Spending well and wisely

My last column dwelt on tax reforms. This column is about expenditure reforms, a subject that has been much talked about but has seen little action.

My last column dwelt on tax reforms. This column is about expenditure reforms, a subject that has been much talked about but has seen little action. Tax reforms have been significant by way of moderating rates, improving information systems, and inducing improved and less onerous compliance.

Expenditure reforms are intrinsically more difficult. They involve many more stakeholders, impinge on Centre-state relations and make evaluation of public outlays less liable to quantifiable variables. Besides, it is easier to restructure tax rates than discontinue expenditure. Public outlays on schemes and projects have infinite tenacity and vested lobbies make it almost impossible to roll back ongoing programmes. The result is that successive budgets and finance ministers make incremental addition for on-going projects while adding some new favourites.

Given our electoral cycle, the timing of any serious expenditure reforms is important, for the honeymoon period in an era of coalition politics is short-lived. In fact, the energies of any newly-elected government get substantially depleted in fulfilling electoral promises 8212; quite a few involve subsidies, public works, and social-sector schemes, all of which constitute outgos from the Consolidated Fund.

No serious expenditure reforms can commence without considerable preparatory work. So how should we prepare for expenditure reforms? While the next regular budget would be presented by the new government which comes to office, this is the time to undertake the preparatory work. Besides, if revenue buoyancy falters during a period of economic slowdown, issues of fiscal deficit will be in sharper focus. In the past, expenditure reforms and the several commissions and committees appointed to make recommendations have invariably centered on rationalising subsidies, restructuring public-sector undertakings and down-sizing the government.

None of these have made much headway. Subsidy reforms are derailed and have in fact only got worse at a time when food security and inflation are the main worries. Disinvestment programmes have been discontinued and ingenious ways to revive public-sector undertakings are in vogue. There is also little appetite for downsizing government since this is inextricably linked with redefining the role and functions of government. Aggressive market liberalisation does not mesh well with understandable priority on a model of inclusive growth. None of the aforesaid issues will make much progress without political appetite and this may not be the most appropriate time to suggest any significant changes.

Here are some ideas on what can reasonably be done by way of preparatory work:

8226; First, to constitute a high level group jointly with the Comptroller 038; Auditor General for reclassification of government accounts. This must go into the oft-repeated distinction on plan and non-plan expenditure. The classification between capital and revenue expenditure with value judgment attached to one form of expenditure vis-agrave;-vis the other are based on questionable assumptions. Treating devolutions to states for health and education as revenue expenditure, designed to be discouraged, are some examples. There are other thorny issues of bringing greater transparency in treating contingent liabilities.

Story continues below this ad

8226; Second, give serious thought to alternative and innovative ways for implementing public outlays.

8226; Third, scaling up of successful models of participative public expenditure management systems avoiding its well-known pitfalls deserves consideration.

8226; Fourth, notwithstanding the room for manoeuvre, a more honest assessment on attrition of ongoing public expenditure portfolio must be subjected to an independent evaluation. The vested interest of state and central government and other innumerable agencies seeking the continuation of many existing schemes is well-known. Setting up an independent or even bipartisan parliamentary group on evaluation of existing expenditure portfolios would help in more sensible segregation.

8226; Fifth, foster an open debate on the most acceptable form for subsidy administration. Is there clarity on tracking beneficiaries? Enlarging the bouquet of choice for the intended beneficiaries in seeking the benefit from competing sources like alternative ration shops, public or private schools through food stamps or education stamps and creating competition to secure a larger share of available finance need encouragement.

Story continues below this ad

8226; Finally, taking a holistic view of public expenditure management system based on the four critical areas of formulation, analysis, tracking and performance evaluation. The ex-post analysis by the CAG needs restructuring to build in ex-ante systems where corrections can be made in real time.

If expenditure reforms are to be made in 2009, the time to begin is now. Chidambaram owes it to himself or whoever his successor might be to initiate the preparatory process.