Stop the Money Spill

In the run up to Budget 2016, Minister of State for Finance Jayant Sinha had raised a very pertinent issue. He tweeted: "Important to understand constraints of the government. Should we tax more, spend less or borrow more? Careful balance needed."

Sinha's concern stems from the fact that India's fiscal deficit is financed mostly through domestic sources, and nearly 85 per cent of it comes from market borrowing. Last year, the government had paid interest of nearly Rs 3,00,000 crore. In essence, if the government could cut down on its borrowings, it could reduce interest payments and, thereby, reduce the overall deficit.

For instance, when Finance Minister Arun Jaitley pledged Rs 3,45,000 crore this year to fund important schemes, it was also about borrowing up to 3 per cent of India's GDP. And, borrowing at this scale distorts markets, raises the cost of capital, crowds out private borrowers and is also grossly inefficient. If the government were to adopt IT-enabled, just-in-time financing, borrowing could be smoothened out and it could reduce the burden on the exchequer and markets, not to mention improve programme delivery.

Part of the reason why government borrowing is lumpy is the slow embrace of technology within its functioning. A few departments notwithstanding, India's public finance management and administrative systems still run on manual systems of files and cheques. So, even if payments or Direct Benefit Transfers (DBT) are increasingly being made electronically, the provisioning of these funds through the system is still done the old way.

In fact, when Jaitley presented the expenditure statement of the previous financial year, he was talking about the amount of money the government had released from the consolidated fund, and not what was actually spent. At present, there is no way of finding out the exact amount spent, until several months later when the accounts are consolidated. Therefore, the government borrows money and sets it aside for potential use, without really knowing how or when it will be used.

This is so because government fund release follows a top-down, supply-driven formula. Funds are pushed down from the top, one level to the next, according to pre-determined Budget allocations - the Centre allocates funds for each scheme to the concerned ministries, which allocates funds to state governments and, they in turn, pass it on to districts, and so on, until the funds reach the implementing agency. According to existing rules, funds at each level are released in two instalments. The last-mile agency is the one that eventually transfers funds to the beneficiaries or vendors. It is only when 60 per cent of the first tranche is used up that an agency requests for the final instalment.