Public Sector Wastage - Issues and Challenges

By Sunil S. Bhandare

Summary

Sunil S. Bhandare’s booklet, originally delivered as a talk at the Nani A. Palkhivala Memorial Trust in Mangalore on 20 January 2014 and reissued by the Forum of Free Enterprise, frames the squandering of India’s public resources as a tragedy of national time, energy and manpower. Writing in the policy idiom of the Forum — Minoo R. Shroff’s foreword insists on “the business of government is governance and not business” — Bhandare argues that India’s declining productivity of capital, stalling reforms and rising populism have all been compounded by the wastage embedded in how the Centre, States and public sector undertakings spend money. Wastage in his definition encompasses depletion, drain and leakage: cost and time overruns, excess capacities, mindless misdirected subsidies, loan waivers and write-offs, persistent budgetary support to loss-making PSUs, and the forced extraction of high dividends from cash-rich PSUs.

Part I situates the problem inside the post-2008 global expansion of state spending and the Indian post-reforms surge in combined Centre-State expenditure (a 14.2% annual rate over 1991-92 to 2012-13). Bhandare insists that fiscal discipline cannot be sacrificed to the AAP-flavoured populism then ascendant, and that good governance — not more outlays — is the only sustainable route to growth. Part II dissects the classification of expenditure into Plan vs Non-Plan and developmental vs non-developmental, drawing heavily on Dr. C. Rangarajan’s 2011 Committee on Efficient Management of Public Expenditure (which recommended scrapping the Plan/Non-Plan distinction) and on the K. P. Geethakrishnan (2001) and Veerappa Moily (2005) Expenditure and Administrative Reforms Commissions to argue that institutional inertia has prevented any serious downsizing of the bureaucracy or reform of the public distribution system. Tables I-III reproduce official Centre-States data showing developmental expenditure recovering to roughly 58-59% of total spending after 2001-02, while social services have absorbed almost half of that share at the expense of physical infrastructure.

Part III turns to Central Public Sector Enterprises. Bhandare tabulates that of 225 CPSEs in 2012-13, sixty-three were loss-making and their losses (Rs.276 billion) knocked off much of the profits of the 161 profit-making firms (Rs.1251 billion); oil marketing companies alone recorded under-recoveries of around Rs.550 billion. He revives B. R. Shenoy’s 1971 catalogue of “idle production capacities, unconscionable wastage of materials and accessories, incredible over-staffing, lack of cost consciousness, gross neglect of maintenance, high cost and low quality, and pressures by politicians” as still describing CPSE pathologies four decades on, and cites MOSPI data showing average cost overruns of 20% across 584 major government projects, including Rs.420 billion sunk into 426 incomplete Maharashtra irrigation projects and the Udhampur-Srinagar-Baramulla railway whose Rs.30.8 billion cost has ballooned to Rs.195 billion.

Part IV ties the diagnosis to a governance agenda — sincere implementation of the Fiscal Responsibility and Budget Management (FRBM) Act, an Outlay-Outcome budget framework, performance monitoring, an autonomous Fiscal Council, and structural disinvestment of CPSEs whose recovery window during the 2003-07 boom years was lost to political expediency. Bhandare closes by invoking CAG Vinod Rai’s Harvard Kennedy School address and the United Nations’ definition of good governance to argue that civil society, media and the judiciary will have to grow more “vociferous and demanding” to force the Indian state to vacate the economic terrain it has proved incapable of managing profitably.

Key points

• Wastage of public resources is defined broadly as depletion, drain and leakage spanning cost/time overruns, excess capacities, misdirected subsidies, loan waivers, perpetual support to loss-making PSUs, and forced high dividend extraction from cash-rich PSUs.

• The macro extent of public-sector wastage in India remains uncounted because village panchayats, urban local bodies and municipalities lack comprehensive composite revenue-and-expenditure data.

• Combined Centre-States expenditure grew at 14.2% annually over 1991-92 to 2012-13, with a sharp acceleration after 2008-09 driven by counter-cyclical fiscal stimulus and a thrust towards social-sector spending.

• Bhandare endorses the Rangarajan Committee’s recommendation to scrap the Plan/Non-Plan distinction and to have Planning Commission consolidate Five Year Plans while the Ministry of Finance handles annual budgeting under a multi-year framework.

• Of 225 CPSEs in 2012-13, 161 made aggregate profits of Rs.1251 billion while 63 loss-making CPSEs together lost Rs.276 billion; oil marketing companies recorded under-recoveries of around Rs.550 billion.

• B. R. Shenoy’s 1971 list of CPSE pathologies — idle capacity, unconscionable wastage, over-staffing, neglected maintenance, political interference — is presented as still valid in 2013.

• The lost 2003-07 boom was the optimum window for disinvestment and strategic privatisation, but the political class found vigorous privatisation ‘expedient’ to avoid even when economically sound.

• Reform agenda: rigorous FRBM implementation, Outlay-Outcome budgeting, performance monitoring, an autonomous Fiscal Council, expenditure tilting from revenue to capital, and renewed disinvestment to usher in a competitive, financially viable economic order.

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