Indian Economy, 5th edition (86 page)

(i)
It was
New Zealand
which
first
introduced such a legal binding on the government’s powers of money creation. Here the central bank is legally bound to ensure that money creation by the government does not increase the rate of
inflation target
—
it means that the central bank has the overriding powers on the government there in the area of extra money creation.
46

(ii)
The
second variant
is putting some firm legal or constitutional limit on the size of government deficits or the power of the government to borrow.
Germany
and
Chile
had such an arrangement—today Germany is bound to the fiscal limits prescribed by the Maastricht Treaty. In the late 1990s, an upper limit on the government’s powers to create deficit was introduced.
47

(iii)
Some countries introduced the so-called
‘Currency Board’
type of arrangement to serve the same purpose—this is the
third variant.
In this arrangement, money supply in the economy is directly linked to changes in the supply of foreign assets—neither the government nor the central bank has any independent powers to create money, as growth in money supply is not allowed to exceed growth in the foreign assets.
48

It was in 1994 that India took the first step in this direction when the central government had a formal agreement with the RBI to limit its borrowing through
ad hoc
treasury bills to a predetermined amount (Rs. 6,000 crores in 1994–95).
49
However, it was a highly liberal arrangement with the government having the ultimate powers to revise the aforesaid predetermined amount by a fresh agreement with the RBI. The importance this beginning had was finally in the enactment of the FRBMA 2003—a historic achievement in the area of fiscal prudence in the country.

Fiscal Consolidation in India

The average combined fiscal deficits, of Centre and states after 1975, had been above 10 per cent of the GDP till 2000–01. More than half of it had been due to huge revenue deficits. The government were cautioned by the RBI, the
p
lanning Commission as well as by the IMF and the WB about the unsustainability of the fiscal deficits. It was at the behest of the IMF that India started the politically and socially painful process of fiscal reforms, a step towards fiscal consolidation.
50
A number of steps were taken by the government at the centre in this direction and there had been incessant attempts to do the same in the states’ public finances too. Major highlights in this direction can be summed up as given below:

1.
Policy initiatives towards cutting revenue deficits:

(i)
Cutting down expenditure—

(a)
Cutting down the burden of salaries, pensions and the PFs (down-sizing/right-sizing of the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension reforms-PFRDA, etc.);

(b)
Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilisers, sugar, drugs to be rationalised, it was done with mixed successes);

(c)
Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of external debts, debt swaps, promoting external lending, minimal dependence on costlier external borrowings, etc.);

(d)
Defence being one major item of the expenditure bilateral negotiations initiated with
c
hina and Pakistan (the historical and psychological enemies against whom the Indian defence preparedness was directed to, as supposed) so that the defence force cut could be completed on the borders, etc;

(e)
Budgetary supports to the loss-making PSUs to be an exception than a rule;

(f)
Expenditure reform started by the governments in different areas and departments;

(g)
General Services to be motivated towards profit with subsidised services to the needy only (railways, power, water, etc.);

(h)
Postal deficits to be checked by involving the post offices in other areas of profit;

(i)
Higher education declared as non-priority sector; fees of institutions of professional courses revised upward; etc.

(ii)
Increasing
revenue receipts
:

(a)
Tax reforms initiated (Cenvat, VAT, Service Tax, GST proposed, etc.);

(b)
The PSUs to be disinvested and even privatised (if a political concensus reached which alludes today);

(c)
Surplus forex reserves to be used in external lending and purchasing foreign high quality sovereign bonds, etc.

(d)
State governments allowed to go for market borrowing for their plan expenditure, etc.

2.
The borrowing programme of the government—

(i)
The
w
ays and Means Advances (WMA) scheme commenced in 1997 under which the government commits to the RBI about amount of money it will give as part of its market-borrowing programme, to bring the transparency in public expenditure and to put a political responsibility on the government.

(ii)
The RBI will not be primary subscriber to government securities in the future—committed way back in 1997.

3.
The fiscal responsibility on the governments:

(i)
The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 (voted by all political parties) which puts constitutional obligation on the government to commit so many things as fiscal responsibility comes in the public finance—fixing annual targets to cut revenue and fiscal deficits; the government not to borrow from the RBI except by the WMA; government to bring in greater transparency in fiscal operations; along with the Budget the government to lay statements regarding fiscal policy strategy in the House and Quarterly Review of trends of receipts and expenditures of the government.

(ii)
A mechanism (to include state governments under the umbrella of fiscal responsibility) was advised (now implemented, too) by the 12th Finance Commission which allows the state governments to go for market borrowing (without central permission) for their need of plan development provided they pass their fiscal responsibility acts (FRAs) and commit to the fiscal responsibility regarding cutting their revenue and fiscal deficits. As many as 19 states have already passed their FRAs by now.

At present, we cannot conclude that once the FRBM Act is passed the fiscal abberations will be automatically checked. At the same time, we cannot say whether it will hamper the social cause. But experts agree upon that at least a legislative beginning has taken place and the opposition in the House must have got a tool (and so the people) to create enough democratic pressure on the governments of the time regarding fiscal prudence.

Zero-Base Budgeting

The idea of zero-base budgeting (ZBB) first came to the privately owned organisation of the USA by the 1960s. This basically belonged to a long list of guidelines for managerial excellence and success, others being Management by Objectives (MBO), matrix Management, portfolio Management, etc to name a few.
51
It was the US financial expert
Peter Phyrr
who first proposed this idea for government budgeting and Jimmy Carter, Govornor of Georgia, USA was the first elected
52
executive to introduce ZBB to the public sector. When he presented the US Budget in 1979
as the US President
it was the first use of the ZBB for any nation state. Since then many governments of the world have gone for such budgeting.

Zero-base budgeting
is the allocation of resources to agencies based on periodic re-evaluation by those agencies of the need for all the programmes for which they are responsible, justifying the continuance or termination of each programme in the agency budget proposal—in other words, an agency reassesses what it is doing from top to bottom from a hypothetical
zero base.
53

There are three essential principles of the ZBB. Some experts say it in a different way there are three essential questions which must be answered objectively before going for any expenditure as per the techniques of ZBB:

(i)
Should we spend?

(ii)
How much should we spend?

(iii)
Where should we spend?

There are
three
special features of this budgeting which distinguishes it from the traditional budgeting. These features, in brief, are as under:

(i)
The conventional aggregate approach is not applied in it, in which each department of the government prepares their own budget for many activities in the aggegate and composite form, making it difficult to scrutinise each and every activity. In place of it every department needs to justify its existence and continuance in the budget document by using the mathematical technique of econometrics, i.e., cost-benefit analysis. In a nutshell, every activity of each department is ‘X-rayed’ and once the justification is validated they are allocated the funds.

(ii)
Economy
in public expenditure is the
raison d’etre
of this budgeting. This is why the ZBB has provisions of close examination and scrutiny of each programme and public spending. Finally, the public spending is cut without affecting the current level of benefits of various public services accruing to the public.

(iii)
P
rioritising
the competing needs is another special feature of ZBB. Before allocating funds to the different needs of the economy, an order of priority is prepared with utmost objectivity. As the resources/funds are always scarce, in the process of prioritised allocation, the item/items at the bottom might not get any funds.

Side by side its benefits, there are certain
limitations
too before the ZBB which prohibits its assumed success, according to experts. These limitations have made it subject to criticisms. The limitations are as given below:

(i)
There are certain expenditures upon which the government/parliament does not have the power of scrutiny (as the ‘
c
harged Expenditure’ in India).

(ii)
There are certains public services which defy the cost-benefit analysis—defence, law and order, foreign relations, etc.

(iii)
Scrutiny is a subjective matter and so this might become prey to bias. Again, if the scrutinisers have a complete utilitarian view many long-term objectives of budgeting and public policy might get marginalised.

(iv)
It has scope for emergence of the Ministry of Finance as the all-powerful institution dictating other ministries and departments.

(v)
Bureaucracy does not praise it as it evaluates their decisions and performances in a highly objective way.

Despite the above-given strong limitation, the ZBB has a sound logic and should be considered a long-term budgetary reform process. The basic idea of this form of budgeting is to optimise the benefits of expenditure in every area of activity and in this sense it is exceptional. To the extent the corporate world is concerned, this has been a very successful financial management tool.

In India, it is believed to be in practice since 1997–99. We cannot say that India is a success in ZBB, but many of the profit-fetching PSUs have been able to use it successfully and optimise their profits.

RESULTS-FRAMEWORK DOCUMENT
(RFD)

In September 2009, the Indian PM approved the outline of a
Performance Monitoring and Evaluation System (PMES)
for government ministries/departments. Under PMES, each ministry/department is required to prepare a Results-Framework Document (RFD). It has been adopted by the GoI to monitor the performance management of various ministries/departments. The RFD system is being implemented in various ministries/departments in phased manner – was implemented to 59 ministries/departments for the year 2009-10, increasing every year in 2013-14 it will get implemented in 84 ministries/departments.
Performance Management
in the government is a
new concept
which determines the performance index based upon the agreed objectives, policies, programme and projects/schemes. To ensure the success in achieving the agreed objectives and implementing agreed policies, programme and projects, the RFD also includes a commitment for required resources and necessary operational autonomy.

A ‘RFD provides a summary of the most important results that a organization expects to achieve during the financial year’. The document has two main purposes –

(i)
Move the focus of the organization ‘from process-orientation to results-orientation’; and

(ii)
provide an objective and fair basis to evaluate organization’s overall performance at the year-end.

The RFD Guidelines are divided into
three broad sections:
1.
Format of RFD;
2.
Methodology for Evaluation; and
3.
RFD Process and Timelines

1. Format of RFD

A Results-Framework Document (RFD) is essentially a record of understanding between a department/ministry representing the people’s mandate, and the Head of the organisation responsible for implementing this mandate. This document contains not only the agreed objectives, policies, programme and projects but also success indicators and targets to measure progress in implementing them. To ensure the successful implementation of agreed actions, RFD may also include necessary operational autonomy. In the case of the Responsibility Centres (attached offices, subordinate offices, and autonomous organisations), the RFD will represent a record of understanding between the parent department/ministry and the Responsibility Centre. The RFD seeks to address
three basic questions
: