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Millennium Post

Making adjustments

To compensate for the current economic slowdown, the government must make cuts to its administrative expenses and clarify its existing structure of expenditure

Making adjustments
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Going by the government's annual spending trend, the size of the 2020-21 union budget scheduled to be presented in Parliament on February 1 may be close to Rs 31,00,000 crore. The large expenditure budget is unavoidable despite the grim picture on the revenue front during the current financial year, mainly because of the economic slowdown and lower revenue generation. It is to be seen how much of such total spending for the next fiscal is on account of plan expenditure or on capital account. The budget must specify the plan expenditure for the next year. That is vital for economic growth. The projection of a futuristic expenditure budget on capital account is okay though it is unlikely to immediately boost the confidence of the industry and consumers. Such an announcement during the 2019-20 budget presentation failed to arrest economic slowdown for the year. Any fiscal deficit on account of annual plan expenditure to create mid- or long-term economic asset is welcome. However, it is time to compress the non-plan expenditure on the revenue account. This is possible and also highly desirable. The 2020-21 Budget could specify the amount proposed to be saved by compressing the size of the government and cutting down administrative expenditure. Precious public sector assets should not be sold to fund the government's growing non-plan expenditure. The current trend in this respect looks rather ominous for the future.

According to official estimates, the fiscal deficit had hit 114.8 per cent of the current financial year's budget, estimated at Rs. 8.07 lakh crore at November end. The government's total expenditure in the next fiscal is expected to go up by at least 15 per cent if it is truly serious about investing big on infrastructure to beat the current economic growth deceleration trend. The government's ability to tighten the expenditure belt on the revenue account is immediately difficult to guess in the absence of a clear official statement in this regard. The non-Plan expenditure still constitutes 70-75 per cent of the gross expenditure at central and state levels. The government may have scrapped the plan and non-plan expenditure distinction and, instead, introduced capital expenditure and revenue expenditure. The new definition seems to have only confused the expenditure structure.

For example, the projected total capital expenditure for 2019-20 is Rs 876,209 crore (USD 131.43 billion) while centrally sponsored schemes were allocated only Rs 331,610 crore (USD 49.74 billion). The actual capital expenditure may be far less. The revenue expenditure is supposed to be matched with revenue receipts. Is this really happening? The concept of plan and non-plan expenditure is clearer. Non-plan expenditure is what the government spends on the so-called non-productive areas, such as salaries, subsidies, loans and interest, while plan expenditure pertains to the money set aside for productive purposes, like various government projects. The government's massive time-bound investment programmes should be seen more as real than a mere concept. The investment plan needs to be specifically linked with the annual budget as plan expenditure. The system is followed by all developing economies, including China, for better appreciation of budgeting tools and specific resource generation targets to meet the plan expenditure.

Honestly, the abolition of the planning commission might not have been a good idea under the country's current rate of development. Developed economies, where the major chunk of capital is with private sector organisations, do not need macro-level government planning for growth. The market economy works perfectly in such cases to push growth in keeping with the demand. Big-pocket private entrepreneurs are ready to invest even in critical high-cost projects, from nuclear power plants to semi-conductors. However, in developing economies such as India, the financial resources of private entrepreneurs are limited. Such resources are employed in short-term projects for quick gains. Shareholders of such enterprises are generally sensitive about return on investment within a time frame. This explains why India is still dependent on public sector firms such as ONGC and Oil India for high-cost oil exploration, why the private sector shows little initiative in generating nuclear power even several years after the government opened up the sector to private investment and why the country failed to rope in a private firm to produce micro-chips in the last 10 years. Few will disagree that economic planning and planned annual budget-supported government expenditure in critical and high-cost projects are the need of the day. It would be wrong to think that the relevance of plan and non-plan expenditure is lost with the abolition of the Planning Commission. A distinction under the heads of revenue and capital — a concept mostly popular in developed and market economies — does not make it a better indicator of productive and general expenditure.

The classification of expenditure — between revenue and capital — is followed in many countries as a 'golden rule' to ensure that governments' cash flows are balanced over an economic cycle and they borrow only to invest and not to meet routine expenditures. The concept is absolutely capitalistic. Key differences between capital and revenue expenditure are that capital expenditure generates future economic benefits while revenue expenditure generates benefit for the current year only. Revenue expenditure occurs frequently. Capital expenditure is a one-time investment of money. Capital expenditure is a long-term expenditure to improve the earning capacity of an enterprise and is capitalised. It is not matched with capital receipts, unlike revenue expenditure which is matched with the revenue receipts. The fact is the concept has failed to generate desired results in India's annual budgeting exercise. It also failed to explain the record mid-year budget deficit during the current fiscal. With almost 40 crore Indians still earning well below Rs 300 a day, the government would do well to recognise the need for proper economic planning and annual plan expenditure in the next budget.

Views expressed are strictly personal

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