Relevance: GS 3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Key Phrases: Goods and Services Tax (GST), GST compensation, Public Expenditure Management, Quality of Public Expenditure, Performance Budgeting, Outcome budgeting, Triple-E framework-expenditure adequacy, effectiveness and efficiency.

Why in News?

• The 5-year period of GST compensation will end on 30 June and there is a growing demand from many States to extend the GST compensation mechanism beyond that date.

Expenditures of the Government

• Expenditure is referred to as the act of spending time, energy or money on something. In economics, it means money spent on purchasing any goods or services.

What are the 3 types of Expenditure?

The 3 types of expenditure are

• Capital Expenditure;
• Revenue Expenditure and
• Deferred Revenue Expenditure.

Revenue expenditure is usually recurring expenses, advanced payment to goods and services is known as deferred expenditure and capital expenditure is a one-time cost.

What are the Types of Capital Expenditure?

• Capital expenditure can be broadly classified into 2 different types – expenses incurred or funds required for maintaining the existing operations and the second type of capital expenditure are the expenses incurred to enable growth in the future.

Need for Prudent Public Expenditure Management:

• Though State governments want GST compensation extended, they are aware that the proceeds of GST cess collection will have to be used to service the debt raised in the last two financial years to meet the compensation shortfall.
• Given the uncertainty over the extension of GST compensation and the possibility of it tapering off at least in the medium term, States must devise strategies toward prudent public expenditure management.
• The 13th Finance Commission had suggested that due weightage be given to “the need to improve the quality of public expenditure to obtain better outputs and outcomes” from fiscal transfers.

Important Constituents of the Quality of Public Expenditure

• An important constituent of the quality of public expenditure is reducing committed expenditures in budgets and focusing on outlays that are “future-” and “growth-oriented”.
• This entails an assessment of the institutional arrangements relevant to the fiscal rules and budgetary procedures in States.

Steps taken:

• Performance Budgeting:
  • As a first step, a system of performance budgeting was introduced to assess performance against set goals/objectives.
  • However, this was not able to establish a clear one-to-one relationship between financial budgets and performance.
• Outcome Budgeting:
  • Outcome budgeting was introduced in 2006-07, which also recognized that outlays do not necessarily mean outcomes.
• Triple E Framework:
  • Reserve Bank of India (RBI) study in 2009 proposed a “triple E framework” to assess expenditure quality, which has constituents of expenditure adequacy, effectiveness, and efficiency.
  • Expenditure adequacy is termed focusing on the government’s primary role, effectiveness is about assessing performance, and efficiency involves an assessment of the output-input ratio.

Present patterns of public expenditure:

• Present patterns of public expenditure in many States are unlikely to pass the test set out by the RBI study’s ‘triple E’ framework.
• As new models of welfarism have emerged, the adequacy of spending on provisioning for public goods itself is under strain.
• Newer and narrower lists of public goods have been the outcome of expenditure provisioning, and these are not necessarily future-oriented.
• The classic case of new welfarism has been the proliferation of subsidies and freebies. Increased allocations for these have often resulted in inadequate allocations for public goods, and hence, low provisioning levels.
• Once expenditure adequacy is undermined with expanded subsidies and freebies, the scope for assessing effectiveness and efficiency gets narrower and is limited to expanding the coverage of such schemes.
• States would ultimately indulge in a distorted version of fiscal competition to expand their scope and penetration, resulting in a race to the bottom in terms of provisioning for future growth.
• Even though freebies and subsidies increase private consumption and could generate growth in the short term, these reduce fiscal space in the long term.
• That is, the availability of budgetary room that allows state governments to provide resources for a higher growth trajectory without any threat to the sustainability of their financial position gets curtailed.

What needs to be done?

• Additional fiscal space:
  • As the share of committed expenses in the total expenditure of many bigger states is high, additional fiscal space can only be created through two routes:
    • Either by exploring avenues for enhancing both tax and non-tax revenues or
    • By careful expenditure management.
  • As possibilities for the first route are constrained within the federal system, the second route could be a pragmatic approach.
  • In this context, getting expenditure priorities right and efficiently utilizing funds is of paramount importance.
• Rationalization of Expenditure:
  • It includes reassessing the continued desirability of specific expenditure programs, such as unbridled subsidy expansion.
  • It would help in realizing possible efficiency gains in the provision of public goods and services, and thus create fiscal space which could then aim for an expenditure mix that is more effective in promoting growth.

Conclusion:

• At this juncture, there exists a need for States to look beyond GST compensationand adopt a long-term view to manage finances.
• Armed with enhanced collective bargaining power, even if GST compensation gets extended beyond June, States shall only gain a short-term source of revenue.
• The long-term solution rests on state efforts at
  • revenue-raising;
  • expenditure re-prioritization or rationalization and
  • judicious borrowings.
• These would raise their potential growth trajectory and open up alternate channels for the creation of fiscal space.
• State Finance Commissions (SFCs) should play a key role in this agenda.
  • Unfortunately, in most States, the governments are either apathetic towards the institution of SFCs, or, in certain cases, poor implementers of the recommendations made. For the sake of their finances, states must change this.

Source: Live-Mint

Mains Question:

Q. “States should look beyond GST compensation and adopt a long-term view on the quality of public expenditure.” Analyze in context of growing demand from many States to extend the GST compensation mechanism.