The public expenditure management (PEM) is an instrument of state policy whose objective is to have overall fiscal discipline, allocative efficiency, operational efficiency and macro-economic stability.
Challenges faced by government in public expenditure management while formulating the budget:
1. Autonomous component of expenditure: Compulsory expenses such as interest payments for public debt, expenditure on defence, pensions and wages and salaries of government employees.
2. Economic shocks: Global slowdown, taper tantrum policy of US Fed, Trade wars, Oil prices, Pandemic induced slowdown (Covid’19), etc. have an impact on the domestic economy because of globalisation.
3. Populist schemes: Farm loan waiver, MSPs for different crops, low-income tax rate slabs, results in higher fiscal deficit and government borrowings.
4. Low tax base: More reliance on regressive indirect tax acts as a constraint for the government to increase its social spending.
5. Inflation targeting: Restricts government spending.
6. Low revenue generation: Inefficient and technologically outdated public enterprises do not generate much revenue for the government to make space for expenditure.
7. Ailing Banking sector: NPA crisis, issues of bank consolidation, compliance of Basel norms left banks with low-risk appetite to back up government expenditure.
8. Subsidy burden: Major portion of revenue goes to fertilizer subsidy and MGNREGA funds.
However, Government did take some measures to manage public expenditure:
1. FRBM (Amendment) Act: To reduce the fiscal deficit.
2. Adopting the revenue-capital classification: For allocation of more resources in creation of capital assets.
3. Inflation targeting by the Monetary Policy Committee: For price stability.
4. More tax devolution to states: Financial autonomy.
Bimal Jalan Committee on expenditure management has also recommended steps such as rationalising subsidies, sticking to a fiscal path, and strategic divestment. It's high to take these into consideration to unlock the growth potential of the Indian economy.