Q.The public expenditure management is a challenge to the Government of India in the context of budget making during the post-liberalization period. Clarify it.

Syllabus Point

• Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

1. Introduction

Public Expenditure Management (PEM) is a critical instrument of state policy and a cornerstone of good governance. The primary objectives of PEM are to achieve overall fiscal discipline, ensure strategic allocation of resources, promote operational efficiency, and maintain macroeconomic stability.

graph TD
    A["Formulate Budget"] --> B["Allocate Budget"]
    B --> C["Execute Expenditure"]
    C --> D["Monitor & Evaluate"]
    D --> E["Conduct Audit & Accountability"]
    E --> A

2. Body

Why Public Expenditure Management Became a Challenge Post-Liberalization

• 1. Fiscal Consolidation vs. Welfare Commitments:
  • Post-1991, India adopted strict fiscal discipline policies to curb the fiscal deficit.
  • Simultaneously, the government had to address expanding social sector demands (e.g., education, healthcare, and MGNREGA).
  • Challenge: Balancing fiscal responsibility with the imperatives of inclusive growth.
• 2. Shift from Plan to Non-Plan Expenditure:
  • The abolition of the Planning Commission and the subsequent merger of Plan and Non-Plan expenditure blurred spending priorities.
  • Challenge: Ensuring that long-term developmental capital expenditure does not get compromised in favor of routine administrative costs.
• 3. Rise in Committed Expenditures:
  • A significant portion of the union budget is locked into interest payments, pensions, and subsidies.
  • Challenge: This leaves highly restricted room for discretionary, capital, and developmental spending.
• 4. Populist Schemes and Political Pressures:
  • Competitive electoral politics often leads to populist announcements (e.g., farm loan waivers, freebies).
  • Challenge: These schemes are frequently poorly targeted and fiscally unsustainable, diverting funds from long-term policy goals.
• 5. Federalism and Centre-State Fiscal Relations:
  • Following the implementation of GST and the recommendations of the 14th Finance Commission, states receive a larger share of central taxes.
  • Challenge: The central government faces tighter spending constraints while continuing to bear the primary burden of major national welfare schemes.
• 6. Need for Outcome-Based Budgeting:
  • Traditional budgeting systems focused heavily on financial inputs and allocations rather than tangible outcomes.
  • Challenge: Transitioning to a performance-based budgeting system that tracks actual outcomes and ensures transparency.
• 7. Increasing Role of Public-Private Partnerships (PPPs):
  • PPPs have become vital in infrastructure, education, and healthcare.
  • Challenge: Managing contingent liabilities and designing robust contracts to ensure value for public money.
• 8. Volatile Global and Domestic Conditions:
  • A liberalized economy is highly exposed to external shocks (e.g., global oil price fluctuations, currency volatility, and pandemics).
  • Challenge: Building sufficient fiscal buffers and maintaining spending flexibility during economic downturns.

Steps Taken by the Government

• Enactment of the FRBM Act (2003) to institutionalize fiscal discipline.
  • Introduction of Gender Budgeting, Outcome Budgeting, and Zero-Based Budgeting.
  • Widespread implementation of Direct Benefit Transfers (DBT) to eliminate leakages.
  • Deployment of the Public Financial Management System (PFMS) for real-time tracking of public funds.
  • A renewed and enhanced focus on Capital Expenditure (Capex) in recent union budgets.

3. Conclusion

In the post-liberalization era, public expenditure management has evolved beyond simple resource allocation; it is about maximizing the efficiency and accountability of public funds in a dynamic economic environment. A robust PEM framework is indispensable for maintaining fiscal stability, driving sustainable economic growth, and reinforcing trust in public governance.