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Business News/ Opinion / Online-views/  Opposing view | (Yet) another expenditure commission
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Opposing view | (Yet) another expenditure commission

The Bimal Jalan panel would do well to address FRBM Act-related issues as they are at the very heart of expenditure management

Former RBI governor Bimal Jalan has been appointed as head of the three-member Expenditure Management Commission. Photo: Ramesh Pathania/Mint Premium
Former RBI governor Bimal Jalan has been appointed as head of the three-member Expenditure Management Commission. Photo: Ramesh Pathania/Mint

Bimal Jalan, the former governor of the Reserve Bank of India and former Union finance secretary, has just been appointed as head of the three-member Expenditure Management Commission that was announced by finance minister Arun Jaitley in his maiden budget speech last month.

Actually, P. Chidambaram, in his very first budget in July 1996 as finance minister in the United Front government, had proposed a similar initiative but with a crucial difference. These were his exact words: “I accept the position that sound expenditure management is not a mere technocratic exercise, but involves issues of equity, fairness and non-discrimination. In order to work out a reasonable policy in this regard, I propose to appoint a high-level Expenditure Management and Reforms Commission comprising distinguished political leaders, economists and administrators". He tried to persuade his predecessor Jaswant Singh to chair the commission. The Bharatiya Janata Party veteran welcomed the proposal but declined the offer, saying that party politics prevented him from doing so. Thereafter, Chidambaram did not choose to move further on this idea, although he was able to later come out, for the first time, with a discussion paper on subsidies classified as “merit" and “non-merit".

Then, in February 2000, when Yashwant Sinha was finance minister, an Expenditure Reforms Commission was set up under the chairmanship of K.P. Geethakrishnan, also a former Union finance secretary. By mid-2001, this commission had submitted 10 detailed reports, mostly on downsizing central government ministries and departments to effect savings in administrative expenditure and on reducing different subsidies.

Since then, the expenditure scene has undergone a sea change. Buoyed by an average annual real gross domestic product (GDP) growth rate of around 7.7% over the past decade, social sector expenditures especially have zoomed. New public expenditure commitments have been taken up on a very large scale in areas such as rural employment, education, health, infrastructure and social security. The centre and states both have passed legislation on fiscal responsibility. The goods and services tax (GST) has been on the agenda for quite some time. The unique identification number initiative, also known as Aadhaar, has been launched. Therefore, even though most of the Geethakrishnan Commission’s recommendations went into cold storage, there is clearly a need to revisit the expenditure scenario. Parliament passed the Fiscal Responsibility and Budget Management (FRBM) Act in 2003. This was indeed a milestone, but before the interim budget was presented in February this year, Montek Ahluwalia, the then deputy chairman of the Planning Commission, had written to Manmohan Singh, calling for a fresh look at fiscal parameters in light of the experience we have had, the limitations inherent in some of the key parameters used as targets and international practice as well (which, for example, does not treat disinvestment proceeds as ‘revenue’). He had argued that we must (i) monitor the “primary deficit", that is the fiscal deficit minus interest payments which are technically not ‘expenditures’ in the national accounting sense; (ii) use the concept of ‘structurally adjusted deficit’ to take into account variations in GDP growth so that fiscal policy is counter-cyclical rather than being pro-cyclical as at present; and (iii) abandon the concept of revenue deficit, since, for instance, grant transfers to states to finance their capital expenditure is treated as revenue expenditure of the centre.

Ahluwalia further contended that budgetary support to the railways or government’s contribution to the capitalization of public sector banks should not be included in calculations of the fiscal deficit. The Jalan Commission would do well to address these FRBM Act-related issues since they are at the very heart of expenditure management.

On the GST, which would indeed be a major landmark, much progress has been made, although both industrialized states such as Gujarat and poorer states such as Madhya Pradesh have been voicing their opposition. The Jalan Commission has been given 18 months to complete its exercise to be in time for the 2016-17 budget to be presented in February 2016. In the meantime, GST may well become a reality, altering the fiscal landscape. There have been some concerns that the centre’s finances may get weakened. In a public speech, given a couple of years back when he was chairman of the standing committee on finance, Yashwant Sinha himself had remarked that “I have a feeling that the government of India is surrendering far more authority under the GST than the states are, but in the government of India, nobody seems to be worried. So be it, but a future finance minister who takes office after the GST comes into force will encounter all these problems".

On Aadhaar, it is good that the prime minister seems to have intervened decisively and dispelled all doubts about its future. It is to continue as before and broadly according to the plan prepared when Manmohan Singh was prime minister. The Aadhaar route, which will eliminate fraud and which will ensure direct delivery of financial benefits to families for whom they are intended, is less politically hazardous than cutting expenditure. True, there are still formidable problems to be tackled to enable its use for delivering kerosene, LPG (liquefied petroleum gas) and fertilizer subsidies, but estimates from pilots show that Aadhaar can save at least 20% of government expenditure on benefits transfers (estimated at something like a whopping 3.5 trillion per year).

Finally, almost 30 years back, the distinguished economist Sukhamoy Chakravarty had spoken about the emerging “fiscal sociology" in the public discourse which gives far greater priority to managing government expenditure than to raising its revenue. If anything, the balance between the two has got even more skewed, and barring the Left parties, nobody even talks about increasing the unacceptably low tax-GDP ratio in our country (around 16% of GDP for centre and states combined). Clearly, there is an urgent need for a revenue-raising counterpart to the Jalan Commission on expenditure cutting.

The author is a Rajya Sabha MP and former Union minister.

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Published: 18 Aug 2014, 04:07 PM IST
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