RBI studies suggest ways of improving quality of public spending

The Reserve Bank of India today released two studies which seek to introduce, conceptualise and operationalise a scheme for integrating the 'quality' dimension of public spending into the devolution scheme of intergovernmental transfers as suggested by the Thirteenth Finance Commission.

The two studies - `Introducing Expenditure Quality in Intergovernmental Transfers: A triple-E Framework' and `An Outline of Post 2009 FRBM Fiscal Architecture of the Union Government in the Medium Term', relate to the terms of reference of the Thirteenth Finance Commission.

The first study entitled `Introducing Expenditure Quality in Intergovernmental Transfers: A triple-E Framework' is co-authored by Mala Lalvani of the Department of Economics, University of Mumbai, along with RBI research staff members Kumudini S Hajra (Director of DEAP) and Brijesh Pazhayathodi (research officer at DEAP).

The study illustrates a scheme of inter-se distribution from an incentive fund, which is labeled as a `Quality Control Fund'. This fund could be kept aside to reward states for their performance on three aspects of expenditure quality, viz, expenditure adequacy, effectiveness and efficiency. The study has provided devolution formulas of the QCF based on a quantitative framework covering the three expenditure parameters. Devolution from the QCF would be in the nature of a reward or a bonus to the states for their performance on the various aspects of expenditure quality. The study urges to tie the funds that the states receive from this incentive fund to spending on education and health. Further, a beginning towards result approach may be made by mandating output targets for the funds received from the QCF.

The second study entitled "An Outline of Post 2009 FRBM Fiscal Architecture of the Union Government in the Medium Term" is co-authored by Ravindra H Dholakia of IIM Ahmedabad, along with RBI research staff members Jeevan K Khundrakpam (director of DEAP) and Dhirendra Gajbhiye (research officer at DEAP).

The study emphasises the need for reconciling the discrepancies between the fiscal deficit and movement in debt in designing a meaningful framework on fiscal consolidation in India. The paper finds that discrepancy between the two arose mainly due to: (i) exclusion of off-budget liabilities and Market Stabilization Scheme (MSS) in fiscal deficit while being part of outstanding liabilities; (ii) part of National Small Savings Fund (NSSF) being utilised by the states to finance their deficits being shown as liabilities of the central government; and (iii) financing of fiscal deficit by draw-down or build-up in cash balances.