ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Public Expenditure Management Committee Report: A Critical Review

The report of the High-Level Expert Committee on Efficient Management of Public Expenditure has recommended abolishing the current dichotomy between Plan and non-Plan expenditure and has suggested that certain public expenditure management reforms must accompany these changes. Overall, while the committee has made some useful points, both the scope of the report and its content are disappointing.

COMMENTARY

Public Expenditure Management Committee Report: A Critical Review

Arindam Das-Gupta

from P/NP (GOIPC 2008, paragraphs 3.56 to 3.61). This led the GOIPC to recommend setting up a high level committee to examine the consequences of the current classification of government expenditure and suggest reforms to increase the efficiency of PEM (GOIPC 2008, paragraph 3.67).

Crucially the GOIPC recognised that the removal of P/NP would require parallel

The report of the High-Level Expert Committee on Efficient Management of Public Expenditure has recommended abolishing the current dichotomy between Plan and non-Plan expenditure and has suggested that certain public expenditure management reforms must accompany these changes. Overall, while the committee has made some useful points, both the scope of the report and its content are disappointing.

Arindam Das-Gupta (oldmonk87@yahoo.com) is with the Centre for Economic Research, Goa Institute of Management, Goa.

Economic & Political Weekly

EPW
october 22, 2011

W
hat happens to the identity of five-year plans (FYPs) if there is no division of government expenditure into Plan and non-Plan categories (P/NP)? If, for example, the Plan loses its identity, then is there a continuing rationale for the central Planning Commission (PC) as well as state commissions? Does the removal of P/NP provide an opportunity to rationalise, simplify and increase the efficiency of public expenditure management (PEM) by first of all, winding up the Planning Commission? Or, at the other extreme, will the removal of P/NP lead to the reincarnation of the PC as an extra-constitutional super ministry overseeing all economic expenditure and transfers and having a larger role to play in PEM than even the Ministry of Finance (MOF)?

Identifying reforms following P/NP removal and related PEM issues formed the mandate of the High Level Expert Committee on Efficient Management of Public E xpenditure set up by the Government of India, Planning Commission (GOIPC) on 22 April 2010 under the chairmanship of C Rangarajan. The committee has recommended transforming the PC into a super ministry after P/NP is abolished, apparently without considering any other alternative. This and other less far-reaching recommendations by the committee are critically examined here. While the committee’s report (the PEM report) does make some useful points, both the scope the report chose to cover and its content are disappointing.

1 Background

According to the Eleventh Five-Year Plan document, the P/NP classification of government expenditure had become “illogical and dysfunctional” and that there was an “indisputable” case for its abolition (GOIPC, 2008, Chapter 3, paragraph 3.59). This conclusion was based on an examination of expenditure misallocations resulting

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changes in the responsibilities of different government bodies in the management of public expenditure.

In line with the GOIPC recommendation, the PEM committee was constituted in April 2010. It submitted its report in July 2011. Besides suggesting an action plan for administrative reforms needed to accommodate P/NP removal, the PEM committee’s terms of reference also included four related financial issues identified in GOIPC (2008). These issues, which did not have as far-reaching significance as administrative reforms after P/NP r emoval, are;

  • (a) Defining the scope of the (public sector) Plan, given changes in the expenditure management structure, and also the new types of implementing agencies such as special purpose vehicles (SPVs), public-private partnerships (PPPs) and government local bodies (LBs). For completeness, this needed to be considered after P/NP r emoval;
  • (b) Recommending changes in the scope of revenue versus capital expenditure to remove inconsistencies, especially in view of the importance of revenue expenditure for compliance with fiscal responsibility acts at the centre and state levels;
  • (c) Proposing a uniform and comprehensive framework for centre to state transfers; and
  • (d) Suggesting measures to strengthen the accountability of states and districts receiving direct transfers under centrallysponsored schemes.
  • 2 Assessment of Recommendations

    2.1 On Expenditure Responsibilities

    After recounting almost the same problems created by P/NP as GOIPC (2008), the PEM report endorses their recommendation for removal of P/NP. However, without explaining why, it recommends continuing the FYP process with the PC playing the lead role as at present. In fact, in the PEM

    COMMENTARY

    report, the central budget is to form only one component of the FYP, with other components relating to public sector enterprises (PSEs), SPVs and PPPs (PEM r eport, para 2.21). This at once undermines a basic prerequisite of efficient PEM, budget comprehensiveness. On the other hand, the PEM report recommends that all budget expenditure should be a part of the Plan after the removal of P/NP.

    Role of the Planning Commission: As at present, the PC is to have overall responsibility for “formulation, appraisal, review and evaluation” of the FYPs. However, FYPs will, as discussed, include the entire budget (except for a few specified sectors like defence) in addition to internal and extra budgetary resources of PSEs and LBs. In projecting plan resources, the PC would seek inputs from the MOF, other central ministries and state governments. Among specific duties in the planning process, four are worth highlighting. These are: to devise projection rules and prepare projections of sectoral budgets and state-wise allocations; devise guidelines for transfers to states; scrutinise annual budget allocations proposed by the MOF; and do “outcome/ output linked reviews” of departmental programmes.

    Role of the MoF: The MOF is to remain in charge of formulating annual budgets in consultation with the PC. It is to have a relatively minor support role in the preparation of FYPs. It is to have a somewhat more substantive role in plan/budget implementation in that it is to set three-year rolling estimates and annual hard budget constraints for ministries. These threeyear rolling estimates are presumably the medium-term expenditure plans (MTEPs) and medium-term fiscal plans (MTFPs) as required under the Fiscal Responsibility and Budget Management Act. However, except for day-to-day administration and personnel issues, budget proposals from ministries and budget ceiling for them are to be fixed “after due consultation with the PC” (PEM report, para 2.27). Future coordination problems could clearly arise with rolling three-year medium-term budgets and the non-rolling, sequential, FYPs, especially when the MTEP spans two FYPs.

    Role of Others: Administrative ministries are to have a support role in setting sectoral goals and sectoral planning. Their role will be primarily inward looking, estimating unit costs and focusing on operational efficiency and performance in the concerned sectors. Regarding budgeting, they will be primarily responsible for preparing three-year rolling sectoral budgets. The role of states in formulating and implementing state plans is also briefly discussed in the PEM report.

    In reviewing responsibilities after the removal of P/NP, the report makes no mention of implications of the finance commissions and their resources and awards. However, it is by now clear that the PEM report implicitly endorses the continuation of the four concurrent financial plans in statements, the FYP, MTFP, MTEP and the annual union budget.

    Overall, the estimation of an aggregate resource envelop giving rise to hard sectoral budget constraints (after providing for committed expenditures) is sound. So is the institutionalisation of a three-year rolling medium-term fiscal framework. The rationale for the continued existence

    october 22, 2011 vol xlvi no 43

    COMMENTARY

    Table 1: Annual Budgeting Process Proposed by the PEM Report
    Activity Period Role of Planning Commission Role of Ministry of Finance Role of Administrative Ministries Role of Others
    Output/outcome linked reviews of budget performance of ministries and IEBRs June/July Lead review Participate Subjects of review PSEs and LBs: review targets
    Revised estimates (RE) and budget estimates (BE) based on the MTEP and performance review September Consolidate and receive BEs Consolidate and receive. Initially communicate budget ceilings to ministries Prepare PSEs and LBs: RE and BE of IEBR
    Estimate state-wise grants for Plan schemes September Consolidate and receive BEs Consolidate and receive Prepare estimates
    Meetings to review REs and BEs November- December Represented at senior level Lead Participant
    Scheme-wise allocations for ministries December end Scrutinise allocations based on "development priorities, outcome targets and sectoral requirements” Prepare and revise allocations after scrutiny. Communicate to administrative ministries Receive allocations
    (a) Revenue and MTFP projections for current and next year and (b) final revision of expenditure budget ceilings January To be consulted Lead role
    Revised expenditure proposals based on final ceilings End January Receive Submit

    of the PC is, however, far from clear, since its main functions, described above, can easily be reallocated to different ministries as in many other countries.

    2.2 On the Annual Budgeting Process

    The complicated and untried annual budgeting process recommended by the PEM report for the proposed institutional structure described above is likely to suffer from serious coordination problems leading to new sources of inefficiency in public expenditure management.

    An eight-step process described in Table 1 is proposed by the PEM report. As can be seen, despite its complicated nature, the description of the process appears incomplete, particularly for internal and external budgetary resources (IEBRs) of PSEs and LBs. Furthermore, the PEM report does not look within ministries and the PC. It is possible that inputs from multiple divisions could add to coordination problems. Most striking, there appears to be no role proposed for the PC that could not be reassigned to either the MOF or administrative ministries without loss, thus simplifying the budget process.

    While conceding that the process of budget review and formulation can never be both thorough and simple, the use of a common technology platform accessible to all participants could facilitate coordination. Furthermore, a study of budgeting calendars and processes in countries that are known for efficient PEM could have been fruitfully undertaken.

    Economic & Political Weekly

    EPW
    october 22, 2011

    2.3 Other Recommendations

    On Centre to State Transfers: The PEM report does not propose any changes in the numerous existing sources and types of transfers to states, though it briefly describes problems with monitoring them, given the existing six-tier system of expenditure classification. Instead, it notes that improved assessment, classification and costing of state schemes will be possible once the current multidimensional r evision of budget and accounts classification is complete. It also recommends the extension of the existing Central Plan Scheme Monitoring System to all central schemes and all states and notes that system interfaces are being also set up with banks and financial institutions.

    On Strengthening Accountability for Direct Transfers: Lack of accountability of implementing agencies that receive funds directly rather that through state treasuries is pointed out by the PEM report. These funds amount to around 30% of plan expenditure in recent years. The PEM report recommends that all transfers be routed through treasuries. This is in accordance with sound PEM principles. In the transition period for agencies receiving direct transfers, it proposes uniform accounting reforms open to audit by the Comptroller and Auditor General. No time frame is proposed for the transition.

    One area where even sample based quantitative estimates would have been useful is of the “substantial” unspent

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    end-of-year cash balances with implementing agencies receiving direct transfers (para 4.12g). For example, if even 10% of transfers remain unspent, this implies an overestimation of plan expenditure by about 3% and a consequent overestimation of the fiscal deficit. While the PEM report notes the negative impact on central cash management (para 4.12h), it does not go into the far-reaching ramifications faulty deficit data can have for fiscal and monetary policy formulation and estimation of the deficit-inflation link.

    On Revenue versus Capital Expenditures: The main change the PEM report proposes is the creation of a head for revenue expenditure used “for creation of tangible assets”. This will allow capital expenditures to be better identified when measuring the fiscal deficit and after accrual accounting is introduced. It suggests that the definition of the related new head “grants for creating assets” be thoroughly examined by an expert group. This, aside from general comments below, is sound.

    2.4 On the Scope of the Public Sector Plan

    This issue necessarily requires resolution after abolition of P/NP. According to the report, the Plan is to include centre, state, LB, PSE plans as also, in part, financing of PPPs. The precise reasons and principles underlying them are not spelt out adequately. The report does, however, go into useful detail regarding funding of PPPs. Regarding implementing agencies funded

    COMMENTARY

    by SPVs, it seeks their merging with state budgets. Since this merger increases budget comprehensiveness, this is welcome – if it can be smoothly implemented.

    3 General Deficiencies

    Public sector organisational design is not a core component of economics or accounting, nor are its principles adequately spelt out in public administration courses. So potential weaknesses in essentially uncharted territory are possible even where the experience and wisdom of those venturing there is beyond doubt.

    However, certain other weaknesses in the PEM report are less easy to understand.

  • It contains no definition of the concept of PEM efficiency and misses this golden opportunity to describe the principles for PEM efficiency and performance for a larger audience.1 This would have enhanced the long-term utility of the PEM report m aterially.
  • The report almost always uses the term “output/outcome”, suggesting they are
  • nearly identical. In fact, this is not the case. Outputs are largely within the control of policy implementing bodies and can usually be quantitatively measured. Ultimate outcomes are neither. The term “outcome”, in fact, should not have figured in the report.

  • The report seems to be based entirely on deliberations in committee meetings (besides two position papers from the Comptroller and Auditor General). It does not appear that the committee undertook or commissioned any background micro investigations, field studies, or test audits, to assess the extent and cost of inefficiencies. The quantitative significance of the inefficiencies it identifies is thus left open. So, for example, in particular cases it is possible that the cost of recommended r eforms may exceed the efficiency gains from them.
  • The report, except in one case, does not try to draw upon international experience nor does it lay out more than one alternative (especially, for organisational redesign) and explain the drawbacks of reform
  • alternatives it rejects. These would have greatly enhanced the utility of the report.

    • In no case does the report spell out timelines and change management responsibilities for different reforms. Also missing are performance benchmarks and criteria so that efficiency improvements actually resulting from different reforms can be measured.

    These omissions greatly decrease the value of the report as a guide to actual reform programmes. Furthermore, since the system resulting if the PEM report is implemented will still be fragmented, with large off-budget flows and little change in monitoring and control of implementing agencies, it is far from obvious that this will lead to more efficient public expenditure.

    4 What Should Be the Next Step?

    A thorough reconsideration of all aspects India’s public expenditure management institutions by an independent, high powered commission is still required. The

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    october 22, 2011 vol xlvi no 43

    COMMENTARY

    commission should also be tasked with laying down a “Five-Year Plan” for PEM reform. The current PEM report, as argued, is inadequate. Furthermore, it is possible that it was unable to consider the alternative of radical downsizing of the organisation (the PC) within which it was constituted even if, as this review suggests, this may have improved public expenditure efficiency.

    Note

    1 The brief outline in paragraph 1.1 and the brief presentation of desirable goals in paragraph 2.23 are together far from adequate. For a “textbook” discussion see for example, Das-Gupta (2010).

    References

    Das-Gupta, Arindam (2010): “Neglected Topics in Public Economics Courses” in M Govinda Rao and Shankar Acharya (ed.), Public Economics: Theory and Policy (essays in memory of the late Professor Amaresh Bagchi) (New Delhi:

    Sage Publishers), (pre-publication draft available at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id= 1288009).

    Government of India, Planning Commission (2008): Eleventh Five-Year Plan (2007–2012): Inclusive Growth, Volume I (New Delhi: Oxford University Press). Available at http://planningcommission. nic.in/plans/planrel/fiveyr/11th/11_v1/11th_vol1. pdf accessed 6 October 2009.

    – (2011): Report of the High Level Expert Committee on Efficient Management of Public Expenditure (C Rangarajan, Chairman), available at http:// www.planningcommission.gov.in/reports/genrep/ rep_hle.pdf accessed 2 October 2011.

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    Economic Political Weekly

    EPW
    october 22, 2011 vol xlvi no 43

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