Model Answer
0 min readIntroduction
Public Expenditure Management (PEM) refers to all the rules and processes used by governments to plan, execute, and control public spending. Effective PEM is crucial for achieving macroeconomic stability, efficient resource allocation, and equitable growth. Prior to the 1991 liberalization, India’s PEM was largely characterized by centralized planning, a dominant role of the public sector, and limited fiscal transparency. However, the post-liberalization era, marked by economic reforms, globalization, and increased social sector commitments, has presented significant challenges to the government’s ability to manage public expenditure effectively, demanding a shift towards greater efficiency, accountability, and sustainability.
Pre-Liberalization PEM: A Snapshot
Before 1991, PEM was largely driven by the Planning Commission’s Five-Year Plans. Budget allocation was heavily influenced by political considerations and focused on expanding the public sector. Fiscal deficits were often financed through borrowing from the Reserve Bank of India, leading to limited fiscal discipline. Transparency was low, and public accountability mechanisms were weak.
Post-Liberalization Challenges to PEM
1. Increased Demand & Fiscal Constraints
Liberalization led to increased demands on the budget from various stakeholders – private sector seeking infrastructure development, a growing middle class demanding social services, and a more vocal civil society. Simultaneously, the government faced fiscal constraints due to reduced tariff barriers, increased competition, and the need to maintain macroeconomic stability. This created a tension between rising expectations and limited resources.
2. Rise of Off-Budget Financing
To circumvent fiscal deficit targets, governments increasingly resorted to off-budget financing mechanisms like Special Purpose Vehicles (SPVs) and Public Sector Undertaking (PSU) borrowing. While these mechanisms provided flexibility, they lacked transparency and often concealed the true extent of public debt. The Uday bonds scheme (2015) for discoms is a prime example, shifting debt from state balance sheets to PSUs.
3. Fragmentation of Expenditure Control
The decentralization of powers to states and local bodies, while positive for democratic governance, fragmented expenditure control. Coordination between different levels of government became challenging, leading to duplication of efforts and inefficient resource allocation. The 73rd and 74th Constitutional Amendment Acts (1992) increased devolution but also required stronger monitoring mechanisms.
4. Weaknesses in Budgeting & Accounting
Traditional budgeting processes remained largely incremental, focusing on past spending patterns rather than performance and outcomes. Accounting systems were often cash-based, providing limited information on the actual cost of services and the effectiveness of public programs. The move towards accrual-based accounting, as recommended by various committees, has been slow.
5. Lack of Transparency & Accountability
Despite efforts to improve transparency, significant gaps remain in public expenditure reporting. Information on contracts, procurement processes, and the performance of public programs is often difficult to access. Accountability mechanisms, such as social audits and citizen charters, are not always effectively implemented. The Right to Information Act (2005) has improved access to information but its full potential remains unrealized.
6. Populist Policies & Subsidies
Political pressures often lead to the implementation of populist policies and subsidies, which strain the budget and divert resources from productive investments. The food subsidy bill, for example, has consistently exceeded budgetary allocations, creating fiscal imbalances. Targeting inefficiencies in subsidy delivery remain a major challenge.
Recent Reforms & Initiatives
The government has undertaken several reforms to address these challenges, including:
- Fiscal Responsibility and Budget Management (FRBM) Act, 2003: Aimed at achieving fiscal consolidation and macroeconomic stability.
- Goods and Services Tax (GST), 2017: Simplified the indirect tax system and improved revenue collection.
- Government Accounting Standards Advisory Board (GASAB): Promoting accrual-based accounting and improving the quality of financial reporting.
- Direct Benefit Transfer (DBT): Reducing leakages and improving the efficiency of subsidy delivery.
Conclusion
In conclusion, public expenditure management in India has become increasingly complex in the post-liberalization period due to heightened demands, fiscal constraints, and evolving governance structures. While reforms like the FRBM Act and GST have made progress, significant challenges remain in areas such as off-budget financing, transparency, and accountability. Strengthening budgeting processes, improving data quality, and enhancing citizen participation are crucial for ensuring that public resources are used effectively and efficiently to achieve inclusive and sustainable development. A continued focus on performance-based budgeting and robust monitoring mechanisms is essential for navigating these challenges.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.