Trends and Issues in Revenue Expenditure of Government
Revenue expenditures are those expenditures of the government which are used for running the show and don’t create any productive assets and don’t reduce liabilities. These include operational and administrative expenses, welfare schemes, subsidies, pensions, salaries, interest payments, grants, money on defence (except defense equipments) and so on. Revenue expenditure enables the government to determine its ability to deliver services to the public (such as capability to finance subsidy and welfare programmes.)
As per currently available data, India pays one of the highest interest rates in the world on its debt. India also has very high revenue expenditure incurred in the form of subsidy on various items such as food, fertilizer and petroleum, cooking gas, etc.
Trends in Revenue Expenditures
7th Pay commission puts huge pressure on government demanding revenue expenditures
Wages and salaries account for a huge fraction of government expenditure. With incorporation of 7th pay commission, the government’s expenditure is likely to increase by Rs. 1.28 lakh crore in the current fiscal, thus, posing issues for public finances.
Debt is mostly internal but interest payments is a problem
Public debt is either domestic (internal debt) or external debt. India’s internal debt comprises of money raised in the open market through special securities issued to RBI, compensation, treasury bills and other government bonds. The external debt includes money raised by issuing securities to international financial institutions such as IMF, World Bank, IDA, IFAD, ADB, Asian Development Bank and so on.
The current circumstances are as follows: First, most of the debt of India is domestic debt or internal debt, which gives us much needed resilience during ups and downs of global economy. Thus, this is not a concern. However, major concern in revenue expenditures is the interest payment. In this reference, India can be compared to a person, who uses credit card for his day to day affairs. India’s interest payment on borrowings is one of the highest in the world. As per latest report released by RBI, although by the end of March 2017, India’s external debt witnessed a decline of 2.7 per cent over its level at end-March 2016, yet, India’s total external debt was placed at US$ 471.9 billion which is very high. While there has been a decrease by 1.4 per cent in long-term debt, the short-term debt increased by 1.4 per cent. We already know that the country has lower Debt-to-GDP ratio; but at the same time India borrows at a much higher interest rates compared to other countries. Under such circumstances, it is imperative that India should its reliance on high interest external debt soon.
The curious case of subsidies
As per the budget 2017-18, the total subsidy on food, petroleum and fertilisers has been increased by 3 per cent to that of financial year 2016-17.
Food Subsidy
Government had rolled out National Food Security Act in November 2016 to provide subsidised food grains to over 80 crore people. This has led to sudden increase in revenue expenditures on food subsidy in last two years.
Fertilizer subsidy
The fertilizer subsidy bill of the government has remained almost stable in last few years. There was no change in total cost of fertilizer subsidy in budget 2017-18 and government currently bears Rs.70,000 crore every year on fertilizer subsidy. This includes around Rs. 50K crore on Urea and rest on other fertilizers.
Petroleum subsidy
At present, government is providing subsidy on diesel, Kerosene and LPG. The government is currently in process of curbing unnecessary subsidies in fuel sector. Though petrol and diesel prices have been decontrolled, kerosene and LPG gas cylinders are still sold at cheaper rates.
Steps taken to Curb Revenue Expenditure
For your examination, some of the major steps taken by the government towards curbing revenue expenditures are as follows:
- Diesel price was made market determined effective 19th October 2014
- Petrol price was made market determined effective 26th June 2010
- Government launched Direct Benefit Transfer Scheme (PAHAL) in the entire country effective 1st January 2015 wherein the subsidy on Domestic LPG is provided only to the eligible consumer directly in their bank account
- Government rationalized the quota of PDS Kerosene resulting in reduction in subsidy
- Recently, government launched the ‘#Give It Up’ campaign which encourages well-to-do households to voluntarily give up their liquefied petroleum gas (LPG) subsidy so that it could be transferred to the poor households.
Steps taken to reduce its Internal and External debt
The central government is following a debt management strategy which prefers low cost, risk mitigation and market development borrowings. It aims to mobilise borrowings at low cost over medium to long-term subject to prudent level of risk. For internal debt, the government launched Market Stabilisation Scheme (MSS) that envisages issue of treasury bills and other securities to absorb excess liquidity, arising largely from significant foreign exchange inflows.
Steps taken to reduce expenditure on employees
It is not possible for the government to reduce salary of government employees as hike in salary is must to keep pace with inflation. Also, the economy is generating very less jobs per unit of GDP, and government jobs seem a distant dream for individuals. So, to deal with the problem the government has tried to improve its Tax Structure through various measures like- launch of GST in India, changes in income tax slab, curtailing unaccounted money by placing a ceiling of Rs 2 lakh on cash transactions.
