Fiscal Management by Controlling Expenditure

Topics: Public finance, Tax, Keynesian economics Pages: 6 (1663 words) Published: March 20, 2013

After discussing revenue side of the fiscal, here in this section we will shed light on the expenditure, another way of controlling fiscal deficit, of Indian government. Focus of this part will be mainly on how irregularities, inefficiencies along with corruption contribute to higher fiscal deficit on budget sheet. We have also tried to come up with few suggestions, which we think if taken in to account while designing and implementing fiscal policies can help achieve the ambitious fiscal deficit target of 5.1% of GDP set by government for financial year 2012-13, especially when economy has already passed the crest.

Task of managing expenses is harder compared to the job of generating revenue, as there are many ways government can spend money. Objective of making these expenses balanced and effective so that government does not lose out on the potential source of future revenue with parochial view of cutting expenditure further complicates the task at hand.

Main issues that surround government while making important fiscal decisions related to expenditure can be listed as: 1) Issues in achieving correct balance between capital and revenue expenditure 2) Issues in managing subsidies

3) Issues in managing interest payments

1. Issues in achieving correct balance between capital and revenue expenditure: Economists have always been in the quest of equilibrium point where all macroeconomic variables balance, and each one them contributes positively to keep the engine of growth running and achieve social welfare. One aspect of fiscal management is to achieve balance between capital and revenue expenditure. So the major dilemma that government faces today is how much to spend on creating capital assets that will repay in long run and keep the fiscal deficit within limit at the same time.

A look at the budget for last five, six years does not really portray a very optimistic picture about the government spending on creating capital assets. It has been nearly stagnant around the figure of 12% of total expenditure. High capital expenditure is a necessity in a developing young economy like India where nearly 2.5% people enter workforce every year. Research has shown that one percent growth in economic output creates 0.4% new jobs. Going by this logic India will need a year on year growth of approximately 7% to absorb these new entrants so that unemployment does not shoot out of proportion. It seems to be a very ambitious target unless government invests in creating infrastructure. So there is need to increase capital expenditure in order to enable the economy to achieve sustainable growth in the long run.

Having said so, pressure on government to reduce the fiscal deficit, one of the key indicators of health of an economy, is so high that it can end up reducing its spending on creating assets cause it’s is not compulsory expense, which is not the case with revenue expenditure. So the choice between decreasing spending to meet the budget or increasing revenue to keep up with expenses is really hard to make especially in short run.

2. Issues in managing subsidies:
For the last decade India has managed to grow considerably well, but the failure of government to distribute this newly created wealth equally among its citizen has resulted in inequality and left behind many impoverished and poor people. Nearly 26% Indian population is below poverty line, absolute number of which is more than the entire population of continent of Africa. In order to ensure the social justice and equality government has to redistribute wealth by taxing the rich and giving it out to poor. One of the majors adopted by Indian government as an instrument of redistribution of wealth is subsidy.

Due to inefficiencies in administration and corruption in the system government faces many issues due to which benefit of the subsidies does not reach the intended people, but still increase the expenditure ultimately...
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