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January 21, 2020

Delivering on India’s Public Finance Reform Promises

India pfm
Posted by Abhirup Bhunia[1]

India’s annual federal government budget for 2019-20 was worth $391 billion. A lower-middle income country with 21 percent of its population still below the poverty line, India runs some of the world’s largest social safety net programs. These include MNREGA – the world’s largest public works program - and the Public Food Distribution System, which account for more than 1 percent of GDP.

With 1.38 billion people and burdened by many of the world’s developmental challenges, India can benefit from committed implementation of performance-based budgeting and/or results-based management. The country has substantial capacity in basic budgeting functions, and reasonably strong and reliable PFM mechanisms are in place. Incremental reforms over many years have improved PFM performance in areas such as accounting, fiscal transparency, policy-based budgeting, reporting, and auditing.

To address remaining inefficiencies in strategic resource allocation and public service delivery, India could improve its record of implementing results-based budgeting reforms already rolled out; and adopt diagnostic tools such as public expenditure reviews (PERs) and public expenditure efficiency analyses (PEEAs).

Improving the effectiveness and efficiency of public expenditure and the optimal allocation of scarce resources are cornerstones of good practice. Results-based management (RBM) provides a governing framework, and accompanying systems/mechanisms, to measure and manage developmental results (outputs, outcomes and impacts) against approved budgetary expenditures. This can be done by postulating a set of concrete outcomes against sums of money spent for the inputs, activities and outputs that are supposed to lead to those outcomes. In other words, every unit of public money should be accounted for by corresponding outcomes (performance-based budgeting). Variants of this paradigm have been implemented in many OECD countries and an increasing number of emerging markets and lower-income countries. Many countries have also implemented monitoring and evaluation systems to measure the outcomes of the RBM framework.   

The federal (union) government of India has quite a long history of developing the performance budgeting and RBM approaches. Early attempts culminated in the introduction of ‘Outcome Budgets’ in 2005, the Performance Monitoring and Evaluation System (PMES) for line departments in 2009, and the recent structural reform to bring public schemes and projects under a monitorable ‘Output-Outcome Monitoring Framework’ (OOMF) in 2017-18. Now, expected outputs and outcomes of schemes and programs are presented to the Parliament along with their financial outlays. These reforms have been designed to foster greater accountability for government agencies as well as more efficient service delivery.

But the reforms have suffered from poor implementation. A 2018 audit of India’s Outcome Budgets for two ministries, including the Ministry of Drinking Water and Sanitation which implements the flagship Swachh Bharat Mission-Gramin program (budgetary allocation of USD 1.78 bn in 2020) found myriad problems – unquantifiable and non-measurable targets, lack of link and coherence between outlays and targets, inconsistent and unreliable reported data, and unchecked use of process and output indicators as ‘outcomes’. Such issues can undermine the purpose of reforms and potentially derail them.

RBM reforms will only flourish when data systems are reliable and high-quality. While most Indian programs and departments have management information systems in place, these systems will typically capture at best only physical/output level data. Many serious issues of data quality – in terms of validation and authenticity, as well as frequency – remain. RBM requires a much more systematic use of data, a dedicated approach, and the existing multiple sources of information – results framework documents, OOMF, outcome budgets, evaluation indicators, etc. – need to be rationalized and linked together.

Concerns with data availability and quality are even more serious at the sub-national levels of government, which is characterized by generally low PFM capacity, and poor reporting standards. This is problematic, as the federal government now devolves over 40 percent of its taxes to states (the second administrative tier), requiring them to make crucial expenditure and investment decisions. Many urban local bodies (ULBs – the third administrative tier) score only a “D” for the reliability of the service data reported by them – the lowest reliability level. 

Existing reforms can be better implemented, and improving the culture of collecting, reporting and using data to inform resource allocation decisions is one way of doing it. To evaluate the effectiveness of public finances, the union government could go one step further and consider conducting periodic PERs) and PEEAs. Several advanced countries have already moved into this space – for example, the ‘strategic program reviews’ in Canada, ‘interdepartmental policy reviews’ in the Netherlands, ‘(comprehensive) spending reviews’ in the United Kingdom. Even some developing countries have implemented PERs - mostly through donor supported programs – at the central government level.

By institutionalising PERs and PEEAs, India could rein in wasteful expenditure, which is particularly likely to occur when several departments and agencies run multiple programs, often with overlapping mandates. The current government, through the introduction of initiatives such as the Aadhar-based validation of beneficiaries, and a direct benefits transfer scheme for subsidies have signalled their intent and capacity to deliver better public services. NITI Aayog, the country’s premier policy think-tank which provides directional and policy guidance to the government, is well-placed to anchor efforts to institutionalise PERs in India.

 

[1] Abhirup Bhunia works at an international development consultancy with their Economics & Public Financial Management (EPFM) and Monitoring, Evaluation & Learning (MEL) practices. He has conducted PFM and MEL assignments globally (including in India, Bangladesh, Myanmar and Ethiopia) for IFIs and donors such as DFID, USAID, the World Bank, and UN agencies. 

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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