- Mention the clear definition of Public Expenditure Management.
- Reason what changed after liberalisation, that necessitated the changes in budget making, with examples.
- Also, provide ways to strengthen the budget-making process on the whole.
Public expenditure management (PEM) is the approach of prudent use of government financial resources so as to achieve good governance. Primarily it concerns with overall fiscal discipline, allocation of resources, operational efficiency and macro-economic stability.
Post-1991 reforms the government’s role has changed from being the driver of economic growth to that of a facilitator of the growth process which has borne new challenges in budget making.
Challenges in budget-making in the post-liberalization era:
- 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.