The Expenditure Reforms Commission

By S. Ambirajan

JUST WHEN we were reconciled to thinking that the public expenditure commission promised in their budgets by Mr. P. Chidambaram and Mr. Yashwant Sinha was a kind of mot pour rire to keep the audience amused, Mr. Sinha sprang a surprise. He kept the promise to constitute the Commission, made in the 1999-2000 Budget, just 48 hours before he was to present the 2000-2001 Budget.

As it is, one cannot fault the composition. It has a former civil servant with considerable experience in the Finance Ministry heading it, and other seasoned bureaucrats to help him. One would not have thought of Dr. Kirit Parekh as the obvious choice for economist member as his specialisation is more in energy economics than in public expenditure analysis. Some may find the Commission a mere technical/advisory body rather an executing authority with the requisite teeth in the absence of any political heavyweight.

It would appear that the brief of the Commission is to examine only the problems of the burgeoning expenditure of the Centre. Obviously the contribution of the State Governments to fiscal profligacy has not been given thought to while forming this Commission. Even so, the tasks assigned to this body are truly mind-boggling. It has to: (1) ``Suggest a road map for reducing the functions, activities and administrative structure of the Centre'', (2) ``Review the framework of all subsides, both explicit and implicit'', (3) ``Review the framework for determination of user-charges of departmental and commercial entities and suggest an effective strategy for cost recovery'', (4) ``Review the adequacy of staffing under Central Ministries... and the existing arrangements for redeployment'', (5) ``Review the procedure for the setting up of government-funded autonomous institutions...'' and (6) ``Consider any other relevant issue concerning expenditure management''. All these, the Commission, with only two full-time members and no secretariat as yet, has to accomplish within ``a period of one year''.

What can the Commission do? The answer has to be seen in what it should not do. First, it should not be mesmerised by notions of inevitability of high public expenditure; second, it should not attempt things which it cannot do. Economists have propounded seductive theories like what the 19th century German savant, Adolph Wagner, claimed as an inexorable ``law'' of ever- increasing state activity and expenditures that applies to ``progressive'' nations. He argued that all varieties of public expenditures tended to rise more proportionately than national and/or per capita incomes as time passed. Dividing public expenditures into two categories i.e. ``internal & external security'' and ``culture & welfare'', Wagner postulated that the former increased fast because of the increasing use of modern technology, capital intensive warfare and the need for heightened police protection due to increasing ``friction'' in society as a result of urbanisation and industrialisation. Expenditure on ``culture & welfare'' would increase because many of these items such as education, health, transportation, communication, banking and insurance were highly income elastic (demand that rises faster than income), and could be produced more efficiently by the public sector.

Wagner did not substantiate his theory either analytically or empirically, but there is a plausible air about it. Does it mean it should be taken as a ``law'' that cannot be defied? Given the way Wagner has stated it, it is not a ``law'' that could be used to predict the course of public expenditure in particular countries. Numerous studies have been made to test this ``law'' both with time-series data of single countries and cross-section data that examines a group of countries at different income levels to see the connection between levels of public expenditure and income. The one uniform conclusion is that at the gross level, the ``law'' holds but once we go into detail, it falls flat because it is in the detail that the devil resides. The economic factors suggested by Wagner as causing the escalation began to be contested even during his lifetime. Critics such as Karl Deutsch have argued that political pressures caused by economic development and democracy result in increased government spending. S. P. Gupta added to this, drawing our attention to the voters' desire for increased government spending financed solely by richer minorities. Of course, beyond a point, financing has to be done by taxing the poorer majorities. This leads to the eventual decline (or at least of the rate of growth) of government expenditures.

In a landmark study, Peacock and Wiseman have shown that public expenditure continues to rise primarily because of the Government's desire to control the economy as well as the increase of tax tolerance among the population. Their data from Britain has demonstrated that tax rates do not decline to their previous low levels once they are increased temporarily to face certain serious social upheavals such as a war. Demand for public services may grow sky high, but where public expenditure to provide these has grown substantially, it has always been with people's willingness to pay for it. Satisfying the demand for the public provision of goods and services cannot be independent of resources available to do so.

It should be clear that the long-term growth pattern of government spending does not give any licence to this Commission to approve high public expenditures on the basis of any kind of ``law''. But how should public expenditure be kept in check in the absence of the necessary financial wherewithal? This is where the Commission must exercise another kind of self-restraint. The Commissioners will know all too clearly how public expenditure keeps creeping up every year. Once a spending agency is created with broad objectives and a bureaucratic set-up, it continues for ever with its allocation increasing every year. Nothing seems to stop these juggernauts because every such agency will have to yield to the powerful vested interests that would fight tooth and nail all attempts at reducing expenditure.

Given this reality, cutting down public expenditure is something that should be done at the lowest level, asking queries about the relevance and utility of individual expenditure heads. In the British parliamentary system, which we are supposed to follow, this exercise is routinely done by the Finance Ministry. This department with a large staff has, as a former Treasury Secretary, Sir Herbert Brittain, said ``a traditional expertise in criticism and cross-examination, born of long experience but continuously brought up to date''. These officers vet every item informally on the basis of the merits of the case, whether it accords with government policies elsewhere, and above all to ascertain the priority to justify the expenditure. The task of spending properly and prudently the assigned sums is left to the departments concerned. The final say is with the full Cabinet. Invariably as the pursemaster of the nation the Finance Minister's views are taken seriously even by the Prime Minister. All these mean that keeping actual expenditure under manageable proportions has both a political and administrative angle.

This Commission has neither the time nor the necessary political/administrative strength to undertake such a task, and in any case the exercise should be a continuing one. Hence it should not attempt to do the impossible by going into the minutiae. But that does not mean ``bowling a loose ball'' as Mr. Geethakrishnan, chairman of the Expenditure Reforms Commission, said at a meeting organised by the public expenditure round table, meaning he would not like to give any advice that will not be carried out by the political establishment.

On the contrary, the Commission should give a tight and concise report setting out (a) a clearly-defined direction that Indian finance should take, (b) enunciating the principles that should guide the public expenditure reforms and (c) indicating the processes and procedures that should be adopted. If what they say is found politically difficult to carry out or unacceptable for electoral reasons, it should not be the concern of the Commissioners.

Send this article to Friends by E-Mail

Section  : Opinion
Previous : A legacy of neglect
Next     : Call Musharraf's bluff