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. 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 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.

... contd.

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