Making every rupee count

As per the 2023-24 budget estimates, All States and UT budgeted to collect tax revenues amounting more than INR 31 lakh crore (more than 350 billion USD). This figure encompasses both own tax and share in central taxes. Unlike non-tax revenues, tax does not entail any direct reciprocal provision of service or goods. Governments collect taxes not merely for the sake of amassing resources but to enable public spending.

In macroeconomic-development context, any tax imposed by the government needs to be seen from two lenses. First, when funds are transferred from the hands of households and enterprises to the exchequer, there is an opportunity cost involved. This represents economic benefits that might have been generated if money had remained in the hands of households and enterprises. Second, government utilizes the mobilized resources to full various developmental and non-developmental obligations, leading to the socially optimal provisioning of public goods such as primary education, public health, rural infrastructure. This expenditure results in range of economic and social benefits for the society.

In terms of public finance management, it is crucial that the 'Return on Investment' (ROI), which is calculated as the benefits minus the opportunity cost of funds, is positive. Additionally, state spending should adhere to principles of equity, ensuring that the benefits of state expenditure are received by those in need rather than being disproportionately captured by the wealthier segments of society.

However, these considerations are often overlooked in the actual process of budget formulation. A significant portion of the budget is based on incremental budgeting principles, where major budget items are seldom evaluated for efficiency and equity. Such evaluations are typically regarded as academic exercises rather than practical tools for resource allocation.

The difficulty in applying these concepts can be partly attributed to measurement challenges. Nonetheless, this does not imply that these challenges are insurmountable, especially considering the substantial funds involved. Investing in building technical capacity within finance or planning departments to assess equity and efficiency can yield significant returns. Even a modest expenditure of 0.1 percent of the total budget to enhance value for money could significantly improve the impact of government schemes.

Estimating the return on investment involves several steps. Initially, it requires defining the economic benefits of potential interventions by developing a theory of change, which includes impact pathways, and a logical framework with specific, measurable, achievable, relevant, and time-bound indicators. Responsibilities for data collection from the project's inception to its conclusion must be established, and these data points should be converted into monetary equivalent benefits using proxies and existing research. The opportunity cost can be calculated more straightforwardly as the total funds mobilized plus the interest cost. Budget proposals should only be considered if they guarantee a positive ROI, with preference given to those with higher ROI.

Several methodologies can be implemented to assess equity, which can be viewed from two perspectives: income and spatial. Benefit incidence analysis is useful for mapping the distribution of scheme beneficiaries across income classes. If a disproportionate share of benefits goes to a small fraction of the population, the scheme fails to meet the equity principle. Similarly, assessing the distribution of benefits across different districts or regions can serve as a measure of equity. Current financial management information systems are capable of producing relevant statistics that can serve as a reference for states during budget discussions. K Muralidharan presents an interesting and straightforward framework for evaluating budgetary proposals with respect to equity and efficiency, as illustrated in Figure 1.

The state can prioritize initiatives that fall within Region A, which will lead to enhancements in both efficiency and equity. Conversely, projects within Region C may be assigned a lower priority. It is acknowledged that budget discussions cannot always adhere to a rule-based framework. Consequently, initiatives within Regions B and D should be selected through a participatory and consultative process that takes into account the political and economic landscape.

These approaches are not novel. Various multilateral organizations have, for decades, developed frameworks to assist countries in enhancing the efficacy of public expenditure. In the era of technological progress, one of the foremost challenges—ensuring the availability of pertinent and reliable data—is being addressed. The quality of administrative data is on the rise. Surveys are increasingly being digitized using Computer-Assisted Personal Interviewing (CAPI), which ensures the timely availability of high-quality data. Moreover, emerging technologies such as remote sensing are proving invaluable for evidence-based budgeting. States must capitalize on these technological advancements to maximize the impact of their limited resources and to further improve efficiencies.