(Probable Question: One fundamental issue with expenditure planning in India has been a strong tendency towards revenue expenditure at the expense of capital expenditure. Explain. Suggest remedial measures.)

Budget expenditure is an important tool for the government to advance policy objectives. Therefore, for effective and desired outcomes, along-with allocation of budget to specific sectors, a strategy for best use of resources and regular monitoring is necessary.

Revenue Expenditure (RE) versus Capital Expenditure (CE)

There has been a strong tendency in India to focus more on Revenue Expenditure compared to Capital Expenditure thus leading to huge revenue deficits. (Revenue expenditures are the key drivers of fiscal deficit). Within RE ‘subsidies’ take up the bulk of expenditure which may have been used for other progressive expenditure on sectors such as education and health. Even within such sectors, ‘salaries’ account for the bulk of the expenditure.

Similarly with CE, several misallocations are there. Traditionally, a large part of government resources are used for investment in products that the private sector can readily produce (e.g. fertilizer, machinery, steel) and thus government investment in such sectors crowd out investment in activities such as rails, roads, ports etc.

Any long-term strategy to address the expenditure imbalances must include measures to increase the tax-to- Gross Domestic Product (GDP) ratio including phasing out myriad exemptions that lead to narrowing of the tax base. Increases in revenues so achieved may then be predominantly used to boost capital expenditure.

Way ahead:

• Gradual withdrawal from activities must be encouraged for enterprises that serve no public purpose and can be undertaken by the private sector. The revenue thus generated must be used for capital investment.
• Social subsidies should be reoriented so that beneficiaries become economically independent instead of remaining perpetually dependent on them. 
• The efficiency of social expenditures must be improved to deliver better outcomes through better targeting and use of methods such as Direct Benefit Transfer.
• Open ended schemes that can absorb ever-rising expenditures and lack clearly identified beneficiaries must be avoided. 

Source: NITI AAYOG Three Year Action Agenda, 2017-18 to 2019-20.