APPLICATION OF MEDIUM TERM EXPENDITURE FRAMEWORK- A CASE STUDY OF TAMIL NADU

1

GROUP MEMBERS

Sritama Gangopadhyay

Khushbu Verma

Khushboo Girotra

Shubham Rohatgi

Mohd. Tariq Azim2

CONTENTS

1. INTRODUCTION

2. OBJECTIVES OF THE STUDY

3. MEDIUM TERM FICAL FRAMEWORK

4. FORCASTING MODEL AND ITS INTERPRETATION

5. MTEF IN HEALTH SECTOR

6. MTEF IN EDUCATION SECTOR

7. POLICY RECOMMENDATIONS

8. LIMITATIONS OF THE STUDY

3

INTRODUCTION

Annual Budgeting cannot be prepared in isolation as it must also take in account events outside the annual cycle particularly the macro economic realities, the expected revenues, the longer term needs of programs and government’s spending policies.

The Traditional Budgeting suffers from several weaknesses:

The recurrent budget is prepared on an incremental basis without reviewing whether the activities being funded should be continued.

Activities continued every year while resources were declining hence some activities which were important was seriously under funded.

The budget preparation process did not link the achievement of objective and meeting of targets with the fund required. So in one sense there emphasis was less on improving the performance of the sector through meeting its objectives and targets.

The classification of the budget did not show programs or activities but only the type of expenditure.

Even though the budget format had moved to programs and activities, the structure was not closely linked to the performance management or the national planning documents.

4

Hence development of a MEDIUM TERM BUDGET FRAMEWORK (MTBF) is a response to

these above problems where this concept is more or less an evolutionary process.

OBJECTIVES OF THE STUDY This particular paper deals with achieving the following objectives on the

effectiveness of MTBF effect in India and suggests for adopting MTBF in Tamil

Nadu. The objectives are:

To examine to what extent MTBF is needed to ensure that the country

moves towards a sustainable fiscal position

To review how the MTBF is designed in different countries and to analyze its

success and failure.

To examine the level of deficit and debt in the MTBF approach and possible

impact on the trade balance, inflation, interest rate and private investment

and consumption.

To comprehend the framework with reference to Health and Education

sector in Tamil Nadu.

5

WHY TAMIL NADU IS SELECTED FOR THE STUDY?

Lack of research on the issue of MEDIUM TERM EXPENDITURE FRAMEWORK (MTEF)in India and particularly in Tamil Nadu motivated for the study.

Moreover Tamil Nadu is selected for its recent achievements in human development indicators particularly in educational aspects among all other Indian states.

Tamil Nadu’s achievements in health within the popular framework of the Tamil Nadu model of development are also compared to those of the developed nations of the west.

6

REVENUE DEFICIT

A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises

when the government's actual net receipts is lower than the projected receipts. On the contrary, if the

actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not

mean actual loss of revenue.

Fiscal deficitThe difference between total revenue and total expenditure of the government is termed as fiscal deficit. It

is an indication of the total borrowings needed by the government. While calculating the total revenue,

borrowings are not included. Generally fiscal deficit takes place due to either revenue deficit or a major

hike in capital expenditure.

Primary deficitDeducting interest payment from fiscal deficit. Interest payment is the Primary deficit is one of the parts of

fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit

can be arrived by payment that a government makes on its borrowings to the creditors.

7

8

VARIABLE COEFFICIENT T-VALUE R SQUARE

DIRECT TAX 0.81 3.26 0.91

INDIRECT TAX 1.36 7.23 0.89

NON TAX (NTAX) 1.24 2.68 0.81

NON INTREST REVENUE

EXPENDITURE(NIRE)

0.33 2.36 0.99

INTEREST PAYMENTS 0.11 1.90 0.91

NET LENDING 10.18 2.43 0.85

CAPITAL OUTLAY 1.82 21.52 0.98

Estimated parameters of the model

9

THE DECLINE IN PRIVATE INVESTMENT AND CONSUMPTION OVER THE BASELINE PERIOD INDICATES SOME EVIDENCE OF CROWDING-OUT

PARTICULARS Log (GDP) Log(WPI)

REAL SECTOR

PRIVATE INVESTMENT EXPENDITURE 1.17 -0.02

PRIVATE FINAL CONSUMPTION EXPENDITURE 0.87 -1.0710

Year Revenue recp. Revenue Exp. Trade bal Outsd liab Rev. Deficit

Gross Fiscal

Deficit Primary deficit

2001-02 18.1 25.1 -2.6 71.1 7.0 10.3 4.1

2002-03 18.9 27.3 -3.1 80.5 8.4 11.3 3.9

2003-04 19.3 27.7 -3.3 80.9 8.4 11.5 3.9

2004-05 19.7 28.0 -3.6 83.1 8.2 11.5 3.9

2005-06 19.7 28.0 -3.6 85.1 8.3 11.6 3.9

2006-07 19.7 27.9 -3.5 86.8 8.2 11.6 3.9

2007-08 20.2 27.7 -3.5 88.3 7.5 11.1 3.4

2008-09 20.4 27.5 -3.4 89.4 7.2 10.8 3.1

2009-10 20.7 27.3 -3.2 90.4 6.6 10.4 2.8

2010-11 20.8 28.0 -3.6 92.8 7.2 11.0 3.1

2011-12 21.1 28.1 -3.6 94.7 7.1 10.9 2.9

2012-13 21.3 28.2 -3.7 96.6 6.9 10.9 2.8

2013-14 21.6 28.3 -3.7 98.4 6.8 10.8 2.7

11

Using the available data from 2001-02 to 2009-10 we have forecasted the values of major

fiscal indicators for 2010-11 to 2013-14.

These empirical evidence suggest that the revenue and gross fiscal deficit will gradually

decline but they will still be very high( more than what is desirable according to FRBM

act). Hence, reflecting that the outstanding liabilities of govt. relative to GDP will remain

high till 2013-2014. The primary deficit although declining, will remain at 2.7% (2013-

2014).

A very high Revenue, Fiscal and Primary deficit along with a high outstanding liabilities

of government as a fraction of GDP makes the fiscal situation more gloomy.

12

MTEF for Health Sector in Tamil Nadu

Developing the MTEF by reconciling bottom up estimates of the cost of carrying out policies, both

existing and new with the resource envelope available for public health expenditure.

The bottom up estimates, actually in the true sense are “what and how much amount is required as

per the policy announcements or as per the field environment” to implement at grass route level,

whereas the resource envelope is actually “what and how much is affordable or what is available” at

the source level i.e at the Government.

YEAR RESOURCE ENVELOPE

2011-12 4433.35

2012-13 5054.01

2013-14 5761.58

2014-15 6568.20

13

The previous table shows the amount of fund available with the government for public health

expenditure.

YEAR CAPITAL REVENUE TOTAL

2011-12 48157 324306 372463

2012-13 54899 369709 424608

2013-14 62584 421468 484053

2014-15 71346 480474 551820

This table shows the amount required as per the policy announcement, to implement at the

grass route level.

14

COMPARISON OF ACTUAL VS PLANNED EXPenditure

Res EV.

Avail. Funds

0

100000

200000

300000

400000

500000

600000

2011-12

2012-13

2013-14

2014-15

Fu

nd

s

Year

Res EV. Avail. Funds Column1

15

The previous graph shows the comparison of funds that are available for public health management

and the funds that are actually required for better health services in the state.

IMPROVING FUND MANAGEMENT

Increasing public expenditure in health management.

Pooling resources.

Community participation

While Tamil Nadu’s achievement to date are commendable, the focus has been

predominantly on maternal health and family planning. So there is a need to reduce

the gap that still remains in providing funds for comprehensive range of health

services.16

MTEF for School Education Department

Estimation of Resource Envelope

Gap Analysis

How to improve quality of education?

YEAR PLAN REV. EXP (Cr) PLAN CAP. EXP (Cr) PLAN LOAN &

ADVANCES (Cr)

AGG. PLAN RESOURCE

(Cr)

2006-07 7201 5852 279 13332

2007-08 8297 7259 149 15705

2008-09 10394 8849 395 19637

2009-10 10957 9949 472 21378

2010-11 12168 11360 563 28909

17

PREDICTIONS :-

The allocation for school education department in the state budget is anticipated to grow at an

average annual growth rate of 30% from the 2011-12 to 2014-15 ( from 13525.44 to 18565.04 ).

The resource availability is predicted ( using moving average ) to increase from level of 28,909 cr

to about 82,567 cr by 2014-2015.

YEAR PLAN REV. EXP(Cr) PLAN CAP. EXP (Cr) PLAN LOAN $

ADVANCES(Cr)

AGG PLAN

RESOURCE(Cr)

2011-12 13525 12970 670 37582

2012-13 15025 14810 799 48856

2013-14 16706 1910 951 63513

2014-15 18565 2180 1134 82567

18

These findings show that the resources which are allocated are not being utilized efficiently. This

gives an impression that the resources are being sought for but the state does not have the capacity

to use these funds in an efficient manner (i.e gap becoming wider and wider).

13331 1570519637 21358

28909

37582

48856

63513

82567

13331 1570519637 21358

2409227165

30642

19568 21879

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Va

lue

in

cr

Year

Planned vs Actual

Agg Plan Resource Actual

19

Growth scenarios to take education sector to desired level

Additional funding

Strengthening Monitoring and Evaluation

Improving quality of education

Professional development of teachers

Improving enrolment of girls in high school.

Establish of school of excellence.

Strengthening of Parent Teachers Associations.

20

NEED OF THE HOUR

We have to explore ways and means to meet resource gaps.

Secondary and higher education in Tamil Nadu needed more immediate reforms,

providing more flexible curriculum and adding quality to education.

21

Findings & Policy Recommendations

1.a)Medium Term Expenditure

Framework

b)Financial Analysis Cell

Create within

(i) Education and

(ii) Health

Department

a)

Contracting

Staff

b) Deputing

interested staff

Aim: Staff Training and exercise

regularly

22

Carry out MTEF periodically every year for 3

years

Resources are Estimated to meet Policy objectives

2.

Areas (i) Education

(ii) Health

3.Provide platform for negotiation with Finance

Dept.

On Budget Allocation to these sectors

23

MTEF looked for overall sectoral MTEF for the State.

Coordination between dept. is necessary

4.

5.

Without coordination difficult to adjust

Expenditure Requirement with the available

resources.

24

Limitations

1) It’s not implemented entirely in Central as well as

State Level.

2) Sufficient information, current and reliable data are

not available.

3) Trust on govt. budgetary documents that are

always questionable.

4) This study is only on sectoral level of Tamil Nadu in

Education & Health sector.

5) It excludes Central Level analysis of MTEF.

25

Area for Further Research

Open MTEF for whole Social Science sector like transport, water

supply, irrigation, etc.

Make comparison with all Social Science sector .

Pursue similar studies for other states of India.

Further researches should be done to improve simulation result of

MTEF.

26

27

28