The constitution of an Expenditure Management Commission (EMC), headed by former Reserve Bank of India Governor and Finance Secretary Bimal Jalan, is the first step towards addressing a crying need — expenditure reform. Unlike taxation, where we have had wide-ranging reforms since the dawn of liberalisation, there has hardly been any attempt to rationalise or improve allocative efficiency in government expenditure. Indeed, the only significant development in this context in recent times has been the introduction of a defined contribution-based pension system for government employees joining after January 2004. The primary reason for neglecting expenditure is populist politics. Governments, irrespective of their political hue, have been unwilling to risk unpopularity by taking what are otherwise entirely rational decisions such as slashing subsidies for the non-deserving or linking pay of government servants to performance. But the present government at the Centre is one that swears by ‘Minimum Government, Maximum Governance’. How much it practices what it preaches will eventually determine the success of expenditure reforms.

Ideally, how much a government spends and on what should be determined by that government. An EMC is at best a ploy to create a distance between the government and certain hard decisions it ought to take. The panel, in any case, is slated to submit its interim report only before the next Union Budget. By then, Assembly elections in Maharashtra, Haryana, Jammu & Kashmir and possibly Delhi will be over. That would make it politically easier for this government to adopt the tough decisions that the EMC could well recommend regarding phasing-out fertiliser and LPG subsidies or implementing the 7th Pay Commission’s report when its recommendations on revised pay scales for Central Government employees are finalised. While nothing stops it from taking a call on these even now, there will be less wiggle room six months down the line.

Expenditure reform is not simply about slashing the Centre’s total spending which, at roughly 14 per cent of GDP, isn’t large by global standards. The problem has more to do with the composition and quality of its spend. Take subsidies, which in the last 10 years have spiralled from under ₹46,000 crore to over ₹260,000 crore – thereby, even exceeding the Centre’s entire budgeted capital expenditure of nearly ₹227,000 crore for 2014-15. It is obvious that this increase has not been attended by any corresponding improvement in welfare outcomes. If anything, the more sensible approach is to replace subsidies — especially market-distorting ones — with direct benefit transfers to intended beneficiaries. The general principle of government expenditure management should be to deploy taxpayer money on infrastructure and public goods, leading to increased productivity of the country and its people. Once this principle, which is very much compatible with the ‘Minimum Government, Maximum Governance’ slogan, becomes accepted practice, things will fall into place. Money will not be spent without serving a productive use. That is true expenditure reform.

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