Public Expenditure Management (PEM) refers to the prudent utilization of government financial resources in order to achieve effective governance. Its main focus is on maintaining fiscal discipline, allocating resources efficiently, ensuring operational effectiveness, and promoting macroeconomic stability.
Following the reforms initiated after 1991, the role of the government has shifted from being the driver of economic growth to that of a facilitator of the growth process. This change has presented new challenges in the process of budget-making.
Challenges in budget-making in the post-liberalization era are as follows:
- Global economic shocks: Events like the 2008 global economic meltdown, fed tapering, fluctuations in crude oil prices, and trade wars have a significant impact on the domestic economy due to increased integration with the global economy.
- Fiscal Policy: Striking a balance between the need for increased government spending in sectors like welfare schemes and infrastructure while keeping the fiscal deficit within the limit of 3 percent of GDP, as recommended by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
- Subsidy burden: The burden of subsidies, such as fertilizer subsidy amounting to 80,000 crore and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) subsidy amounting to 60,000 crore, has grown exponentially. This creates a shortage of capital for investments.
- Banking sector issues: The banking sector faces challenges such as the Twin-Balance sheet crisis, finding a balance between disinvestment and bank consolidation, and the Non-Performing Assets (NPA) crisis.
- Public Sector Enterprises: With the significant growth of capabilities in the private sector following liberalization, there is a demand for disinvestment or privatization of Public Sector Enterprises (PSEs) like Air India, BSNL, and other loss-making PSEs.
- Populist schemes: Schemes like farm loan waivers, higher Minimum Support Prices (MSPs) for different crops, and income tax cuts above the lower slabs lead to a higher fiscal deficit and reduce private investment opportunities.
- Low tax base: Despite steady growth in incomes after liberalization, there has been limited improvement in the income tax base, with only around 4 percent of the population filing income tax returns and around 1 percent paying income tax.
- Low Tax to GDP ratio: The Tax to Gross Domestic Product (GDP) ratio has increased from around 7 percent in 1990 to 10 percent in 2019. However, this growth is not in line with India’s economic growth trajectory.
Government measures for effective Public Expenditure Management (PEM) include:
- The Fiscal Responsibility and Budget Management (FRBM) Act (Amendment): The government aims to gradually reduce the fiscal deficit and stabilize it at 2.5 percent by 2023.
- Eliminating the Plan/Non-plan distinction: Instead, adopting the revenue-capital classification of public expenditure will enable the allocation of more resources for creating capital assets.
- Establishing a Monetary Policy Committee to enhance inflation targeting.
- Strengthening Fiscal Federalism: More tax revenue has been devolved to states from the divisible tax pool.
- Implementing the Public Fund Management System: This online platform helps monitor the progress of government schemes.
- Establishing a Public Debt Management Agency: This proposed agency would manage the government’s entire internal and external debt.
The Bimal Jalan Committee on expenditure management has recommended measures such as rationalizing subsidies, adhering to a fiscal path, and pursuing strategic divestment. Prudent management of public finances will be crucial in unlocking the growth potential of the Indian economy.