The Hindu Business Line : Right size, composition of Govt spending key to public finance revamp: Panel

THE 12th Finance Commission has stated that getting the right size and composition of Government expenditure to ensure the highest attainable growth rates and meeting the Government's social obligations should be considered integral to any plan for restructuring public finance.

In a detailed examination of the restructuring of public finance, the Commission said the social obligations of the Government include poverty reduction and provision of health and education, which require increasing the public spending on social and economic infrastructure for accelerating growth, while reducing the overall fiscal imbalance.

It said that the suggested reform strategy has to aim to strengthen growth by increasing public sector savings and the Government's capital expenditure relative to the gross domestic product (GDP). This would entail reducing the share of revenue deficit in fiscal deficit, which itself should fall.

The macro-economic scenario that serves as a framework for fiscal corrections is characterised by a 7-per cent real growth on an average and a 5-per cent inflation rate.

The Commission said fiscal correction requires increasing the combined GDP-tax ratio to 17.6 per cent, primary expenditure to 22 per cent of GDP and capital expenditure to nearly 7 per cent of GDP by 2009-10.

In the context of debt and fiscal deficit, keeping in view the Fiscal Responsibility and Budget Management Act, the targets and the related sustainability requirements, the Commission proposed that the system will converge to a combined debt-GDP ratio of 56 per cent with a combined fiscal deficit of 6 per cent of GDP and a nominal growth rate of 12 per cent per annum. The current level is estimated to be as high as 81per cent of GDP which should be brought down to at least 75 per cent by the end of 2009-10.

The Commission urged States to follow a recruitment and wage policy in such a manner that the total salary bill relative to revenue expenditure net of interest payments and pensions does not exceed 35 per cent.

It also contended that a restructuring plan must perforce include reforms relating to the planning process. Part of the distortion in the structure of expenditure is derived from the distinction between plan and non-Plan expenditures. "It is inefficient to show preference for creating new assets or undertaking new schemes being part of the Plan, while sacrificing maintenance of already created assets," it said.

As a result of this, there are many incomplete projects/schemes not yielding services on one side, and ill-maintained and fast-depreciating assets on the other.

"Over time, plans have become more scheme-oriented rather than project-oriented, so that assets that could provide returns to service the debt that was used to finance plan expenditure are neither being created nor maintained," the report said.

On the Planning Commission's resource transfers about which many States have complained, the finance commission said, in the case of Plan assistance, the proportion between grants and loans at 30:70 for the general category States and 10:90 for the special category States has a counterpart in the interest rate charged by the Central Government on the Plan loans to the States, which has been in the past sometimes 300 to 400 basis points higher than the cost of funds to the Centre.

In other words, Plan grants are not really interest-free grants, it said adding that over time, these are recovered back in the form of higher interest receipts.

Hence, the Finance Commission maintains that the Plan grants should be given as genuine grants and States might be encouraged to borrow from the market directly. Stating that such a change would require delinking of grants from loans in plan assistance, the finance commission said this would facilitate determination of grants according to needs and loans according to capacities.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page