Opinion Why we need norms on government spending
There is a need to revisit the subject of expenditure allocations. The next Finance Commission may consider drawing up such norms
The basic principles of public economics talk about the state as being responsible for fostering equality through redistribution. 
In a democracy, people vote political parties to office. The party or coalition that crosses the halfway mark forms the government and decides on where to spend public money. No referendum on the expenditure allocation or priorities is taken.
The choice of expenditure, where the money is actually spent, is fraught with controversy. The general belief is that governments should get the most economic value from their spending. This means that the multiplier effect to society and the economy at large should be maximised. This happens when more is allocated towards capital expenditure. However, more is allocated towards “non-development expenditure” which can also empower the recipients.
The basic principles of public economics talk about the state as being responsible for fostering equality through redistribution. The analogy with Robin Hood is stark though legal means are used. A progressive tax structure is followed. The concept of redistribution is, however, nebulous. For some, it can mean giving a “freebie” to the poorer sections of society.
The common man will prefer having “regular” trains, perhaps not Vande Bharat. For instance, an a/c chair car from Mumbai to Nashik costs Rs 380 on a normal train (Panchvati Express) while Vande Bharat charges Rs 720.
The common man will vote for projects which generate employment and income, not make them worse off, if, for instance, this involves giving up their land for the larger good. The issue of compensation is still contentious. And besides the landless labour attached to the land will be out of employment. But this decision is left to the government. This is why there are varied views on spending priorities.
Hypothetically, if all possible avenues of discretionary expenditure (which excludes fixed commitments like salaries, defence and interest payments) were put to a vote, individual choices would lean towards “freebies”. The Amma meal in Tamil Nadu, free electricity scheme in Delhi, free travel for women in public transport — these would find favour with the majority as most people belong to the lower end of the income distribution. The views of the richer/elites would be sidelined. This is why it has been observed that states tend to be more inclined to give freebies as they are closer to the citizens than the Centre.
States also have a different position on so-called freebies. There is an argument that when cycles, saris and dhotis are distributed for free, the expenses incurred are not totally wasteful as they do incentivise production in their respective industries. The same holds for free or subsidised meals. In fact, free power and water to farmers in Punjab has been defended on the grounds of wheat prices being kept subdued as in the absence of the same, the costs would have gone up. These arguments may be considered fair by some.
This line of thinking can also be extended to loan waivers. The argument goes that when bad loans of industry are provided for by banks or written off from their books, the depositors’ money is being unfairly treated, while a loan waiver comes clean as it is being provided for by the government for a vulnerable section.
How then are governments to decide where to spend their limited resources?
When parties contest elections, promises are made to the voters. While there is a divergence between promises and delivery based on fiscal constraints, in general parties do try not to renege. But this is a competitive arena as each party promises more than the other.
One way out is to put a cap. And to ensure that there is parity across all the levels of government. There is a need to revisit the subject of expenditure allocations. The next Finance Commission may consider drawing up such norms.
The writer is Chief Economist, Bank of Baroda and author of Corporate Quirks: The darker side of the sun. Views are personal
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