APRIL 12, 2014

By TIOL Edit Team

International Monetary Fund’s (IMF’s) focus on expenditure reforms in its latest Fiscal Monitor Report (FMR) is of direct relevance to India that has operated on the edge of fiscal precipice for years.

Expenditure reforms have become an orphan child in the election year. It is  marked by dole-outs given by the outgoing UPA Government and all sort of welfare promises made by political parties wrestling for votes in the ongoing Lok Sabha polls.

At present, no one knows how much bill the new Government would have to bear on fulfilling poll promises made by the political party/alliance that comes to power at the Centre.

No one also knows the size of legacy expenditure that the new Government would have to bear over the next five years on account of outgoing UPA’s largesse. The largesse include tax sops announced in the Interim Budget, food security and other populist initiatives such as setting up of pay commission, which is expected to give its recommendations by 2015-end.

The new ruling political alliance, while trying to honour its poll promises, must take a leaf out of FMR that is aptly captioned as ‘titled ‘Public Expenditure Reform Making Difficult Choices.’

As put by FMR, “While tax reform can help boost potential growth through the removal of distortions, spending reforms have a key role to play in strengthening public service delivery.”

It says that meaningful expenditure reform strategies comprise three main elements: ensuring the sustainability of social spending and the public wage bill-the main items in most governments’ budgets; achieving efficiency gains while paying due regard to equity; and establishing institutions that promote spending control.

To achieve fiscal consolidation and thus rein in inflation and accelerate growth, the new Government should establish a statutory expenditure reforms commission (ERC). NDA Government had constituted a non-statutory ERC, which submitted 10 reports during February 2000-September 2001. The Government’s non-plan expenditure has increased manifold since then.

The proposed ERC must have statutory status to ensure that the Government does not dispose of its recommendations in a casual manner as successive Governments have done over the years with advice from several committees. Moreover, study of the scope for efficiency in expenditure can’t be reduced to a periodic affair. It has to be a continuous exercise.   

ERC Act must contain a provision for the Government to disclose to Parliament in detail the reasons for rejecting or partly accepting ERC recommendations. The same approach must be become the norm for explicit and implicit suggestions made by Comptroller and Auditor General in its different reports.

ERC should be empowered to lay down principles of tax expenditure/revenue forgo to impart transparency in grant of numerous indirect and direct tax incentives to different sections of the society. Such an initiative would minimize the scope of crony capitalism, which has been the bane of Indian governance system so far.

The Government has never disclosed the criteria for deciding when and how long e different direct and indirect taxes should be given to which segments of the society.

Tax expenditures should be sector and region neutral. The Government, for instance, can provide a calibrated income tax incentive to businesses linked to the number of direct jobs they generate.

There is also an urgent need to re-engineer the Government structure keeping in view the emergence of e-governance, deregulation and off-loading of regulatory functions to the regulatory commissions.
Re-engineering would require reduction in the number of ministries and departments keeping in view overlap of functions and growing convergence of sectors and segments.    

The new Government can in fact readily implement the UPA-rejected recommendations of Administrative Reforms Commission (ARC) to cut the top governance structure to size.

In its 13th report on ‘Organisational Structure of Government of India’ submitted in April 2009, ARC had mooted restructuring of ministries to align their functioning and coordination. Such an initiative would reduce the number of ministries to 20-25. It also recommended re-definition of ministries and re-writing of allocation of business rules as part of radical organization reforms. The UPA Government trashed these recommendations without disclosing any reason. It mere stated “The recommendations have not been accepted.”

The proposed Commission should regularly spot opportunities for reducing expenditure at Government’s organizational level, in the governance processes and at the activities level. ERC can institute regular awards for Government staff and outsiders for recommending innovations that offer good prospects for reduction in expenses and improvement in governance.

Two big-ticket areas that anyone would suggest are 1) reduction in perks and security & retinue expenditure on VIPs who generally occupy sprawling bungalows in national and state capitals and 2) reduction in security expenditure on fighting naxals and several regional militant separatist groups through sincere political resolution of contentious issues. 

The savings resulting from expenditure reforms can be deployed in capital expenditure to create assets and generate employment and revenue.

Can the new Government transform the perceived poison pill of expenditure reforms into a medicine for rejuvenation of the economy?