Budgeting in India – Process, Evaluation and Innovations

INTRODUCTION #

A government Budget is basically as an annual statement of all the estimated receipts and estimated expenditures of the government in a fiscal year from 1 April to 31 March. Though the word “Budget” does not mention in the Constitution, but it is mandated in Article 112 that the Union government shall present before the Parliament an “Annual financial Statement” of estimated receipts and expenses of the Government.

In a mixed economy like ours, the government plays a significant role along with the private sector. The three major functions served by this presentation of estimates are:

• Allocation function: Public goods (national defense, roads, government administration, measures of lower air pollution,etc.) can’t be provided by Market Mechanism(transaction between individuals).
• Distribution function: Government can alter income distribution by making transfer pay- ments and collecting taxes, therefore affecting personal disposable income of households. Thus, through its tax and expenditure policy government tries to achieve a fair income distribution in society.
• Stabilization function: Fluctuations in econ- omy may lead to inflation and unemployment. Government policy measures to stabilize domestic economy.

EVOLUTION OF BUDGETING GLOB- ALLY #

Budgeting is the process of estimating the

availability of resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources.

The Line Item Budget #

In the early nineteenth century, government budgeting in most countries was characterized by weak accounting procedures, adhocism, little central control and poor monitoring and evaluation.

In the late nineteenth century, line-item budget- ing was introduced in some countries. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initia- tive then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments. It shows the comparison between the financial data for the past accounting or budgeting periods and estimated figures for the current or a future period.”

In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated.

The line item budget approach is easy to under- stand and implement. It also facilitates centralized

control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

The weaknesses of the line item budgeting were sought to be remedied by introducing certain reforms. Performance budgeting was the first such reform.

Performance Budgeting #

Unlike the traditional line item budget, a per- formance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achieve- ment of the objectives.

A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

Zero-based Budgeting #

The concept of zero-based budgeting was intro- duced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the ear- lier systems where only incremental changes were made in the allocation. Under zero-based budgeting, every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, then the funds are allocated to it.

The basic purpose of ZBB is phasing out of programmes/activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero- based budget, but in modified forms the basic principles of ZBB are often used.

Programme Budgeting and Performance Budgeting #

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was

introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.

Programme budgeting aimed at a system in which expenditure would be planned and controlled by the objective. The basic building block of the system was classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.

PPBS went much beyond the core elements of programme budgeting and was much more than the budgeting system. It aimed at an integrated expendi- ture management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate prepara- tion time given nor was a stage-by-stage approach adopted. Therefore, the attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

Many governments today use the “programme budgeting” label for their performance budgeting system. As pointed out by Marc Robertson, the contemporary influence of the basic programme budgeting idea is much wider than the continuing use of the label. It is defined in terms of its core elements as mentioned above. Programme budget- ing is an element of many contemporary budgeting systems which aim at linking funding and results. “The extent of ongoing influence of programme budgeting is partly obscured by a wide variety of terminology used today to refer to programme such as “outcomes” or output groups (Australia) and ‘Requests for Resource’ (UK)”.

Programme budgeting by itself may not bring the outcome orientation. It is also difficult to make performance targets as part of the budget formu- lation process unless managers at various levels get involved in the budgeting process, involving prioritization of activities and resource allocation on that basis.

THE UNION OF INDIA’S BUDGET #

The annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support

those outlays and tax revenues make up the union budget. The union budget has two purposes:

1. To finance the activities of the union govern- ment
2. To achieve macroeconomic objectives.

The use of the union budget to achieve macro- economic objectives such as employment, sustained economic growth, and price level stability is called fiscal policy.

The Institutions and Laws #

The Government is not free to tax, borrow and spend money the way it likes. Since there is a limit to the resources the State can mobilize, the need for proper budgeting arises. Every item of expenditure has to be well thought out and the total outlay worked out for a specific period. Also, there must be the sanction of the people behind all these financial proposals, expressed clearly through their chosen representatives.

It is in this context that the Budget of the Gov- ernment of India is presented before both the Houses of Parliament every year. The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, which at present commences on the 1st of April every year, but now the government is planning to shift the date from 1st April to 1st Jan- uary. In other words, it is a proposal of how much money is to be spent on what and how much of it will be contributed by whom or raised from where during the coming year. The Budget gives estimates for the ensuing year and offers an opportunity to the government to review and explain its financial and economic policy and programmes besides enabling the Parliament to discuss and criticize it.

The essential features of the financial procedure followed in India are laid down in the Constitution which ensures the supremacy of the Lok Sabha in financial matters. The Constitution provides that no tax shall be levied or collected except by authority of Parliament and that the President shall, in respect of every financial year, cause to be laid before both Houses, the Annual Financial Statement.

ANNUAL FINANCIAL STATEMENT (AFS) #

It Provided under Article 112.

It Shows estimated receipts and expenditure of the Government of India for the following year, estimates as well as revised estimates for the current year as also expenditure for the previous year.

The receipts and disbursements are shown under the three parts, in which Government Accounts are kept viz. (i) Consolidated Fund (ii) Contingency Fund and (iii) Public Account.

Under the Constitution, Annual Financial State- ment distinguishes expenditure on revenue account from other expenditure. Government Budget, therefore, comprises Revenue Budget and Capital Budget. The estimates of receipts and expenditure included in the Annual Financial Statement are for the expenditure net of refunds and recoveries, as will be reflected in the accounts.

The Constitution provides for a Consolidated Fund of India to which all revenues received by way of loans, advances etc. are credited. The expenditures are embodied in the Budget as:

• The sums required to meet the items of expend- iture described by the Constitution as those charged on the Consolidated Fund of India.
• The sums required to meet other expenditures proposed to be made from the Consolidated Fund of India.
• Expenditures contains in the first category can be discussed in both the Houses but are not submitted to vote of either House. In other words, they constitute the non-votable part of the Budget. The expenditures charged on the Consolidated Fund of India include:
  • The emoluments and allowances of the President.
  • The salaries and allowances of the Chair- man, Deputy Chairman of the Rajya Sabha and the Speaker and the Deputy Speaker of the Lok Sabha.
  • The salary and other allowances payable to the judges of the Supreme Court.
  • Any other expenditure declared by the Constitution or by Parliament by law to be so charged.

The expenditure falling in the second category are presented in the form of Demands for Grants

to the Lok Sabha and are voted by this House. The Lok Sabha has the right to assent or to refuse any such demand or reduce the demand specified therein. No such demand shall be made except on the rec- ommendation of the President. Since these demands are meant to fulfill the programmes and policies of the government, if any demand as a whole is voted down, it tantamount to a defeat of the government.

The significance of the Consolidated Fund, the Contingency Fund and the Public Account as well as the distinguishing features of Revenue and Capital Budget are given briefly below.

The existence of the Consolidated Fund of India (CFI) flows from Article 266 of the Constitution. All revenues received by Government, loans raised by it, and also its receipts from recoveries of loans granted by it form the Consolidated Fund. All expenditure of Government is incurred from the Consolidated Fund of India and no amount can be drawn from the Consolidated Fund without authorization from the Parliament.

Article 267 of the Constitution authorizes the Contingency Fund of India which is an imprest placed at the disposal of the President of India to facilitate Government to meet urgent unforeseen expenditure pending authorization from Parliament. Parliamentary approval for such unforeseen expend- iture is obtained, post-facto, an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund. The corpus of the Contingency Fund as authorized by Parliament presently stands at 50 crore.

Moneys held by Government in Trust as in the case of Provident Funds, Small Savings collections, income of Government set apart for expenditure on specific objects like road development, primary education, Reserve/Special Funds etc. are kept in the Public Account. Public Account funds do not belong to Government and have to be finally paid back to the persons and authorities who deposited them. Parliamentary authorization for such payments is, therefore, not required, except where amounts are withdrawn from the Consolidated Fund with the approval of the Parliament and kept in the Public Account for expenditure on specific objects, in which case, the actual expenditure on the specific object is again submitted for vote of the Parliament

for drawl from the Public Account for incurring expenditure on the specific object.

Revenue Budget consists of the revenue receipts of Government (tax revenues and other revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the Union.

The estimates of revenue receipts shown in the Annual Financial Statement take into account the effect of various taxation proposals made in the Finance Bill. Other receipts of Government mainly consist of interest and dividend on investments made by Government, fees, and other receipts for services rendered by Government. Revenue expenditure is for the normal running of Government departments and various services, interest payments on debt, subsidies, etc.

Broadly, the expenditure which does not result in creation of assets for Government of India is treated as revenue expenditure. All grants given to State Governments/Union Territories and other parties are also treated as revenue expenditure even though some of the grants may be used for creation of assets.

Capital Budget consists capital receipts and cap- ital payments. The capital receipts are loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, dis- investment receipts and recoveries of loans from State and Union Territory Governments and other parties.

Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machin- ery, equipment, as also investments in shares, etc., and loans and advances granted by Central Gov- ernment to State and Union Territory Governments, Government companies, Corporations and other parties.

Stages #

The procedure adopted in the Parliament while dealing with financial matters, specifically the Budget, involves many stages:

Presentation of Budget #

The Budget is presented with a ‘Budget Speech’ which is in two parts: Part A contains ‘a general

economic survey’ of the country and Part B ‘the taxation proposals’ for the ensuing financial year. The Rules of Procedure and Conduct of Business in the Lok Sabha for Financial Legislation are as follows:

• The Annual Financial Statement or the State- ment of the Estimated Receipts and Expendi- ture of the Government of India in respect of each financial year (also called ‘the Budget’) is presented to the House on such day as the President may direct.
• The Budget is presented to the House in such form as the Finance Minister may, after considering the suggestions, if any, of the Estimates Committee, settle.
• There shall be no discussion of the Budget on the day on which it is presented to the House.

Demands for Grants #

Article 113 of the Constitution mandates that the estimates of expenditure from the Consolidated Fund of India included in the Annual Financial Statement and required to be voted by the Lok Sabha are submitted in the form of Demands for Grants.

The Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement.

Generally, separate demands are made for the grants proposed for each Ministry.

Each demand contains first a statement of the total grant proposed and then a statement of the detailed estimate under each grant divided into items.

Demands are required to be made in the form of a motion but in practice, they are assumed to have been moved and are proposed by the Chair to save the time of the House.

General discussion on Budget #

Subsequently, on a day appointed by the Speaker, the House is at liberty to discuss the Budget as a whole or any question of principle involved therein, but no motion is moved nor is the Budget submitted to the vote of the House.

The Finance Minister has a general right of reply at the end of the discussion.

The Speaker may, if he thinks fit, prescribe a time limit for speeches.

Voting of demands for grants #

Motions may be moved to reduce any demand for grant.

No amendments to motions to reduce any demand for grant are permissible.

Cut motions #

A motion may be moved to reduce the amount of a demand in any of the following ways:

• ‘That the amount of the demand be reduced to Re.1/- representing disapproval of the policy underlying the demand. Such a motion shall be known as ‘Disapproval of Policy Cut’. A member who is giving notice of such a motion has to indicate in precise terms the particulars of the policy which he proposes to discuss. The discussion is confined to the specific point or points mentioned in the notice and it is open to members to advocate an alternative policy.
• ‘That the amount of the demand be reduced by a specified amount’ representing the economy that can be effected. Such specified amount may be either a lump sum reduction in the demand or omission or reduction of an item in the demand. The motion shall be known as ‘Economy Cut’. The notice indicates briefly and precisely the particular matter on which discussion is sought to be raised and speeches shall be confined to the discussion as to how economy can be effected.
• ‘That the amount of the demand be reduced by Rs.100/-’ in order to ventilate a specific grievance which is within the sphere of the responsibility of the Government of India. Such a motion shall be known as ‘Token Cut’ and the discussion thereon is confined to the particular grievance specified in the motion.

For the sake of convenience, usually the main motion for demand and the Cut Motion relating to it are put and discussed together in the House. Cut Motion, thus is a device to initiate the discussion on demand for grants. After discussion, first the cut motions are disposed off and thereafter, the demands for grants are put to vote of the House. Cut Motions are generally moved by members from

the opposition, and if carried, amount to a vote of censure against the government.

Speaker to decide admissibility #

The Speaker decides whether a cut motion is admissible or not under the rules and may disallow any cut motion when in his opinion it is an abuse of the right of moving cut motions or is calculated to obstruct or prejudicially affect the procedure of the House or is in contravention of the rules.

Notice of cut motions #

If notice of a motion to reduce any demand for grant has not been given one day previous to the day on which the demand is under consideration, any member may object to the moving of the motion. Such an objection generally prevails, unless the Speaker allows the motion to be made.

Vote on Account #

A motion for vote on account states the total sum required and the various amounts needed for each Ministry and Department.

Amendments may be moved for the reduction of the grant.

Discussion of a general character may be allowed on the motion or any amendments.

However, the details of the grant are not dis- cussed further than is necessary to develop the general points.

In other respects, a motion for vote on account is dealt in the same way as if it were a demand for grant.

Supplementary etc. grants and votes of credit #

Supplementary, additional, excess and excep- tional grants and votes of credit are regulated by the same procedure as is applicable in the case of demands for grants

Token grant #

When funds to meet proposed expenditure on a new service can be made available by reappropri- ation, a demand for the grant of a token sum may be submitted to the vote of the House. If the House assents to the demand, funds may be made available.

Appropriation Bill #

Under the Constitution, no money can be with- drawn from the Consolidated Fund of India without enactment of law by the Parliament. In pursuance of this, a Bill incorporating all the demands for Grants voted by the Lok Sabha, along with the expenditure charged on the Consolidated Fund, is introduced in the Lok Sabha. This Bill is known as the Appropri- ation Bill. The Bill, as the name suggests, intends to give legal authority to the government to appropriate the expenditure from and out of the Consolidated Fund.

Procedure regarding Appropriation Bill #

The procedure in regard to the passage of an Appropriation Bill is the same as for any other Bill, generally with only those modifications that the Speaker may consider necessary.

The debate on an Appropriation Bill, however, is restricted to those matters which has not already been raised while the relevant demands for grants were under consideration. No amendments can be proposed.

After the Bill is passed by the Lok Sabha, the Speaker certifies it as a Money Bill and transmits it to the Rajya Sabha. The latter House has no power to amend or reject the Bill, but has to give its concurrence. The bill, thereafter, is presented to the President for his assent.

Finance Bill #

At the time of presentation of the Annual Finan- cial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regu- lation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. It is accompanied by a Memorandum explaining the provisions included in it.

Procedure regarding Finance Bill #

In this rule “Finance Bill” means the Bill ordi- narily introduced in each year to give effect to the financial proposals of the Government of India for the next following financial year and includes a Bill to give effect to supplementary financial proposals for any period.

At any time after the introduction of a Finance Bill in the House, the Speaker may allot a day, for the completion of all or any of the stages involved in the passage of the Bill by the House. Thereafter, the Speaker, at the specified hour on the allotted day, forthwith puts every question necessary to dispose of all the outstanding matters in connection with the stages for which the day has been allotted

WEAKNESSES IN THE BUDGETARY PROCESS #

Many of the weaknesses in budgeting reflects the failure to address linkages between the various functions of budgeting. The following factors con- tribute to budget systems and processes that create a disabling environment for performance in the public sector, both by commission and by omission:

• Almost exclusive focus on inputs, with perfor- mance judged largely in terms of spending no more, or less, than appropriated in the budget;
• Input focus takes a short-term approach to budget decision making; failure to adequately take account of longer-term costs (potential and real), and biases in the choice of policy instruments (e.g., between capital and current spending and between spending, doing, and regulation) because of the short-term horizon.
• A bottom-up approach to budgeting means that even if the ultimate stance of fiscal pol- icy was appropriate (and increasingly after 1973 it was not) game playing by both line and central agencies led to high transaction costs to squeeze the bottom-up bids into the appropriate fiscal policy box;
• A tendency to budget in real terms, leading either to pressure on aggregate spending where inflation is significant (which was often vali- dated through supplementary appropriations) or arbitrary cuts during budget execution with adverse consequences at the agency level;
• Cabinet decision making focused on distrib- uting the gains from fiscal drag across new spending proposals;
• Cabinet and/or central agencies extensively involved in micro-decision making on all aspects of funding for ongoing policy;

• Last minute, across-the-board cuts, including during budget execution;
• Weak decision making and last-minute cuts cause unpredictability of funding for existing government policy; this is highlighted to the centre by central budget agencies on the alert to identify and rake back “fortuitous savings;”
• Strong incentives to spend everything in the budget early in the year and as quickly as possible, since the current year’s spending is the starting point for the annual budget haggle and the fear of across-the-board cuts during execution;
• Existing policy itself (as opposed to its fund- ing) subject to very little scrutiny from one year to the next. (This and previous point epitomize the worst dimension of incremental budgeting);
• Poor linkages between policy and resources at the centre, between the center and line agencies, and within line agencies because of incremental budgeting;
• A lack of clarity as to purpose and task and therefore poor information on the perfor- mance of policies, programmes and services, and their cost because of poor linkages;
• The linking together (in association with the point above) within government departments of policy advising, regulation, service delivery and funding and an aversion to user charging; and
• Overall, few incentives to improve the per- formance of resources provided.

Specific    Weaknesses    in    the    Indian Budgetary System and Implementation #

• Unrealistic budget estimates.
• Delay in implementation of projects.
• Skewed expenditure pattern with a major portion getting spent in the last quarter. of the financial year, especially in the last month.
• Inadequate adherence to the multi-year per- spective and missing ‘line of sight’ between plan and budget.

• No correlation between expenditure and actual implementation.
• Ad hoc project announcements.
• Emphasis on compliance with procedures rather than on outcomes.
• Irrational plan / non-plan distinction leads to inefficiency in resource utilization.

BUDGETARY REFORMS #

Attempts are continuously being made to over- come as many of the shortcomings as possible. In this respect recently the Union Cabinet has approved the proposals of Ministry of Finance on certain land- mark budgetary reforms as given below. All these changes will be put into effect simultaneously from the Budget 2017-18.

Merger of Railway Budget #

The presentation of separate Railway budget started in the year 1924, and has continued after independence as a convention rather than under Constitutional provisions.

Benefits of it #

• The merger was warranted so as to save the annual dividend liability of railways which runs to about Rs. 10,000 crores.
• This is a colonial practice which does not seem to rightly fit in the changed conditions. No other country has a similar practice today.
• The practice is mainly used by politicians for populist reasons without sound economic rationale.
• Over the years the general budget expendi- tures have been more than the railways and several ministries like defence have more expenditures than railways.
• The presentation of a unified budget will bring the affairs of the Railways to centre stage and present a holistic picture of the financial position of the Government.
• The merger is also expected to reduce the procedural requirements and instead it brings into focus, the aspects of delivery and good governance.

• Consequent to the merger, the appropriations for Railways will form part of the main Appropriation Bill.

Advancement of Budget Date #

Benefits of it #

• This would pave the way for early completion of Budget cycle and enable Ministries and Departments to ensure better planning and execution of schemes from the beginning of the financial year.
• It would lead to utilization of the full working seasons including the first quarter.
• This will also preclude the need for seeking appropriation through ‘Vote on Account’ and enable implementation of the legislative changes in tax laws for new taxation meas- ures from the beginning of the financial year.
• This would synchronize the transfer of funds to states with their own state budgets.
• However, this will lead to less expenditure by various ministries in the current fiscal year, which can be a deterrent for growth.

Merger of Plan and Non-Plan classification #

Benefits of it #

• The Plan/Non-Plan bifurcation of expenditure has led to a fragmented view of resource allocation to various schemes, making it dif- ficult not only to ascertain cost of delivering a service but also to link outlays to outcomes.
• The bias in favour of Plan expenditure by Centre as well as the State Governments has led to a neglect of essential expenditures on maintenance of assets and other establishment related expenditures for providing essential social services.
• The system is based on past commitments and requirements and residual resources allocated to Plan budget. This has resulted in reduced flexibility in allocation within the Plan budget.
• The distinction was important earlier as Plan- ning Commission used to play an important role in determining the quantum of plan expenditure. However, with the abolition of

the Planning Commission, the relevance of plan and non-plan expenditure is lost.

• A better indicator of productive and general expenditure will be a distinction under the heads of revenue and capital. The merger is expected to provide appropriate budgetary framework having focus on the revenue, and capital expenditure.

Medium Term Budget Frameworks #

Medium-term budget frameworks form the basis for achieving fiscal consolidation. They need to clearly state the government’s medium term fiscal objectives in terms of high-level targets such as the level of aggregate revenue, expenditure, deficit/ surplus, and debt. They then need to operationalize these high-level targets by establishing hard budget constraints for individual ministries and programmes over a number of years.

FRBM ACT #

What is FRBM Act? #

• Financial Responsibility and Budget Man- agement Act 2003 was passed to provide a legislative framework for reduction of deficit and debt of the Government to sustainable levels over a medium term.
• This was done to ensure inter-generational equity in fiscal management and long term macro-economic stability.

Salient points of the Act #

• Achievement of Fiscal Deficit of 3% of GDP and eliminating Revenue Deficit.
• Prohibits borrowing by Government from RBI – Making Monetary Policy independent of Fiscal Policy.
• Prevent monetization of Government deficit – Ban on purchase of primary issues of Central government by RBI from 2006.

Act mandates 4 Documents to be laid before Parliament:

1.     Medium Term Fiscal Policy Statement: #

• 3 year rolling targets for 5 fiscal indicators with respect to GDP at market price and the strategy to attain them.

• Five fiscal targets are: Revenue Deficit, Effective Revenue Deficit, Fiscal deficit, Tax to GDP Ratio and Total Outstanding Debt as percentage of GDP.
• Fiscal Policy Strategy Statement: Presented at the time of Budget and outlines the Govt. strategic priorities for ensuing financial year related to Taxation, Borrowing, Expenditure, Investment, Pricing, Guarantees etc.
• Macro-economic Framework Statement: Presented at the time of budget and contains the expected GDP growth rate with under- lying assumption, Fiscal balance of Central Government and the external sector balance of Economy.
• Medium Term Expenditure Framework Statement: This has been added in 2012 and presented in Monsoon Session.

Need For Paradigm Shift in FRBM Act #

Why the Debate? #

Union Minister has recently commented that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively of the economy. This suggests that there should be an inverse correlation between fiscal deficit (fiscal expansion) and bank credit (monetary expansion). This is to ensure adequate money supply to the economy in all the cycles.

Why   Fiscal   Deficit   target   should   be relaxed during downturn of economy? #

Banks and financial institutions funds business and others, and it is that credit money which drives the economy.

If, for some reason including reasons like lack of business confidence or rising NPAs, the bank credit to the economy does not adequately grow, economic growth will suffer due to lack of adequate money.

That is when the Budget needs to step in, to pump money into the economy by incurring deficit, and, for the purpose, borrow the money lying with banks or even by printing more money, if that is needed.

Crowding In Effect – Government spending during economy downturn will boost the economy

and subsequently draw investment from private industries too.

Why   Fiscal   Deficit   target   should   be adhered to? #

• Frequently amending the FRBM target or not meeting them will raise concern in the mind of investor and will lead to lower investment.
• Better fiscal health will improve the credit rating of India
• Lower fiscal deficit will help to avail cheap credit for development, as higher FD fuels inflation and hence higher rate of borrowing
• It will also bring India closer to its emerging market peers making India an attractive des- tination for FDI.

Way Forward #

Adopting FD target as a range rather than 3% of GDP as fixed number. This would give the neces- sary policy space to deal with dynamic and volatile situations like global economic and financial market uncertainty, a slowdown in China, and tepid private investment demand domestically. Expenditure of the government should be on the creation of long term public assets.

MEDIUM   TERM   DEBT   MANAGE- MENT STRATEGY #

The government of India has put MTDS in public domain for a period of three years (2015-18).

The plan aimed at lowering cost of borrowings and expanding the list of eligible investors which would deepen the local sovereign bond market.

What is MTDS? #

Medium-Term Debt Management Strategy is a framework that the government intends to use over the medium-term to ensure:

• Debt levels stay affordable and sustainable.
• New borrowings are for a good purpose and that the costs and risks of borrowing are minimized.
• MTDS covers both external and internal debts including portfolio of government guarantees and contingent liabilities.

• Reserve Bank of India acts as the manager of govt. debt.

Top-Down Budgeting Techniques #

Budgeting has traditionally operated on a bot- tom-up principle. This means that all agencies and all ministries send requests for funding to the finance ministry. These requests greatly exceed what they realistically believe they will get. Budgeting then consists of the Finance Ministry negotiating with these ministries and agencies until some common point is found. This bottom- up system has several disadvantages to it.

1. It is very time consuming and it is essentially a game; all participants know that the initial requests are not realistic.
2. This process has an inherent bias for increas- ing expenditures; all new programmes, or ex- pansion of existing programs, are financed by new requests; there was no system for real- location within spending ministries and there were no pre-set spending limits.
3. It was difficult to reflect political priorities in this system as it was a bottom-up exercise with the budget “emerging” at the end of this process. This manner of budgeting is now be- ing abandoned and replaced with a new top- down approach to budget formulation. This has been of great assistance in achieving fis- cal consolidation.

The starting point for the new system is for the government to make a binding political decision as to the total level of expenditures and to divide them among individual spending ministries. This decision is made possible by the medium-term expenditure frameworks which contain baseline expenditure information, i.e. what the budget would look like if no new policy decisions were made.

The political decision is whether to increase expenditures for a high-priority area, for example education, and to reduce expenditures, for exam- ple defence programs. Only the largest and most significant programmes reach this level of political reallocation. The key point is that each ministry has a pre-set limit on how much it can spend.

Relaxing Central Input Controls #

This is based on the simple premise that the

heads of individual agencies are in the best posi- tion to choose the most efficient mix of inputs to carry out the agency’s activities. The end-result is that an agency can produce the same services at less cost, or more services at the same cost. This greatly facilitates fiscal consolidation strategies by mitigating their effects on services.

Relaxing central input controls operates at three levels.

1. The consolidation of various budget lines into a single appropriation for all operating costs (salaries, travel, supplies, etc.).
2. The decentralization of the personnel man- agement function.
3. The decentralization of other common ser- vice provisions, notably accommodations (buildings). This can be seen as the public sector’s version of “deregulation.”

An Increased Focus on Results #

An increased focus on results is a direct quid pro quo for relaxing input controls as described above. Accountability in the public sector has traditionally been based on compliance with rules and proce- dures. It didn’t matter what you did as long as you observed the rules. Now, when the public sector is deregulated, a new results-based system is needed to hold managers accountable.

This is a fundamental change: holding managers accountable for what they do, not how they do it.

Budget Transparency #

The budget is the principal policy document of government, where the government’s policy objec- tives are reconciled and implemented in concrete terms. Budget transparency – openness about pol- icy intentions, formulation and implementation – is therefore at the core of good governance agenda. If we take a look at fiscal transparency in concrete terms, we can say that it has three essential elements:

• first is the release of budget data: The systematic and timely release of all relevant fiscal information is what we typically associ- ate with budget transparency. It is an absolute pre- requisite, but it is not enough.
  • The second element is an effective role for the legislature: It must be able to scrutinize the budget reports and independently review them. It must be able to debate and influence budget policy and be in a position to effec- tively hold the government to account. This is both in terms of the constitutional role of the legislature and the level of resources that the legislature has at its disposal.
  • The third element is an effective role for civil society, through the media and non-gov- ernmental organizations. Citizens, directly or through these vehicles, must be in a position to influence budget policy and must be in a position to hold the government to account. In many ways, it is a similar role to that of the legislature albeit only indirectly.