Indian Economy, 5th edition (87 page)

(i)
What are organisation’s main objectives for the year?

(ii)
What actions are proposed to achieve these objectives?

(iii)
How would someone know at the end of the year the degree of progress made in implementing these actions? That is, what are the relevant success indicators and their targets?

The RFD should contain the following
five sections
:

(i)
Organisation’s Vision, Mission, Objectives and Functions.

(ii)
Inter se
priorities among key objectives, success indicators and targets.

(iii)
Trend values of the success indicators.

(iv)
Description and definition of success indicators and proposed measurement methodology.

(v)
Specific performance requirements from other departments/organisations that are critical for delivering agreed results.

2. Evaluation Methodology

At the end of the year, the parent ministry/department will look at the achievements of the organisation, compare them with the targets, and determine the composite score. The composite score shows the degree to which the organisation in question was able to meet its the promised results, i.e.,
objective
. Various agencies will have a diverse set of objectives and corresponding success indicators. Yet, at the end of the year every organisation will be able to compute its composite score for the past year.

3. RFD Process and Timelines

Beginning of the Year:
At the beginning of each financial year, each organisation to prepare a RFD. And as per the priorities listed in the RFD, proposed activities and the corresponding success indicators to be approved. The RFDs draft has to be completed by 5th of March for feedback and finalised by 31st March every year – the final versions of all RFDs to be put on the websites by the 15th of April each year. The final RFD to take into account budget provisions and in particular the
Outcome Budget
. The RFDs to be drawn up in such manner that quarterly monitoring is possible.

During the Year:
After six months, the Results-Framework as well as the achievements to be reviewed – the RFDs may be reviewed and the goals reset, taking into account the priorities at that point of time (this will enable to factor in unforeseen circumstances such as drought conditions, natural calamities or epidemics). Cabinet Secretariat to select about 24 RFDs using a stratified random sampling procedure to examine them.

End of the Year:
At the end of the year, all RFDs to be reviewed, a report listing the achievements of their respective organisations against the agreed results in the prescribed format. This report is required to be finalised by the 1st of May each year. After scrutiny by the concerned administrative ministry/department, these results will be placed on the website by 1st of June each year.

The RFD is among the attempts by which government have been trying to bring in higher performance in its ministries/departments together with ‘transparency’, ‘accountability’ and ‘responsibility’. This is in the series of other such initiatives like ‘Outcome Budgeting’ and ‘Performance Budgeting’. The ‘Zero-Base Budgeting’ was a similar and first such initiative in this direction taken by the GoI in mid-1990s.

Charged Expenditure

It is the public expenditure which is beyond the voting power of the Parliament and is directly withdrawn from the
c
onsolidated
f
und of India.
54
The emoluments of the President,
s
peaker and Deputy
s
peaker of the Lok Sabha, Chairman and Deputy Chairman of the Rajya Sabha, Judges of the Supreme Court and the High Courts, etc. in India, for example.

Types of Budgets

Golden Rule

The proposition that a government should borrow only to invest (i.e., plan expenditure in India) and not to finance current spending (i.e., revenue expenditure in India) is known as the golden rule of public finance. This rule is undoubtedly prudent but provided spending is honestly described as investment, investments are efficient and does not crowd out the important private sector investments.
55

Balanced Budget

A budget is said to be a balanced budget when total public-sector spending equals total government income (revenue receipts) during the same period from taxes and charges for public services.
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In other terms, a budget with zero revenue deficit is balanced budget. Such budget making is popularly known as
balanced budgeting
.

Gender Budgeting

A general budget by government which allocates funds and reponsibilities on the basis of gender is gender budgeting. It is done in an economy where socio-economic disparities are chronic and clearly visible on a sex basis (as in India).

Gender budgeting started in India with the Union Budget 2006–07 which proposed an outlay of Rs. 28,737 crore dedicated to the cause of women and created gender budgeting cells in 32 ministries and departments.
57

Outcome and Performance Budgets
58

The concepts are part of result-oriented budgeting. While outcome budget is presented by different departments and divisions of a ministry or the government, the performance budget is presented by the
m
inistry of
f
inance on behalf of the government. Both go for ‘quantitative’ as well as ‘qualitative’ progress reports of the performance. The outcome budget is a micro level process while performance budget is a macro level process in budgeting. There are many outcome budgets in any one performance budget.

The basic objective of such budgeting is to bring in transparency and thereby making the government more and more responsible to the
h
ouse and the public. Naturally, they bring in prudence and optimisation elements in public spending (also see entry ‘Outcome Budget’ in Chapter 24).

Cut Motion

In democratic political systems, there is a provision of Cut Motion in the House/Parliament (usually it is the opposition but floor might be crossed by members of the House belonging to the government due to presence of inner-party politics). In the US, the budget provisions presented by the government must be passed by the Congress. Only then they can be enacted. Unlike this, in the British parliamentary system though the budget of the government is voted by the House usually this is considered a political document and passed unchanged. India has mixed provisions of voting on the budget after discussion in both the Houses. There are different constitutional provisions by which the Parliament starts discussion on the demands, grants, etc. proposed by the government in the Budget
59
—

(i)
Token Cut
is a cut of ‘100 by the House from the total demand made by the government.

(ii)
Economy Cut
is a cut of specific amount from the total demands made by the government.

(iii)
d
isapproval of Policy Cut
is cutting just ‘1 from the total government demands made in the budget. It is a symbolic cut.

(iv)
Guillotine
is the most severe form of the cut motion in which demands by the budget are directly put to vote
without any discussion or scrutiny.
This is the most radical form as it might culminate in the fall of the government—a kind of no confidence motion. Floor-crossing is an imminent danger in this. However, it has never happened in the Indian fiscal arena.

Trilemmas

Putting the right kind of fiscal policy has always been the most challenging policy decision to be taken by the democratic governments around the world there are some famous ‘trilemmas’ related to this aspect. Economics have by now many ‘trilemmas’ developed and articulated by economists from time to time and the process still continues. Let us see some highly popular and newsmaking ones:

(i)
The
‘financial stability trilemma’
put forward by Dirk Schoenmaker
60
(2008), explains the incompatibility within the euro zone of –
(a)
a stable financial system,
(b)
an integrated financial system, and
(c)
national financial stability policies.

(ii)
By far the most high profile current trilemma of the euro-zone (by Edward Chancellor
61
) was believed to be the seeming irreconcilability between its
three wishes,
namely,
(a)
a single currency,
(b)
minimal fiscal contribution to bail outs, and
(c)
the ECB’s commitment to low inflation.

(iii)
Martin Wolf
62
spoke about the US Republican Party’s
fiscal policy trilemma:
(a)
large budget deficits are ruinous;
(b)
a continued eagerness to cut taxes; and (
c)
an utter lack of interest in spending cuts on a large enough scale.

(iv)
Then we have the
Earth Trilemma
(EEE), which posits that for:
(a)
economic development (E),
(b)
we need increased energy expenditure (E),
(c)
but this raises the environmental issue (E).

(v)
Above all these more recent trilemmas in economics, the prima donna of all of them is Mundell’s
‘impossible trinity’
. This old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of –
(a)
free capital flows,
(b)
a fixed exchange rate, and
(c)
an independent monetary policy. The impossible trinity, has seen enough waters flowing down the time since it was articulated almost five decades ago which has a strong theoretical foundation in the
Mundell-Fleming Model
developed in the 1960s.

Dani Rodrik
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argued that if a country wants more of globalisation, it must either give up some democracy or some national sovereignty. Niall Ferguson
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highlighted the
trilemma
of a choice between commitment to globalisation, to social order and to a small state (meaning limited state intervention).

Treasury Computerisation of
State

Governments

A scheme for implementation of the mission mode project
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‘Computerisation of State Treasuries’ was put in place by the GoI in June 2010 under the
National e-Governance Plan (NeGP)
. The states and UTs are required to complete their projects in about three years beginning 2010-11. The funds are released against deliverables. The scheme will support states and UTs to fill the existing gaps in their treasury computerisation, upgradation, expansion and interface requirements, apart from supporting basic computerisation. The Scheme covers installation of suitable hardware and application software systems in a networked environment on a wide area basis and building of interfaces for data sharing among various stakeholders.

The scheme for treasury computerisation is expected to make the budgeting process more efficient, improve cash flow management, promote real-time reconciliation of accounts, strengthen management information systems (MIS), improve accuracy and timeliness in accounts preparation, bring about transparency and efficiency in public delivery systems, help bring about better financial management along with improved quality of governance in states and UTs. The overall estimated cost of the scheme is Rs. 626 crore at Rs. 1 crore per district in existence on 1 April 2011. Financial support is up to 75 per cent (90 per cent in case of northeastern states) of the individual project cost of admissible components limited to Rs. 75 lakh per district (Rs. 90 lakh per district for north-eastern states). Funds will be released as central assistance in three instalments of 40 per cent, 30 per cent, and 30 per cent each, subject to satisfactory receipt of utilisation certificates.

CRIS of India

The Finance Ministry of India has developed and released
(January 31, 2012)
the
Comparative Rating Index of Sovereigns (CRIS)
–
a new index of sovereign credit rating.
Together with it, the Ministry has also released an estimation of CRIS over the
last five years
, for
different nations
belonging to different blocks of the global economy.

Major credit rating agencies give out the sovereign credit rating of each nation as an absolute grade. How other nations fare does not matter in a particular nation’s rating score. The CRIS is very different from a comparative rating. An example of comparative rating is the percentile score – the way
GRE
(Graduate Record Examination)
results are at times given. If a student is described as belonging to the 99th percentile, it clearly says something about this student’s performance vis-à-vis other students.

It is arguable that even for sovereign credit ratings, there is a case for providing some kind of a comparative score. When an investor searches across nations for a place to put her money, the relative rating of nations is important. If nation
y’s
rating remaining the same, other nations’ ratings improve over time, there may well be a case to invest less in nation
y.

The computation of CRIS is based on nothing apart from
Moody’s
ratings and data on the GDPs of different nations as given by the
IMF
. In the paper, the Ministry defines the CRIS formally and then track how nations have done over time. In order to capture this impact, the Ministry of Finance developed a new system for comparing the relative ratings of sovereign debt based on the historical evolution of their ratings over five years and the volume of their economic activity as measured by their GDP (not adjusted for Purchasing Power Parity (PPP)). The Finance Ministry develops a relative rating index and rank 101 economies according to this for the years 2007 to 2011. The index uses external data on GDP and ratings combined in terms of pure mathematical and statistical methods without interventions or interpretations.