Managing Public Finances: What public finance documents don't tell you

Economist Anoop Singh's book is a laudable initiative to create greater awareness about healthy public financial management in India

Managing Public Finances in a New Global Era: India’s Experiences and Challenges

by Anoop Singh

Published by Academic Foundation

336+XXXII pages ₹1,795

  The story of India’s public finances is mostly discussed and debated in short bursts. The need for fiscal consolidation or fiscal policy reforms assumes urgency in the national media and among experts mostly around the time the Union government presents its annual financial statement, or the Budget. Once the Budget exercise is over, the debate over fiscal issues also fades out.

 

Every year, about 30 governments in the states and Union Territories also produce their budgets, but they too provoke little discussion before or after their presentation. Even the national media gives short shrift to the importance of states pursuing a path of fiscal prudence — so much so that rarely do the fiscal deficit numbers provided in state finance ministers’ Budget speeches attract any attention in the news coverage. Instead, the state finance ministers’ focus on big projects and welfare schemes hogs the limelight.

 

Anoop Singh, a member of the 15th Finance Commission and an economist who spent many years in the Reserve Bank of India and the International Monetary Fund, has made a signal contribution in trying to change this pattern of public discourse. His book, Managing Public Finances in a New Global Era, scrutinises public finances in India, an exercise that is bound to ignite a much-needed debate over how the Union and state governments frame their annual budgets. Hopefully, this laudable initiative will result in greater awareness about what constitutes a healthy public financial management in the country.

 

The book is neatly divided into two sections. The first section examines India’s fiscal architecture and the second focuses on the prevailing climate change governance structure, emphasising that it must be rooted in robust public financial management systems. Unsurprisingly, the second section, apart from providing a brief overview of India’s climate change commitments, lists a few basic steps to integrate green public financial management practices into government processes.

 

But the more striking revelations are in the first section of the book. As the author rightly notes, the first section is the core of the volume as it analyses data gaps, off-budget practices and institutional weaknesses that adversely impact fiscal transparency. This section provides important insights into subsidy reporting, misclassification of capital expenditure, and how states target fiscal prudence. There are also important recommendations for reforming India’s public financial management system to improve fiscal governance, reporting integrity and government accountability.

 

All these suggestions should ideally be taken up seriously not only by the finance ministries at the Union and state governments, but also by the Comptroller and Auditor General of India, which would do well to incorporate some of the yardsticks Dr Singh has recommended for inclusion in its auditing and assessment exercise. However, the book stands out in highlighting startling gaps in how governments measure and present their subsidies and capital expenditure to legislative bodies.

 

Dr Singh points out that there is no standard, universally accepted definition of subsidy at either the Union or the state level. “Freebies, tax rebates, cash transfers and implicit subsidies are often selectively omitted or included, making comparisons difficult,” Dr Singh notes, underlining the need for a uniform framework. Other instruments used to bypass scrutiny and conceal financial liabilities while allocating resources for subsidies include off-budget financing, extra-budgetary resources, and deferred payments. These practices result in risks to financial credibility and debt sustainability. Consequently, over the last many years, the actual subsidy as a percentage of gross domestic product (GDP) has been higher than the subsidy reported in Budget documents.

 

Equally disturbing is the author’s assessment that the actual capital expenditure by the Union and state governments is misleading.

 

For the states, Dr Singh argues that over 40 per cent of their capital expenditure is for debt repayment, not tangible asset creation. Similarly, the Union government’s actual capital spending on creating non-financial assets is lower than its budgetary gross estimates. This assessment is based on the principles laid down in the International Monetary Fund’s Government Finance Statistics Manual.

 

On off-budget borrowings, the author notes that some progress has been achieved at the Centre, but more needs to be done for the states. Dr Singh’s central argument is that India’s public finance management systems at the Union and state levels lag international best practices, although several committees, including the finance commissions, have recommended reforms. An interesting suggestion the author makes is that states should present their annual budgets before the end of February, just as the Union government now presents its budget on February 1 to facilitate passage before the financial year starts.

 

Rich in public finance data from the last couple of decades, the book makes a compelling argument that Union and state governments must reform their budgetary practices without delay. In other words, the Union and state governments must reform their budgetary practices to make India’s public financial management system comprehensive, integrated, and consistent with international best practices.