Roadmap for Answer Writing
1. Introduction
- Objective: Introduce the concept of public expenditure management (PEM) and its relevance in the context of budget-making.
- Definition: Explain PEM as the prudent use of government financial resources to achieve good governance, fiscal discipline, and macroeconomic stability.
2. Context of Public Expenditure Management
- Post-Liberalization Overview: Briefly outline the LPG reforms of 1991 and their impact on the Indian economy.
3. Key Challenges in Public Expenditure Management
A. Exposure to Global Economic Shocks
- Fact: Global events like the 2008 financial crisis and fluctuations in crude oil prices significantly affect domestic economic stability and budget estimates (Source: Reserve Bank of India).
- Impact: Increased vulnerability of the economy to external factors.
B. Fiscal Policy Constraints
- Fact: The FRBM Act, 2003 mandates keeping the fiscal deficit within 3% of GDP, which constrains government spending on welfare and infrastructure (Source: Ministry of Finance).
- Impact: Difficulty in balancing social support with fiscal discipline.
C. Banking Sector Challenges
- Fact: Post-liberalization, the government is required to recapitalize public sector banks, which are unable to do so independently (Source: Economic Survey).
- Impact: Increased financial burden on the government.
D. Privatization and Disinvestment Pressures
- Fact: The growth of the private sector has led to calls for privatization of inefficient public sector enterprises (PSEs) (Source: NITI Aayog).
- Impact: Challenges in maintaining service delivery while transitioning to privatization.
E. Narrow Tax Base
- Fact: Despite rising incomes, the income tax base has not expanded significantly, limiting government social spending (Source: Ministry of Finance).
- Impact: Increased subsidy burden and reduced capital investment capacity.
F. Inadequate Institutional Capacity
- Fact: Many government schemes face underutilization due to poor implementation and structural bottlenecks (Source: Bimal Jalan Committee Report).
- Impact: Inefficiency leads to cost overruns and ineffective resource allocation.
4. Conclusion
- Summary: Recap the challenges of public expenditure management in the post-liberalization context, emphasizing the need for effective policies.
- Call to Action: Highlight the importance of rationalizing subsidies and enhancing institutional capacity to improve PEM.
Relevant Facts
- Source: Reserve Bank of India, Ministry of Finance, Economic Survey, NITI Aayog, Bimal Jalan Committee Report.
- Key Figures:
- Fiscal Deficit Target: 3% of GDP as per the FRBM Act, 2003.
- 2008 Financial Crisis: A significant global economic event impacting India.
This roadmap provides a structured approach to answering the question while ensuring clarity and accessibility of information.
Public Expenditure Management Post-Liberalization
1. Context of Post-Liberalization Period:
2. Challenges in Public Expenditure Management:
3. Recent Examples:
4. Measures to Address Challenges:
In conclusion, managing public expenditure in the post-liberalization period requires balancing economic growth, social needs, and fiscal discipline while adapting to changing economic dynamics and ensuring effective use of resources.
Model Answer
Introduction
Public expenditure management (PEM) refers to the efficient use of government financial resources to achieve good governance, encompassing fiscal discipline, resource allocation, operational efficiency, and macroeconomic stability. Since the liberalization, privatization, and globalization (LPG) reforms of 1991, PEM has presented several challenges for the Government of India, particularly in the context of budget-making.
Challenges in Public Expenditure Management
1. Exposure to Global Economic Shocks
The integration of the Indian economy into the global market has made it vulnerable to external economic shocks, such as the 2008 global financial crisis, fluctuations in crude oil prices, and trade wars. These shocks significantly impact domestic budget estimates and economic stability.
2. Fiscal Policy Constraints
The government faces pressure to increase spending on infrastructure and welfare schemes while adhering to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which mandates keeping the fiscal deficit within 3% of GDP. Balancing these demands is a considerable challenge.
3. Banking Sector Challenges
Post-liberalization, the government has had to recapitalize public sector banks, which struggle to operate profitably while ensuring financial inclusion. This creates a burden on public finances.
4. Privatization and Disinvestment Pressures
With the private sector’s capabilities expanding, there is growing demand for the privatization of inefficient public sector enterprises (PSEs). The government must navigate this transition while maintaining public service delivery.
5. Narrow Tax Base
Despite rising incomes, the income tax base has not expanded proportionately, limiting the government’s ability to increase social spending. The growing subsidy burden exacerbates this issue, diverting funds from capital investments.
6. Inadequate Institutional Capacity
Many government schemes suffer from poor implementation, leading to underutilization of allocated budgets. This inefficiency results in cost overruns and ineffective resource allocation.
Conclusion
The post-liberalization period has seen increased per capita income and government expenditure; however, the tax-to-GDP ratio has not improved correspondingly. This disparity has rendered public expenditure management a significant challenge for the Indian government. The Bimal Jalan Committee has recommended rationalizing subsidies and sticking to a disciplined fiscal path to unlock the growth potential of the Indian economy. Effective PEM is crucial for sustainable economic development and governance.