Expenditure Reform

The introduction of the Nagaland Fiscal Responsibility and Budget Management Bill 2005 by Chief Minister Neiphiu Rio on the first day of the Assembly Monsoon Session should be seen as a welcome move. The Fiscal Responsibility Bill will hopefully become the cornerstone for a larger exercise in expenditure reform, which Nagaland now urgently requires. The timing of the bill could also not have been more appropriate coming as it does on a day when the Government issued the White Paper on utilization of one time Grant of Rs. 365 crore received from the Central Government. Besides, Rio’s own admission that a major part of the State resources were being drained out owing to the salary payment of the government employees, and also that the government was over burdened because of the overstaffing pattern of employees only emphasizes the need for such a legislation. The three corrective measures announced by the Chief Minister—ban on creation of new posts, inter-departmental transfer of existing manpower, Voluntary Retirement Scheme (VRS)—should also be welcomed in the context of expenditure reforms.

A sound expenditure management policy assumes significance because of the growing revenue deficit in the State, which has brought about a situation where most government borrowings are used for financing current consumption expenditure most notably the non-plan side of the budget. Unless a sincere effort is made to keep expenditure under control, any further increase in fiscal deficit will pose a threat of an impending debt trap. In actual practice, Fiscal deficit per se is not a bad thing for any economy. Many countries in Europe have Fiscal Deficits of over 10% but their management of borrowing is more productively channelized into capital expenditure such as creating infrastructure. The problem stems from mismanagement of funds and also the costs incurred by non-development expenditure. To carry out expenditure reform therefore requires greater political will in cutting down on wasteful spending and populist measures.

The proposed Fiscal Responsibility Act (FRA) will enable transparency, stability and accountability in the use of government finances. It will lead to transparency in budgetary planning; ensure stability of government programs and expenditure.

The other essential components for sound expenditure management includes restructuring and reform in State run Public Sector Undertakings, setting up of a Expenditure Reforms Commission (ERC) to lay down clear parameters for government’s revenue and expenditure as well as budgetary reforms, the introduction of a zero base budgeting in respect of all the ongoing programs of the government and the extension of the concept to the government’s budgeting, minimizing fresh recruitment in government departments, doing away with some of the non-merit subsidies and also introducing the concept of user-charges for services rendered by the government. Some of the above components may appear cosmetic but measures like PSU reforms, legislative check on finances (FR Act) and the ERC if implemented sincerely can bring about a substantial cut in government expenditure.

It is equally important to mention that fiscal discipline has been added as a separate factor in the 11th Finance Commission devolution formula for the first time by giving it a certain weight age. This implies that how much grants each state receives will be based on how much of its expenditure is being incurred by the State out of its own resources.

Over and above all this, a radical expenditure reforms, if the government is serious about, must also take into consideration the role of NGOs, private agencies and business houses who could be entrusted to take up task of providing larger number of services where till date the government has been the sole service provider. This will encourage not only privatization and with it efficiency but the government’s expenditure responsibility can also be gradually eased. For the present though, full marks to Chief Minister Neiphiu Rio for pushing through this important legislation for greater fiscal responsibility which will go a long way in managing government expenditure in a more judicious manner.