Answer:
| Approach:
Introduction
- Mention a clear definition of Public Expenditure Management (PEM).
Body
- Elaborate on the challenges faced in budget making due to changes post liberalization.
Conclusion
- Conclude saying that liberalization has led to growth in public expenditure especially on infrastructure and social needs but there has not been a similar increase in tax income and this creates challenges in PEM.
|
Introduction:
Public expenditure management (PEM) is the approach of prudent use of government financial resources so as to achieve good governance. It deals with allocation of public financial resources into public administration, economic growth and for some welfare schemes. Primarily it concerns overall fiscal discipline, allocation of resources, operational efficiency and macro-economic stability.
Body:
In the aftermath of the LPG reforms in 1991, the management of public expenditure is facing challenges on the following fronts:
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- Exposure to Global economic shocks: Global economic shocks such as the 2008 global economic slowdown, fed tapering, crude oil prices, trade wars, etc have much more effect on the domestic economy due to an increasingly integrated global economy. This impacts the budget estimates.
- Fiscal Policy: Government needs to create infrastructure and give social support. Maintaining the balance between the demands for increased government spending on welfare schemes and infrastructure while keeping the fiscal deficit within 3% of GDP as recommended by FRBM Act, 2003 is a huge challenge.
- Banking sector: Prior to LPG reforms, India undertook nationalization of banks. Post-LPG the government is now required to recapitalise the public sector banks as the banks cannot do it on their own given the fact that they operated for financial inclusion and not just profits.
- Privatization: Post-liberalization, capabilities of the private sector have grown manifold while public sector enterprises reel under inefficiencies. Thus, there is a demand for disinvestment or privatization of PSE’s.
- Narrow tax net: Post-liberalization, incomes have grown steadily but similar improvement is not seen in income tax. It constrains the government from increasing its social spending. Subsidy burden has grown exponentially and this creates a shortage for capital investments.
- Inadequate capacity and efficiency of public institutions: Substantive portion of budget allocation towards various schemes remains unutilized and underutilized due to poor implementation and structural bottlenecks. It leads to poor efficiency and cost overruns.
Conclusion:
In the aftermath of LPG reforms, the nation’s per capita income increased, governments expenditure increased and demands for infrastructure investment also increased. But there has not been a commensurate increase in the tax to GDP levels. As a result, public expenditure management has become a challenge to the government. Bimal Jalan Committee on expenditure management has recommended steps such as rationalizing subsidies, sticking to a fiscal path, and strategic divestment. Prudent public finance management would be key to unlocking the growth potential of the Indian economy.
