Thinking about India’s Budgetary Reform

India’s rising fiscal deficit and the need to reform it, is being seen as the top priority by economists and business media.  The question is how do we think about reforming budgetary institutions?

Richard Allen of IMF has written a sitimulating paper on reforming budgetary institutions and challenges the process of reforms brings. Here is a blog post by the author as well.

The paper notes that the development of sound budgetary institutions in countries such as France, the U.K. and the U.S. has taken a very long time ―200 years or more―and is still evolving. It discusses Douglass North’s prediction ―which is supported by available data ―that institutional reform is also likely to be very slow in developing countries since the budget is especially prone to rent-seeking influences. Finally, the paper discusses the currently fashionable emphasis on complex, multiannual PFM reform strategies, which have been strongly promoted by the donor community; and advocates a simpler approach grounded on Schick’s important principle of “getting the basics right.” The paper identifies several areas where further research would be fruitful.

It is a very useful paper and also provides a lit survey on the key issues on public debt management. It discusses the various frameworks by which one can reform the public debt institutions. Here is one para I liked which sums the dilemma for developing countries pretty well:

Finance ministers have an important potential role in coordinating and driving improvements in the budget process; indeed, without their intervention and active leadership, such improvements are unlikely to take place. Unfortunately, in most developing countries, they do not enjoy the powerful status they have in the developed world. Indeed, the national plan (or poverty reduction strategy) is often regarded as the preeminent policy document for planning the allocation of national resources and for attracting donor financing. The division of responsibility for the budget between capital investment projects (managed by the minister of economy) and recurrent expenditures (minister of finance)—another common practice in developing countries—not only fragments the budget process, but significantly weakens the role of the finance minister as a potential leader of the reform process.

One cannot really wish away the other development programs needed in emerging and underdeveloped economies. The question is how do we balance them.

In India’ case also economists are divided over the fiscal deficit. Though a vast majority feels we need to rein in fiscal deficit, there are some in minority that say it should not be at the cost of these development programs. They add the distribution of these programs may not be efficient but then it is a different debate/issue. Now, as these development programs are usually public goods the government has to step in. If its steps in the fiscal deficit rises/remains high. Tough choices really and as usual we don’t really have answers.

3 Responses to “Thinking about India’s Budgetary Reform”

  1. Ten Swedish Lessons for India’s Budget Consolidation Program « Mostly Economics Says:

    […] Swedish Lessons for India’s Budget Consolidation Program By Amol Agrawal I had earlier pointed out to a paper on how Indian policymakers should approach Budgetary […]

  2. Public Finance Resources « Mostly Economics Says:

    […] PFM Blog also points to useful advice from Goran Persson, who stitched Swedish public finances after 1990 crisis. It also has an interview of Richard Allen, the PFM expert at IMF.  I reviewed his excellent paper on the issues here. […]

  3. Oliver Darraugh Says:

    While interest rates at the moment are at some of the lowest to be seen in a long time many are still struggling to continue meeting their mortgage and other debts. While those who took the tracker option are fairing well and enjoying around 11% more income, those who opted for the fixed rate are losing out and are looking to long term ways of clearing their unsecured debts, at least. If you are one of these then contact a debt specialist and run your debt questions by them.

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