It Is Not Too Late, But It Soon Will Be

Business Standard 7th August 2020 Save

Context: he fragility of central government finances is partly legacy, part refusal to acknowledge and address the problem due to the lack of strategic vision and poor institutional capability.

Issues with the fiscal space of The Government of India

Falling Government Expenditure:

In 1950-51, the total expenditure of the Union government was just 4.8% of GDP.
This rose to 18% in 1990-91.
The ratio has further fallen to 12.2% in 2019-20.

Still Hugely controlled by Government???? Crowding-Out Effect:

Economic Liberalization had only dismantled the license permit Raj and relaxed import controls and not the Central Government presence in the economy.
On the contrary, flagship programmes and central schemes have expanded the footprint of the central government.

Falling Government Revenues:

In 1990-91, the Revenue to GDP ratio was at 9.37%. In 2019-20, it is 8.18%.
In 2007-08, Tax-to-GDP Ratio was 8.8%. In 2019-20, it is 7.82%.
Failure of the disinvestment plan to generate expected revenues.
Bad Situation: The government had to resort to intra-public sector transactions including dividends from the Reserve Bank of India.

Rising Off-Budget Borrowings: Since the committed expenditures now account for 35 % of total expenditure, this has led to the government pursuing off-budget transactions.

In 1980-81, 4.5% of the total borrowings were used to finance current expenditures, rising to 69% in recent years.
Have poor results and saddle the financial system with non-performing assets.

Institutional Incompetence:

Hastily created departments like the Department of Investment and Public Asset under the Ministry of Finance have created complexities.
No Point Authority: Unlike home, defense, and external affairs, finance has no single executive head and has no authority to execute coordinated action.
No Accountability: “Austerity measures” are announced and soon forgotten. There is no accountability for continued failure to collect revenues,

Way Forward:

A Medium-Term Fiscal Framework: with realistic revenue projections, binding expenditure targets, and clearly defined objectives for structural change is required.
Institutional Reforms: including a fiscal council, and a fit for purpose finance ministry architecture.