Informist, Friday, Jun 18, 2021

NEW DELHI – The last decade has seen a sharp deterioration in the quality of the expenditure made by the central government, according to a paper by the Reserve Bank of India staff.

An analysis of six indicators of central and state government finances showed that while the quality of the former's expenditure improved in high-growth years, following the passage of the Fiscal Responsibility and Budget Management Act, 2003, global financial crisis worsened expenditure quality, which has only continued since.

Expenditure quality has deteriorated at the state level too from the pre-global financial crisis period, although not to the same extent as is the case for the Centre.

"It is noteworthy that fiscal rules, when they were conceived, had embedded features focusing on the quality of expenditure--for instance, the FRBM Act, 2003 sought to build in quality in the form of the prescription of a zero revenue deficit," said an RBI staff paper titled 'Fiscal Framework and Quality of Expenditure in India', released Wednesday.

However, emphasis on the quality was compromised in the post-global financial crisis period in the pursuit of fiscal deficit targets, with the 3% aim often cited as an aspirational goal, the paper added.

The views expressed in the paper do not necessarily reflect those of the central bank.

The six indicators used to construct the expenditure quality index, and their weights, are as follows for the Centre and states, respectively:

* Revenue expenditure to capital outlay ratio: 19.7%, 24.5%

* Revenue deficit to gross fiscal deficit: 12.6%, 19.8%

* Capital outlay to total expenditure: 20.4%, 24.5%

* Capital outlay to GDP: 19.1%, 24.1%

* Development expenditure to GDP: 10.6%, 6.6%

* Committed expenditure to GDP: 17.6%, 0.4%

Commenting on the way forward for government finances beyond the pandemic, the paper said a reduction in spending should not be in the form of blanket, across-the-board cuts but follow a strategy that protects programmes with high marginal social benefits.

Some target indicators suggested by the paper include capping the Centre and states' revenue deficit-to-fiscal deficit ratio at 40%, a revenue expenditure-to-capital outlay ratio of 4-5 against 7.5 for the Centre and 6.2 for states in 2019-20, and either fixing a floor to the capital outlay-GDP ratio or targeting a particular rate of growth in capital outlay.

"While COVID-19 has tested the limits of flexibility in fiscal policy frameworks in India as in the rest of the world, it has offered a unique opportunity to redefine fiscal policy in a manner that emphasizes 'how' over 'how much'," the paper said.  End

Reported by Siddharth Upasani

Edited by Nidhi Chugh

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