• 07 Jun 2023 05:37 PM
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An Expenditure Council could help promote fiscal prudence

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The debate on governmental ‘freebies’—offering goods and services free of cost or at heavily subsidized rates even to the people who might not need them—has its roots in the issue of countries’ wasteful expenditure, which is a subtle yet potent deterrent of economic growth. Such spending may bring short-term benefits, but eventually, it risks upsetting fiscal balance, outcompeting productive investments, and amplifying income inequality. This issue draws an uncanny resemblance to the timeless wisdom imparted by Adam Smith in The Wealth of Nations, where he emphasized the judicious use of resources as an essential element of national wealth. Any deviation from this principle invites inefficiencies and can even instigate an economic downturn.

The debate on governmental 'freebies'—offering goods and services free of cost or at heavily subsidized rates even to the people who might not need them—has its roots in the issue of countries' wasteful expenditure, which is a subtle yet potent deterrent of economic growth. Such spending may bring short-term benefits, but eventually, it risks upsetting fiscal balance, outcompeting productive investments, and amplifying income inequality. This issue draws an uncanny resemblance to the timeless wisdom imparted by Adam Smith in The Wealth of Nations, where he emphasized the judicious use of resources as an essential element of national wealth. Any deviation from this principle invites inefficiencies and can even instigate an economic downturn.

Linking this to the Indian scenario, it underscores the pressing need for a supervisory body—perhaps an Expenditure Council (EC), just like the GST Council. Its role would be to formulate guidelines and foster agreement on the best practices for state governments in terms of resource allocation. With a clear expenditure roadmap, the focus could be on implementing schemes that encourage inclusive growth, promote sustainable development, and maintain fiscal health. In doing so, the nation's long-term prosperity and the well-being of its people are safeguarded.

By exercising such financial prudence, the states can divert the resources used on 'freebies' to areas that require more attention which could result in sustainable development. The dilemma over freebies, therefore, becomes a question of prioritizing resource allocation, which is where an Expenditure Council could play a vital role in guiding state governments.

Union-level commissions like the Expenditure Reforms Commission (ERC), set up by the Atal Bihari Vajpayee government in 2000 under K.P. Geethakrishnan, have examined India's expenditure patterns. Its primary goal was to curb non-developmental government expenditure and kick-start organizational downsizing. Similarly, the Narenda Modi government formed an Expenditure Management Commission led by Bimal Jalan in 2014 to recommend spending reforms. However, no such body facilitated a consensus-building platform between states and the Centre.

Is there an existing platform where state authorities can converge to discuss and optimize financial strategies? It's not as simple as it seems. We have the National Development Council (NDC), an organization linked to the Planning Commission. However, with the dissolution of the Planning Commission, the relevance of the NDC has faded. It still exists on paper, but its functioning is practically non-existent. Though, technically, the governing council of Niti Aayog can be presumed to be an NDC with a different name.

What about the Niti Aayog? Could this organization take the reins? Once again, the reality is multifaceted. The Niti Aayog is burdened with numerous responsibilities, making it difficult for it to shoulder this task in a post-Planning Commission landscape. Furthermore, states may not be keen to collaborate with it on fiscal matters.

The third player is the Finance Commission. Its mandate involves recommending the division of tax proceeds between the Union and states, establishing principles for revenue aid grants from the Consolidated Fund of India, and handling any financial matters referred to it by the President. While interacting with states, the Commission lacks the platform for both central and state governments to collaboratively strategize on the most efficient use of resources. One must also bring together the recommendations and views of state finance commissions.

Thus, there is a need for an EC to prioritise the areas, especially on the concurrent list where states can spend efficiently. The council should also come up with areas that the states should avoid spending on.

The inception of an EC, modelled after the GST Council, necessitates an intricate understanding of its structure, operations and jurisdiction. Firstly, the EC's composition should echo the GST Council's structure, with the Union finance minister chairing it. Additional members should include the minister of state in the ministry of finance and finance ministers from all states and Union territories possessing legislative assemblies. This ensures a comprehensive representation of India's diverse regions, promoting inclusive decision-making.

Secondly, the EC's principal objective is to promote financial responsibility by setting guidelines that discourage extravagant and populist expenditures. Instead, the focus is shifted towards prudent, strategic and sustainable resource allocation. It will aim to achieve consensus on spending items that are considered populist and lack long-term benefits, and suggest states to refrain from them.

In terms of functionality, the EC would meticulously analyse state-level schemes and budgets, identify unnecessary expenses, and recommend strategies for their reduction or alteration. It would also regularly publish reports and guidelines, providing a roadmap for state governments to follow.

One of the key principles guiding the EC's operations would be consensus building. Rather than imposing decisions, it should foster dialogue and cooperation among states, facilitating the attainment of shared understandings. This is crucial keeping in mind India's federal structure, where states have distinct rights and responsibilities.

Regarding voting, the decision-making mechanism would mirror that of the GST Council. The Union finance minister would hold a third of the voting power, while the combined states possess the remaining two-thirds. Any decision would necessitate at least three-fourths of the total votes to pass. Finally, a robust dispute resolution mechanism should be established to efficiently handle disagreements or disputes that might arise from its decisions. This holistic approach would ensure that the EC is well-equipped to handle the complex nature of national financial planning, promoting sustainable growth and economic stability. Convincing states to be part of EC would be tough, but it is not intractable.

Reforms are like strategic chess moves in the grand game of economic growth. They may involve sacrifice and are often a win-lose situation. The autonomy of states resembles the chess pieces, diverse yet united by the goal of India's prosperity. Curbing populism is like taming eager pawns, prone to short-sighted moves. The game demands balancing aggression with sustainability and forsaking quick wins for a developed India.