Business   

Finance panel's role in public finance revamp

The Finance Commission can recommend improvements needed to correct existing deficiencies and suggest a code of conduct for sound fiscal policy and management.

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 its terms of reference is to suggest a plan to bring about a reconstruction of the public finances restoring budgetary balance, achieving macroeconomic stability and debt reduction along with equitable growth. Reconstruction implies deficiencies in the existing model and alteration for improvement. An attempt is made here to identify major fiscal problems of the Centre and the States, possible improvements and the Commission's role in drawing up the plan.

Fiscal deficiencies

The main fiscal deficiencies at present are the following:

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 even committed expenditures in the post budget years and spiralling budget deficits.

Revenue mobilisation has been poor and suffers from a narrow base and inefficient collection. Non-tax revenue is neglected with poor coverage and inadequate user charges. Arrears in loan recovery by the governments are not known.

Capital expenditure for asset creation as a percentage of GDP is showing a declining trend; even the limited funds allocated are not fully spent.

Revenue deficit and fiscal deficit estimates in the budget are invariably 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 statement.

The increase in fiscal deficit and the resultant huge public debt are a matter of concern. Interest charges preempt more than half of annual revenue. Serious doubts arise about the ability to service the growing debt. Much of the borrowing goes to meet current consumption expenditure and non-priority, unproductive and inefficient expenditure of the Government. Fiscal deficit ignores the borrowings by public sector undertakings .

Expenditure policy and management have not addressed basic issues.

The role and functions of the Government have not been redefined so that the Government can withdraw from unnecessary functions and outsource even in areas where it has to remain.

Discussions on subsidies ignore basic policy and management issues. For example, the food subsidy can be cut only through a review of the food policy on pguaranteed 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 enterprises ( PSEs ) continue to be a burden on the Government budget. Privatisation has been an excruciatingly slow process. The Railways continue to rely on the Government for capital funding and default even on paltry dividends to the Government. The State governments additionally suffer because of bankrupt electricity boards.

There is no awareness of the need for austerity. Accountability for expenditure is still in terms of only spending budget allocations and not for achieving the targeted output and outcomes. Modern management 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 the Government, which are growing rapidly.

There is no institutional mechanism to initiate, sustain and monitor fiscal reconstruction.

Any plan for the reconstruction of public finances should aim to remove all these deficiencies. Essential elements of such a plan can be:

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

A statement of fiscal policy objectives, quantified where possible, and the specific taxation and expenditure measures to achieve these.

Comprehensive and quantitative macroeconomic framework based on explicit assumptions and parameters such as 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 a cash flow statement.

Extension of the 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 the Government with a new role of facilitation. Providing a list of schemes and activities weeded out with data on the 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. Transparency of expenditure priorities through data on sector allocations as percentages of the budget and GDP instead of percentage increase over previous year's revised estimate.

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

Better control and monitoring of guarantees given by the Government. Budget transparency of performance against contingent liabilities.

An action plan to reduce the burden of PSEs , the Railways and statutory bodies on the budget.

Strengthening 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 here along with possible lines of improvement. The Commission can recommend improvements needed to correct 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.

A. Rangachari

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

Business

News: Front Page | National | Southern States | Other States | International | Opinion | Business | Sport | Miscellaneous |
Advts: Classifieds | Employment | Obituary |

Stories in this Section

• Finance panel's role in public finance revamp
• Company directors face tougher times
• Web Scraping
• Tech stocks weak on growth uncertainties
• Changes in the Finance Bill, 2003
• Telematics to go pragmatic

Copyright © 2003, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu