Mismanagement of Financial Resources
Author : CA A. K. Jain
Preamble
Unproductive, unjustified, wasteful, extravagant application of financial resources by Indian government agencies is a serious issue of concern and has significant repercussions on our nation's economic development.
India, with its vast population and diverse socio-economic landscape, faces numerous challenges on the path to economic prosperity. While prudent fiscal management is imperative for sustainable growth, the misallocation of resources undermines these efforts and hampers the country's development trajectory.
Unproductive Allocation
1. Infrastructure Projects : Despite substantial budgetary allocations, many infrastructure projects in India suffer from delays, cost overruns, and inefficiencies due to poor planning and execution. For instance, the National Highways Authority of India has faced criticism for projects marred by delays and sub-standard quality, leading to wastage of taxpayer money. According to the Comptroller and Auditor General (CAG) of India, numerous government projects have experienced cost overruns ranging from 20% to 150%, indicating significant financial mismanagement. December 2023 report from the Ministry of Statistics and Programme Implementation highlights significant cost overruns in Indian infrastructure projects. The report indicates 431 projects (each exceeding Rs. 150 crore investment) faced cost overruns totalling over Rs 4.82 lakh crore. This translates to an 18.65% increase from the original estimated cost.
2. Subsidies and Welfare Schemes : While welfare schemes are essential for addressing socio-economic disparities, instances of leakages, corruption, and inefficiencies plague these initiatives. Subsidies often benefit the affluent rather than the intended beneficiaries, resulting in a misallocation of resources and fiscal strain on the government. A report by the NITI Aayog highlighted that leakages and inefficiencies in subsidy delivery mechanisms result in substantial revenue losses for the government. As per budget documents, the food subsidy for 2023-24 is estimated at a staggering Rs. 1.97 lakh crore. Leakage and diversion of subsidized grains to the open market is a major concern. Additionally, the sheer number of beneficiaries puts a strain on the system's efficiency.
3. Public Sector Enterprises : Many PSEs operate inefficiently, with bloated bureaucracies, low productivity, and outdated technology. Despite continued financial support from the government, several PSEs incur losses year after year, draining public funds without delivering commensurate value. Bharat Sanchar Nigam Limited (BSNL) reportedly suffered a net loss of Rs. 55,773 crore in 2021-22. MTNL, HMT and Hindustan Photo Films have also incurred heavy losses over a period of time.
4. Agricultural Loan Waivers : Loan Waivers also have negative consequences for the economy. They strain government finances, leading to budgetary deficits and potentially crowding out other essential expenditures such as infrastructure development, education, and healthcare. Loan waivers also create moral hazard by incentivizing irresponsible borrowing behaviour, as farmers become less cautious about taking on debt if they anticipate that it will be forgiven in the future. Moreover, loan waivers distort credit markets and discourage private investment in agriculture, as lenders may become more cautious about extending credit to farmers in the future. Uttar Pradesh, Maharashtra, Punjab, Karnataka, Telangana and Rajasthan are some of the examples where state government announced loan waiver scheme for farmers. It's essential to note that loan waiver schemes often face criticism for their long-term effectiveness and potential impact on fiscal health.
5. Industrial Loan Write off : Writing off loans for borrowers who default create moral hazard, where businesses may engage in risky behaviour knowing that they won't bear the full cost of failure. This could encourage reckless lending and borrowing practices in the future.
While writing off industrial loans can provide short-term relief to struggling businesses and facilitate economic recovery, it should be done judiciously and as part of a comprehensive strategy to address underlying structural issues in the economy. Without proper governance and oversight, write-offs could exacerbate moral hazard, strain public finances, and distort market dynamics, ultimately undermining the health of the Indian economy.
According to the Reserve Bank of India (RBI), the Gross NPA ratio of Public Sector Banks (PSBs) in India was 14.78% as of March 2023. This means nearly 15% of all loans given by PSBs are not being repaid. The power sector is a major contributor to NPAs in PSBs, accounting for a significant portion of the total outstanding bad loans.
Minister Bhagwat Karad clarified in Lok Sabha in December 2023 that , all Scheduled Commercial Banks have written off nearly Rs. 10.6 lakh crore in the last 5 years, out of which nearly 50 per cent belong to large industrial houses. It also said that nearly 2300 borrowers, each having a loan amount of Rs. 5 crore or more, wilfully defaulted around Rs. 2 lakh crore.
It is noteworthy that, ”the Supreme Court of Pakistan initiated suo-motu proceedings against 222 companies ,in 2008 on press reports that the State Bank of Pakistan had quietly allowed commercial banks to write off NPLs under a scheme introduced by the regime of former army chief and ex-president retired General Pervez Musharraf”.
6. Multiple Pensions To Elected Politicians : This is a controversial issue with arguments both for and against its implementation, and its impact on the Indian economy can vary depending on various factors. Here are some considerations:
(a) Burden on Public Finances : Providing multiple pensions can impose a significant financial burden on the government, especially in a country like India with a large population of elected representatives. This could strain public finances and divert resources away from essential services and development initiatives.
(b) Perception of Entitlement : Offering multiple pensions might contribute to a perception of entitlement among elected politicians, potentially leading to misuse of public funds and undermining public trust in the political system. According to a 2018 Legislative Research report, there were over 130 Members of Parliament receiving dual pensions in India.
(c) Inequity and Inefficiency : Multiple pensions for politicians could be perceived as unfair by the public, especially if other segments of society, such as civil servants or the general population, do not receive similar benefits. This could exacerbate social inequality and breed resentment.
(d) Misallocation of Resources : Providing generous pensions to politicians could lead to a misallocation of resources away from more pressing needs, such as poverty alleviation, healthcare, education, and infrastructure development, which could hinder overall economic growth and development.
Therefore, the provision of multiple pensions to elected politicians may offer certain benefits such as recognizing their service and ensuring their financial security, it also raises concerns about fiscal sustainability, fairness, and the efficient allocation of resources. Any decision regarding this matter should carefully weigh these considerations and prioritize the broader interests of the Indian economy and society.
7. Pension Payments : Large pension bills can strain government budgets, limiting resources for other crucial areas like infrastructure, education, and healthcare. High pension payouts for a smaller retired population can put a burden on the working population, potentially leading to resentment. Life expectancy is increasing, leading to a larger pool of pensioners. Without reforms, the pension system may become unsustainable in the long run.
Impact on Economic Development
Resource Scarcity : Misallocation of financial resources exacerbates scarcity, limiting the availability of funds for critical sectors such as healthcare, education, and infrastructure development, hindering their growth and impeding socio-economic progress.
Investor Confidence : Wasteful expenditure and inefficiencies in government projects erode investor confidence, deterring domestic and foreign investment essential for fostering economic growth, job creation, and technological advancement.
Fiscal Deficit : Continued unproductive spending contributes to widening fiscal deficits, necessitating increased borrowing or taxation, which burdens future generations and constrains the government's ability to undertake productive investments.
Recommendations for Reform
Enhanced Transparency and Accountability : Strengthening oversight mechanisms, promoting transparency in budgetary allocations, and enforcing accountability measures are essential to curb wasteful expenditure and ensure optimal utilization of resources.
Performance Evaluation : Implementing rigorous performance evaluation frameworks for government projects and PSEs can identify inefficiencies, streamline operations, and improve the effectiveness of resource allocation.
Encouraging Private Participation : Promoting public-private partnerships (PPPs) and privatization initiatives can inject efficiency, innovation, and accountability into sectors traditionally dominated by government agencies, fostering competition and driving productivity gains.
Government Initiatives
1. Fiscal Responsibility and Budget Management (FRBM) Act : Enacted in 2003, this act sets targets for reducing fiscal deficit and public debt, promoting long-term financial sustainability. The FRBM Act mandates the central government to bring down the fiscal deficit to 3% of GDP by 2023-24.
2. Direct Benefit Transfer (DBT) Scheme : This initiative bypasses intermediaries and electronically transfers subsidies directly to beneficiary bank accounts, minimizing leakage and corruption. A 2021 World Bank report estimated that DBT in India saved the government Rs.1.7 lakh crore ($23.6 billion) between 2014 and 2018.
3. Government e-Marketplace (GeM) : This online platform facilitates transparent and efficient procurement of goods and services by government agencies, reducing opportunities for inflated prices. Since its launch in 2016, GeM has witnessed over Rs.18 lakh crore ($252 billion) in transactions, with an estimated saving of Rs.6 lakh crore ($84 billion) for the government.
4. Debt Restructuring : Banks may restructure loans to provide relief to borrowers facing financial difficulties. This could involve extending the repayment period, reducing interest rates, or providing a moratorium on repayments.
5. Asset Reconstruction Companies (ARCs) : ARCs are entities that purchase NPAs from banks at a discounted price and attempt to recover them. The government may encourage the formation and functioning of ARCs to help banks clean up their balance sheets.
6. Recapitalization of Banks : The government may infuse capital into banks to strengthen their financial position and enable them to absorb losses arising from NPAs.
7. Insolvency and Bankruptcy Code (IBC) : Introduced in 2016, the IBC provides a legal framework for resolving insolvency and recovering bad loans through time-bound mechanisms. While progress has been made, the process can be lengthy and complex.
8. Audit by Comptroller and Auditor General (CAG) : The CAG, the independent auditor of India, regularly scrutinizes government spending and flags inefficiencies and wasteful practices. The CAG's 2022 report identified Rs. 1.38 lakh crore ($19.1 billion) in irregularities in various government departments, prompting corrective actions.
9. Focus on Outcome-Based Budgeting : The government is increasingly focusing on allocating funds based on predefined performance outcomes, ensuring resources are directed towards achieving specific goals. Several ministries, like education and health, are adopting outcome-based budgeting models to improve program effectiveness.
Conclusion
Resources for development are always scarce in a developing economy therefore judicious application of whatever is available is of relevance. Despite multilateral check and balances, India still faces challenges in curbing wasteful spending, such as bureaucratic hurdles and a lack of robust monitoring mechanisms. Although a lot has been done on this front, but looking at the ground level realities there appears to be plenty of scope for further engagement.
Considerable amount of resources can be saved through thoughtful planning and effective implementation of projects, preventing misuse of subsidies, reforms in pension schemes, finding alternative sources of government funding with lower interest rates, rigorous controls on non-plan and administrative expenditure, effective recovery of NPA’S of bleeding Nationalized Banks, alluring black money funds parked inside and outside the country for Government development projects. These measures will also reduce burgeoning fiscal deficit of India.
Continued efforts are needed to ensure, taxpayer money is used effectively. By prioritizing fiscal responsibility, the Indian government is paving the way for a more efficient and productive economy. Continued commitment to these initiatives will be crucial to ensure India's economic development reaches its full potential.
In conclusion, addressing the issue of unproductive allocation of financial resources by Indian government agencies is imperative for fostering sustainable economic development, reducing fiscal strain, and unlocking India's immense growth potential. Urgent reforms are needed to instil fiscal discipline, enhance efficiency, and channel resources toward priority areas that will catalyze inclusive and equitable growth for all segments of society.
Author : CA A. K. Jain
Email: caindia@hotmail.com
Cell: +91 9810046108
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**********Disclaimer: The information and statistics presented in this article have been compiled from various sources deemed reliable. However, readers are advised to independently verify the accuracy and relevance of the data before making any decisions or taking action based on the information provided herein. The author and publisher do not assume any responsibility or liability or any consequences resulting from reliance on the information presented in this article.
2024/05/20
