Public Budgeting in India

Government budget is a statement of resource and spending proposals for a specified period of time. As per the Indian Constitution, the Central government (Article 112) and state governments (Article 202) are mandated to present their Annual Financial Statement (AFS) before the Parliament and State Legislatures, respectively. Budgets are instrumental in translating the socio-economic development goals of the governments into reality by way of resource provisioning for the professed development.

The paper makes an attempt to delve into and review the fiscal provisions of the Constitution of India, the Constitutional imperatives, the division of fiscal responsibilities between the Centre and States and the amendments from time to time. The roles and responsibilities of the Comptroller and Auditor General and the legislative control on public finances. A critical understanding of the influence of these provisions on the Indian economic system as a whole is provided.

The present paper is an attempt to outline the structure of government’s budgets in the Indian context and to explain the key concepts used in fiscal management and their implications. The media coverage of the budget mainly focuses on the highlights of the Finance Minister’s budget speech and the critical comments by political parties and business interests. Very rarely is any attempt made to analyse the actual budget documents other than a summary of what is called the Annual Financial Statement and a few highlights of taxation proposals. Also, the process of preparing a government’s budget is seldom the subject of public curiosity. The general public therefore remain largely uninformed about the details of the budget proposals relating to how most activities of government are proposed to be financed during the relevant year. This paper is an attempt in the direction of providing a holistic understanding of the budget covering the aspects of planning and budgetary processes.

The government looks at the revenue system as a means towards accomplishing one or more objectives and setting certain criteria or principles as guidelines for developing the revenue system. In common parlance, practice is applied to part of the theory which in turn develops out of practice. Growth process of an economy is highly multifaceted in nature and in the process; a few growth-oriented institutions improve, while the economy faces the challenges in energizing some other. In this process, upholding closeness between theory and practice is not an easy task. This paper focuses on what the theory says about the public revenue and what is in practice, and sources of public revenue and their growth at the central as well as State governments in the Indian context. The gap between theory and practice is quite evident. Realizing the fact that Indian tax system is cumbersome, the central government has initiated reforms in the revenue front which in turn has reflected in the revenue growth. Likewise, the State governments also pursued the reforms and executed several measures in consonance with the central government and achieved the outcomes too. However, much is to be done with regard to cannon of efficiency. This is only revenue side of the fiscal policy.

The paper traces the changing roles of State from time to time, the fiscal functions and the changing importance of public expenditure both in the global and Indian contexts. A historical perspective of growth in public spending and their implications for development are discussed. The paper collates the existing research evidences and the various Committee views on the fiscal scenario in India, especially that of the Finance Commissions. The issues covered include the growth in public expenditure, its implications on economic growth, regional development, quality of public spending and the frameworks adopted by the government to track the outcomes of public spending.

Broad trends in the central government expenditure and its composition especially during the economic reform phase and the emerging issues are analysed in the present paper. Analysis of the deficit trends of the central government highlights a major fiscal concern relating to the composition of fiscal deficit, wherein the revenue deficit constitutes a predominant and largely uncontained share leaving very little room for capital investments, a dire concern for a country struggling with infrastructure inadequacies. Issues concerning dwindling capital expenditure, small and inadequate allocations to social and economic infrastructure, the poor quality of spending, poor translation of outlays into outcomes and inadequate corrective measures emerge from the discussion on the public expenditure analysis. Further, the paper also addresses the issues of public expenditure management and control.

Participatory budgeting at the local government level has gained the momentum in the 1990s. It was very successful in several countries like Brazil and Kenya. This paper examines the budgeting process at local government level in the State of Karnataka and also discusses the provisions under Karnataka Panchayat Raj Rules, 2006. Various best practices regarding Panchayat budgeting and its execution and lessons to be learned from those practices have been clearly examined in the study. This paper emphasizes that the State Government should insist on conducting special Grama Sabha to discuss the budget issues. Expenditure to be incurred should reflect the priorities of the people that are decided in the Grama Sabha.

Public budget reforms have become a buzzword and been very popular among many nations. India is no exception, and sub-national governments too have been making efforts to adopt varied forms of reforms. The present paper presents a critical account of the budget reform initiatives adopted in a fiscally progressive state—Karnataka with a special focus on the Program Performance Budget (PPB) attempted by the state with support from the United State Aid for International Development (USAID). The paper provides an outline of the PPB framework and critically evaluates the experience in Karnataka. It is argued that an essential requirement for PPB framework with an outcome focus to be truly meaningful is to identify the relevant outcome indicators and generate data to verify progress in that direction. India in general and Karnataka in particular have a long way to go in this endeavor.

The new public management systems emphasising on the transparency, cost-effectiveness and managerial flexibility have suggested moving away from cash-based budgeting to accrual-based budgeting. This article offers an analysis of the limitations and benefits of cash and accrual systems. An attempt is also made to evaluate the experiences of New Zealand and Australia with accrual budgeting in order to gain insights into how accrual budgeting has impacted in areas of public performance, sustainability and accountability. The paper further examines the prospects of introducing accrual accounting and budgeting in India, based on the insights gained from the experiences of New Zealand and Australia.

An attempt is made in the paper to provide an account of the historical evolution of the concept of accountability. History shows that the concept and content of accountability has been changing over the centuries both in India and other countries. It always ended up as a compromise between the demands of the people and what the ruling powers were willing to concede. Accountability is and has always been a two-way expression of what the people think of their government and what the governments think that they can realistically do in order to meet the demands and hopes of the people. In the process of arriving at workable formulations of the two-way relationship between the people and the government, the concept and content of democracy on the one hand, and systems of governance on the other, have gone through several changes with each change leading to  a new change. At no stage, however, the changes were part of a preconceived plan; rather they evolved from time to time neglecting the practical situations. Accountability thus varied from time to time, and with it, the content of financial accountability also changed from time to time.

The paper presents an account of the government accounting and auditing principles, structures, the roles of treasury, Accountant General and the government accounting reform initiatives of Government of Karnataka. The structure of accounts under the Consolidated Fund and the coding pattern of revenue and expenditure are discussed. Major roles and responsibilities of the Comptroller and Auditor General (CAG) and the major checks undertaken are critically evaluated. The paper also presents a critical account of the major reform initiatives under treasury system initiated in Karnataka. Issues regarding effectiveness of corrective action and public financial accountability in the backdrop of the delays that occur in addressing the audit paras and the subsequent limited scrutiny by the parliament institutions are addressed.

The present study has made an effort to answer the vital question as to what extent the unmet infra needs of the economy have been addressed by the alternative strategy to the public budgeting through public–private partnerships (PPPs) in the Indian context. The analysis reveals that there exists a strong theoretical support base for PPP as an alternative to the public budgeting of infra services provision. The growth of PPP projects across the infra sub-sectors and various geographical regions has changed the public provisioning of infra services in India since the late 1990s. The few infra sub-sectors, mainly transport, limited to national highways (NHs), airports and urban infra projects being developed through PPP mode, whereas the health and education and rural infra projects continue to remain unattractive despite their huge inadequacy. The study also brings out the positive impact of competition on the project cost of PPPs, in terms of reducing the financial burden of governments. The results also reveal that ex-ante competition has an inverse association with the unit cost of projects in the case of select national highway PPPs. Finally, the study, based on an analysis of the quantitative and qualitative value for money (VfM), explains the financial and non-financial savings to the government and other users from the select NH projects. The quantitative VfM results prove that in respect of three out of the four select NH PPPs, the government has been able to save substantially (i.e. a sum of Rs. 1037 crore through PPP mode), while the qualitative VfM results prove that there are significant gains to the users in terms of a reduced travel time, fuel efficiency, travel time consistency, improved road safety and pothole-free roads.