Abstract
Chapter 2 Review of Literature
2.2 Expenditure Implications of the Fiscal Crisis and Reform Measures
Fiscal crisis or imbalance of a government compels the respective governments to adopt different fiscal reform measures which may have serious implication in terms of reduction and shifting of expenditure from priority sectors. At the same time, it is equally true that any successful reform measures require some kind of adjustments of the government expenditure.
This section of review of literature has been carried out to know the expenditure implication of fiscal reform measures as well as role of efficient expenditure management towards successful fiscal reform campaign.
Gillingham et al. (2008) based on their study on Honduras found that public expenditure programme such as energy subsidies, university education and public pension programme provided disproportionate benefits to the higher income households. They were of the view that progressivity of the public policy could be increased by reducing those expenditure that were poorly targeted.
Endersby and Towle (1997) were of the view that different government had employed various statutory and constitutional devices to limit government spending. Many of these devices intended to increase executive control over expenditures. The authors found that such efforts were ineffective or counterproductive. They were of the view that state legislatures controlled by a single party were more likely than divided legislature to limit government spending and minimize debt. Thus, political and electoral influences appear to explain the state expenditure better than legal restrictions on the appropriation process.
Mathur (2001) was of the view that public expenditure management has an important role in containment of fiscal deficit as effective and efficient public expenditure management helps to contain fiscal deficit. Therefore, public expenditure management should be the main instrument of states’ fiscal policy in India.
Howes et al. (2004) was of the view that state governments in India have significant developmental expenditure responsibilities. The “fiscal crisis” which engulfed Indian states in 1990s led to a rapid increase in expenditure. But increase in expenditure was not able to increase in development effectiveness of the state governments. They were of the view that the fiscal crisis weakened the developmental and poverty impact of state governments
especially in the poor states. Real growth of expenditure in health and education was found to be slowed down or halted. The efficiency of government expenditure was also found to be less as liquidity constraints tightened and non-salary expenditures were crowded out.
Howes et al. (2005) observed that at the time of fiscal crisis in the later part of 1990s, all the state governments in India faced the difficult task of increasing expenditure in priority areas while reducing deficits to a sustainable level. The option available for the states was to explore the viable methods to improve expenditure allocation. The problem was same for all the states. Different states had undergone fiscal adjustment according to the intensity of the crisis. They advocated for reduction of expenditure on non-priority sectors.
Howes and Jha (2004) had made an assessment of expenditure implication of the state level fiscal crisis and found that fiscal crisis not only slowed down growth in key areas, but also worsened the quality or efficiency of spending. Fiscal deficit was also associated with a rapid increase in expenditure level and it was usually assumed that the rising expenditure increases the development effectiveness of the state governments. However, their study made a closer look and found that this was not the case. It had weakened the development and poverty impact of public expenditure. Efficiency of government expenditure was also found to be affected due to crowding out of non-salary expenditure.
Gupta and Sarkar (1994) were of the view that fiscal reform measures should give importance on human resource development. From their study, they found that human resource development had been adversely affected by the macro-economic and policy reforms undertaken by the Government of India from time to time. It may have very serious implication. Their study covers public expenditure of central and state governments on human resource development during the time period 1988 to 1993. They were of the view that economic cost of fiscal adjustment imposed heavy social cost in terms of reduction of human resource development for the above mentioned time period. This was mainly due to the fact that the main emphasis of economic reforms since 1991 was to adopt market oriented policies and instruments. But there was a need to protect the vulnerable sections of the society under these circumstances. The absolute reduction in expenditure on social services
both at the central and state level might raise the social cost which ultimately undermines the purpose of entire economic reform programme and its acceptance by the political system.
World Bank (2005) in their study which was carried out on the backdrop of state level fiscal crisis of India in 1990s suggested various expenditure control measures for maintaining the quality of expenditure. Their study found that although associated with an increase in public spending, the fiscal deterioration weakened the developmental and poverty impact of state governments. For controlling salaries and pensions, they advocated for restraint on wages of the public sector employees. The World Bank was of the view that to maintain a policy of wage restraint was to avoidance of another Pay revision. They justified the policy of hiring restraint, even though India’s civil service was small by international standards. They found that targeted retrenchment programmes had not been successful in India. Regarding subsidy, the Bank found that subsidies had proved difficult to cut, largely for reasons of political economy. The power subsidies which constituted large portion of subsidies were found to be large and growing during the time period 1980-81 to 1999-00. But compared to the cost of power subsidy, it had brought few benefits. The biggest problem facing the power sector was the lack of commercial discipline that permeates the sector. There had been some progress in reducing power losses, but not in agriculture. Reform of the Public Enterprises was another area which required significant changes. They were of the view that closure and privatization would not provide large and immediate fiscal gains. The quality of spending must be improved through spending on priority sectors such as health, education and infrastructure etc. Their view was that agency specific reforms, including an increased role for the private sector, can improve service delivery.
Mukherjee (2007) highlighted the importance of government expenditure on social sector such as education in the process of development. He was against any reform measures which curtails the expenditure on education. He was of the view that the role of education in economic development had been recognized in mainstream economic literature. Divergence between the private and social rate of return from education is the rationale for intervention by the states in ensuring equity in opportunity across the population. He opined that higher levels of schooling and better quality of workforce will lead to an increase in the rate of
growth and thus strengthening the case for public expenditure on education. However, the effectiveness and efficiency of resource allocation by the government has generated considerable debate, both from ideological and technical points of view.
Sen and Karmakar (2007) were against any reform measures that reduces expenditure on human resource development. They were of the view that in the urgent and substantial task of raising the level of human development of their citizens, the basic challenge faced by most of the states of India was to break the 'vicious circle of poverty’, low human development and low income. Low level of income across the population also limits the ability of the state governments to finance human development through their own resources. This is clearly indicated by the strong association between public expenditures and per capita incomes often noticed by researchers, both across states and over time. Moreover, within the framework of fiscal responsibility legislation which have been enacted by the centre as also by several states (after the strong support it got from the Twelfth Finance Commission), it is not feasible to vigorously push for public expenditures financed by deficits, and consequent borrowings.
The state governments in India faced the dilemma of maintaining human development without deteriorating deficit indicators.
Jagannathan (1986) in his study which includes the states such as Andhra Pradesh, Bihar, Madhya Pradesh, Maharashtra, Tamil Nadu and West Bengal found that the budgetary format was not able to highlight the growing indebtedness and increasing share of wage bill.
He was of the view that although revenue accounts of state governments had been increasing during 1970s and first half of 1980s, maintenance expenditure was gradually squeezed out by the other components. He was in favour of reallocation of expenditure for proper development of an economy.
Shariff et al. (2002) in their study on India observed considerable decline in the share of the state governments’ expenditure on social sector and poverty alleviation as central share was gradually increasing over time. The state governments seemed to be easing out of the constitutional commitment to sustain programme in the social sectors. They found this trend as undesirable as state governments seem to have better knowledge of their expenditure priorities.
Srivastava and Rao (2004) had made a critical analysis of huge subsidies obligation of the Indian states and its effect on deficit indicators. They were of the view that subsidies were justified if they provided positive externalities in the public provision of non-public goods.
They found that state budgetary subsidies had increased in the later part of 1990s due to payment of revised salary to the employees of the State Public Enterprises. But there was no corresponding increase in user charges. Considering the huge financial burden of subsidies, they advocated for reduction of government subsidies through subsidy reforms. Additionally, they were of the view that, since primary objective of reform would be to construct a subsidy regime that was small and promotes equity as well as efficiency, it was important for both central and state governments to periodically review subsidies and weed out unnecessary ones. Governments should withdraw from certain sectors where government did not need to run public sector enterprises and where the government did maintain a presence, it should drastically cut costs, particularly salary bills, close down inefficient units and reduce input costs through better management. Their analysis found that best way to control subsidies was to make them transparent and explicitly stated in budgets. The increase in user charges may also contribute towards reduction of subsidies.
Thorat and Roy (2004) had made an analysis of use of contingent liabilities which imposed a huge financial burden on the respective governments in India. They found that guarantees became a source of financing and the rising guarantees and assured payments arrangements at the state level posed the issue of sustainability. The prevalent accounting system of government finances in India does not consider guarantees or contingent liabilities as debt obligation. So, they advocated for fixing ceiling on guarantees provided by the state governments.
Das Gupta (2012) has found that share of development expenditure to GSDP of state governments in India declines in the post-liberalisation period compared to the same in the 1980s. The constraint in independent policy making of the state governments is found to be responsible for this decline in developmental expenditure of the states. He is in favour of increase in developmental expenditure of the states at least to the level of the 1980s.
Choudhury (2002) in her study on Assam gave importance on proper expenditure management. Regarding quality of expenditure, the researcher found lots of mismanagement and irregularity in budgetary expenditure. Subsidy expenditure of the state was found to be very large compared to its revenue earnings. From her study, the writer found that the quality of expenditure in the state was very poor as evident from the facts that Assam had very poor medical services, low literacy rate and the urbanization process was very slow. The author was in favour of proper reform measures to improve the quality of expenditure.
Thus, it is clear that reduction of selective expenditure such as subsidies and salary and wages etc. may help to release resources for other productive uses. This can be materialized by reducing poorly targeted public expenditure. It can also bring progressivity in public policy. But unplanned reduction of expenditure may deteriorate existing quality of expenditure. Proper expenditure management with emphasis on reduction of unproductive expenditure is considered to be a better fiscal strategy. But it should be supported by appropriate revenue effort on the part of the governments. Under these circumstances, it is necessary to review the studies on revenue efforts of different tiers of government.