jalan Committee on expenditure management has recommended steps such as rationalizing subsidies, sticking to a fiscal path, and strategic divestment. Prudent public finance management would be key to unlocking the growth potential of the Indian economy.
The Indian economy is facing demand and supply side shocks due to GST, 2016 demonetization and a sluggish development in exports and Industrial sector which has reduced the growth forecast a little bit for the year 2019. Recently the government has implemented and OROP for defence personnel and the seventh pay commission for the government employees, which would have repercussions for the government expenditure. Also, government’s announcement of recapitalization of banks in view of mammoth Non- Performing Assets as well proposal of increase in public sector investment in infrastructure, railways as well as rural development would also put pressure on government exchequer apart from various subsidies. The additional proceeds from Public Sector disinvestment is also uncertain.
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