Ministry of Finance (1996), Guidelines on Expenditure Management—Fiscal Prudence and Austerity, Office Memorandum of the Department of Expenditure (India).
Prepared by Dimitri Tzanninis.
The paper makes only selected reference to spending at the state level. A more detailed discussion of state-level expenditure issues is contained in World Bank (1995), and in Chapter I of SM/92/205 (1½3/92). Furthermore, Chapter III of SM/94/48 (2/25/94) illustrated the issues involved in state finances with a case study of Uttar Pradesh.
Grants to states constitute the single largest category of non-interest current expenditure of the central government. In 1995/96, about 70 percent of these grants were plan grants, which are block grants given as central support to state development plans.
This increase masks a gradual erosion in real wages in the upper pay scales of the civil service through the partial indexation for cost-of-living changes.
About 3 percent of civil servants leave the payroll each year.
It is not clear how much of the reduction in employment in the Railways represents reductions in casual labor.
Surplus employees receive foil compensation, and are required to report to work, but have no duties to perform. Although surplus employees cannot object to a transfer, it has been very difficult in practice to redeploy employees in areas outside the area of their recruitment. Moreover, there is no retraining to improve mobility of surplus or regular employees.
A reliable estimate of surplus labor in the central government would require a manpower audit, which does not exist in India. The manpower audit is needed to review functions of departments, and identify surplus labor and redundant or overlapping departments.
Previous Pay Commission recommendations have typically included some retroactive component.
Such benefits include, among others, subsidized housing, education, and health services.
The previously large export subsidy (0.5 percent of GDP), was eliminated in 1991/92 in the context of trade liberalization and exchange market reform. There are a range of other subsidies, many substantial, in the Indian economy, including on rural electricity and irrigation, kerosene and liquefied propane gas, passenger rail traffic, and small loans. Many of these are covered by cross-subsidization within a sector or incur a burden on state, rather than central government, finances.
The size of the subsidy understates the true budgetary cost, since public production units as a whole suffer losses, which are covered separately through budgetary transfers. Three of the nine public production units are chronic loss-makers, with losses totaling Rs 8.9 billion (0.1 percent of GDP) in 1995/96.
A pre-tax return on net worth corresponding to post-tax return of 12 percent is given to manufacturers under the Retention Price Scheme. Retention prices vary by manufacturer, depending on their unit costs.
Grain exports, however, increased in 1995/96 in response to good supply conditions and large stocks.
The Revamped Public Distribution System (RPDS), introduced in 1992, is an exception to this general feature of the system, providing foodstuffs to tribal and inaccessible areas, where the incidence of poverty is higher, at prices substantially lower than in PDS shops.
In addition to grants and loans, statutory transfers include a share of some centrally collected taxes distributed according to the recommendations of the Finance Commission. See SM/92/205 (1½3/92).
Centrally sponsored schemes are designed and monitored by the central government, implemented by state governments, and financed mainly by the central government.
The modified Gadgil formula allocates central assistance to states on the basis of fixed weights assigned to population, state per capita income, fiscal management, and state-specific problems.
States have limited authority to raise financing on their own account. The Constitution forbids states from accessing foreign financing, and from borrowing on domestic markets without the central government’s consent if there are any outstanding liabilities to the central government.
The interest rate charged on these loans is 14.5 percent per annum. However, the effective cost to the central government from administering the small savings scheme is about 18 percent per annum on these funds. Loans against small savings collections have a maturity of 25 years and a five-year grace period, although the deposits themselves are only up to five years in maturity.
The Tenth Finance Commission has recommended that the states’ share of revenues collected by the central government be set at a uniform rate of 29 percent and frozen for 15 years. Customs duties, corporate income tax, and services tax-which at present are not shared with states-would be included in the divisible pool, along with the currently shared excise duties and personal income tax.
These measures included the requirement that posts left vacant for one year would be abolished, the decision to cut employment and departmental expenses by 10 percent, and strict enforcement since 1994 of an older rule that departments and agencies could not transfer funds from plan to non-plan expenditure.