Annual Central Budget or Medium-term Expenditure Framework

(Probable Question: Do you think that it is time for India to move from an annual central budget to, like most modern economies, a multi-year budget?)

The Centre’s budget is set for an annual horizon. This means that the revenues and expenditure are decided for the upcoming year. This is in contrast to most of the modern economies, which employ a multi-year horizon when preparing the budget. Such an approach is essential for better realignment of expenditures to priorities as a time-period of one year is quite short to realign the budget as per changing needs.

Moreover, in a limited period of one year it is difficult to provide dynamic attention to areas which require more focus as compared to others and the temptation in a one-year-horizon budget is to expand all expenditures more or less radially.

Such multi-year expenditure planning forms a part of the current planning structure, however, it does not receive adequate attention. The Fiscal Responsibility and Budget Management Act, 2003 requires the Central Government to prepare a medium-term expenditure framework, which sets three-year rolling targets for expenditure. There is, however, no obligation for the government to adhere to these targets during the actual budget.

Therefore, the time is ripe for the government to adopt a credible medium-term expenditure framework (MTEF) for allocating expenditure.

The advantages of such an exercise would be as follows:

  • It would make government expenditure more predictable and credible.
  • It would provide certainty to individual departments and ministries on available resources to them in the medium term.
  • It would ensure optimum utilization of the available resources.

(Probable Question: What areas of focus/challenges should be kept in consideration in order to adopt the MTEF?).

How should the MTFE be approached:

A medium-term fiscal framework would require forecasts of the levels of economic growth during the next three years, the expected tax and non-tax revenues of the Centre, and the targeted fiscal deficit. The MTEF would specify sector-wise and ministry-wise allocable expenditure ceilings based on the strategic objectives and development priorities. The states may also wish to consider allocating their resources based on a state level MTEF that may be synchronized with the Finance Commission award, along with appropriate amendment to the state level fiscal responsibility legislations.

  • Prediction of fixed term forecast levels of economic growth would be required along with the expected revenues and sustainable fiscal deficit.
  • Sector-wise and ministry-wise priorities would have to be outlined in order to allocate expenditure in an optimum manner.
  • The national level MTEF must be synchronized with the state level MTEF along with appropriate amendments in the relevant legislation. 

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