Government should undertake expenditure restructuring: RBI

A report on the need of expenditure restructuring of the Centre and states prepared by a working group of Reserve Bank of India (RBI) has observed that the government should improve on the practices for performing its core function of providing public services. The report is expected to be drawn upon by the Thirteenth Finance Commission, which will decide on the new formula for sharing taxes between Centre and the states.

The report "Introducing expenditure quality in intergovernmental transfers: a triple-e framework'' has suggested measures like data re-classification, increasing accountability and transparent budgetary procedures in the context of Centrally Sponsored Schemes (CSS), revealing contingent liabilities in the Budget and mandating the introduction of performance and outcome budgeting . The measures are likely to hurt entrenched vested interests and face stringent opposition.

"Hence, it is our firm belief that even though these are hard decisions and require the consensus of policymakers and politicians, these will necessarily need to be imposed,'' notes the report.

Expenditure restructuring will require that the government focuses more on its primary responsibilities rather than thinly spread the resources in many areas where the private sector can provide the necessary services. However, such an improvement in the 'quality' of public sector budgets would require some macro issues to be tackled, which will not be possible without the consensus of policy makers and politicians across party lines, argues the report.

There has been considerable debate on the utility or otherwise of the classification of expenditure into plan and non-plan. It has been argued that this distinction is dysfunctional. The distinction focuses on new schemes, projects and extensions to currently running schemes, which alone qualify for being included in the Plan, resulting in neglect of maintenance of the existing capacity and service levels.

While a lot of effort is made both by the Centre and the states to achieve a large increase in Plan size, its impact is often negated by lack of maintenance of the service delivery capacity already created, said the report.

The Plan and Non-Plan dichotomy also results in a piecemeal view of resource allocation to various sectors. With the emphasis shifting to social sectors where salary costs are high, routine bans on recruitment for non-plan posts supposedly to conserve expenditure, cause serious problems for service delivery. Health and education are two sectors that are badly hit by such bans. Thus, there is a strong case against the use of these categories, suggested the report.

The last two decades have seen a massive increase in both the number of CSS as well as funds available under the individual schemes. Theoretically, there are two arguments in support of the CSS.

First, there is no doubt that there is merit in using central resources to tackle the specific obstacles that will prevent the achievement of inclusive growth. This can be done by effectively earmarking resources to support state expenditure in particular areas such as rural development, health, education, agriculture and irrigation. Unless this is done, it will be difficult to give a special impetus to these critical areas. Second, the mechanism of CSS enables the Centre to address problems as they exist in different states without being constrained by the Gadgil formula, which would otherwise guide the transfer of untied funds.

However, herein lies the catch. The virtuous element, while important for flexibility, also gives scope for misuse at the hands of political agents who would be inclined to favour their own political constituencies - a phenomenon popularly known as pork barrel politics. Also, large proportion of the funds transferred to the states under the CSS are also being routed to the district-level bodies directly by the central government, bypassing the state governments.