Public Expenditure Management (PEM) for Budget Making

Public Expenditure Management (PEM) for Budget Making

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Public expenditure management (PEM) is a strategy for judicious use of financial resources available to the government in order to attain good governance. It is primarily concerned with general budgetary restraint, allocation of resources, operational effectiveness, and macroeconomic stability. With the changes of 1991, the government's role has evolved from that of a catalyst for economic growth to one of a facilitator, posing new difficulties for budgeting.

Challenges in budget-making in the post-liberalization era

Economic shocks - Because the global economy is becoming more linked, global economic shocks like the 2008 financial crisis, Fed tapering, rising prices of crude oil, trade wars, etc. have a much greater impact on the home economy.

Fiscal Policy - Keeping the fiscal deficit within the 3% of GDP as prescribed by the FRBM Act, 2003, while balancing the requests for higher government spending in areas like infrastructure and welfare programmes.

Burden of Subsidy - There is a lack of capital investments due to the exponential growth of the subsidy burden, which now totals 60,000 crores for MGNREGA and 80,000 crores for fertiliser.

The banking sector - The banking industry is dealing with problems including the Twin-Balance Sheet Crisis, the choice between bank consolidation and divestment, the NPA Crisis, etc.

Public Sector Enterprises - After liberalisation, the private sector's capabilities multiplied, leading to calls for the disinvestment or privatisation of PSEs including Air India, BSNL, and other loss-making PSEs.

Low tax base - Although post-liberalization incomes have increased significantly, the income tax base has not improved as much; just 4% of people file income taxes, and only 1% actually pay them.

Low Tax to GDP proportion - this ratio has increased from 10% in 2019 to an estimated 7% in 1990, which is not consistent with India's economic growth trajectory.

How can governments make PEM more effective

• The government has set a goal to steadily reduce the fiscal deficit and stabilise it at 2.5% by 2023.

• The allocation of more resources for the production of capital assets will be aided by eliminating the distinction between plans and non-plans and replacing it with the revenue-capital classification of public expenditure.

• Monetary Policy Committee establishment for improved inflation targeting

• Deepening of Fiscal Federalism: A larger portion of the states' share of the divided tax pool has been devolved.

• An online tool for tracking the success of government initiatives is the Public Fund Management System.

• The Public Debt Management Agency is the proposed organisation to oversee all of the government's debts, both internal and external.

The Bimal Jalan Committee on Expenditure Management has advised taking action in the form of decreasing the subsidies, strategic divestment and an adherienceto a fiscal path. The potential of Indian economy's growth could be unlocked through prudent public financial management.