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An Expenditure Gap

  • Published
    20th Oct, 2023


There is a need to revisit the subject of expenditure allocations by the Finance Commission.

Controversies in Expenditure Allocation:

  • Political Parties and Spending Priorities: In democracies, parties in power make decisions on public spending without referendums, to maximize economic value, favoring capital expenditure for its multiplier effect, but non-development expenditure also holds importance.
  • Redistribution and Progressive Taxation: Progressive tax structures are employed, but the concept of redistribution remains ambiguous, sometimes seen as providing "freebies" to the poor.
  • Public Preferences vs. Economic Value: Land acquisition for larger projects is contentious, as compensation issues arise, affecting landless laborers.

State vs. Centre

  • Citizen-Centric State Initiatives: States are more inclined to provide freebies, being closer to citizens and thus more attuned to their preferences.
  • Industrial expansion via Freebies: Free or subsidized meals, as well as power and water for farmers, are defended on the grounds of stabilizing prices and supporting vulnerable sections.
  • Debates on Loan Waivers and Industry Bailouts: Loan waivers are viewed favorably as they provide direct government support to vulnerable sections, unlike industry bailouts using depositors' money.

Addressing Spending Allocation Challenges

  • Election Promises and Fiscal Constraints: Political parties make promises to voters during elections, but there's often a gap between promises and actual delivery due to fiscal limitations.
  • The Need for Spending Norms: Implementing spending caps and ensuring parity across all levels of government could be a solution to the allocation dilemma.
  • Way forward: The upcoming Finance Commission should consider formulating such norms to guide expenditure decisions effectively.
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