Coping with New Guidelines on Expenditure Management

Acknowledging that the cash position of the government may be stressed during the first quarter of the current fiscal due to the slowdown caused by the outbreak of COVID-19 pandemic, the Department of Economic Affairs of the Ministry of Finance (MoF) has issued fresh guidelines for cash management on April 8, 2020.1

The New Guidelines

The new guidelines divide the 100-odd demands for grant of various central ministries and departments into three categories. The first category, or category A, comprises 17 grants related to sectors like food and agriculture, health, civil aviation, textiles, railways and rural development. In the current situation, the ministries administering these grants are the vanguard of the fight against the pandemic. No new restrictions have been imposed on grants covered by this category.

This category also includes demands which largely provide for charged or obligatory expenses, such as those related to the President and Supreme Court of India, Central Vigilance Commission, interest payment, transfer to states, and the Union Public Service Commission.

It is the other two categories which would be of interest to the Ministry of Defence (MoD) as three of its four demands for grant – defence services (revenue), capital outlay on defence services and defence pensions - figure in category B which covers 31 grants, while the fourth one – MoD (Civil) - is included in category C which covers as many as 52 grants.

The revenue and capital grants of the defence services, incidentally, also cater to other departments and organisations like the Defence Research and Development Organisation (DRDO), ordnance factories, Rashtriya Rifles, and the Ex-Servicemen Contributory Health Scheme (ECHS), to name a few.

The guidelines provide that the monthly expenditure in respect of the grants included in category B may be kept at 8 per cent of the budget estimates (BE) of the FY 2020-21 for the first month, and at 6 per cent for each of the last two months of the first quarter (April to June 2020). The restrictions in respect of the grants in category C are more stringent, with the guidelines prescribing a cap of 5 per cent for each of the three months of the quarter.

Implications for Defence

In so far as the revenue and capital expenditure of the armed forces is concerned, it may not be impossible to adhere to the monthly cap stipulated in the guidelines as, even in the normal circumstances, the pace of expenditure in the first quarter is generally quite slow, except for the expenditure on salaries, as the salary for the month of March is also paid and booked in the account for the month of April.

Containing the expenditure may, however, pose a bit of a challenge if a substantial amount of payments, due towards the end of the previous financial year but held back because of shortage of funds, are to be released in this month. Release of the dearness allowance instalment, due from January 2020, could also add to the pressure.

What is surprising is the inclusion of defence pensions in category B. The demand for grant for defence pensions caters predominantly for the obligatory expenses on payment of pension. Going by averages, the monthly expenditure on pensions would be around 8 per cent of the total allocation.

Considering that, like salaries, pension for the month of March is also paid and booked to the account for the month of April, it is difficult to imagine how the expenditure can be consciously restricted to 8 per cent of the BE in the first month of the quarter.

Defence pension is disbursed by thousands of pension disbursing authorities all over the country. They have no authority to withhold or curtail the pension payable to a pensioner. Nor do they have any means of ensuring that the payments made by them are within the cap on the monthly expenditure.

The defence ministry spokesman did clarify on April 10 that the MoD had taken up the matter with MoF and that “no problem with regards to payment of pensions is envisaged at this stage”.2 This is unlikely to prevent confusion among the pension disbursing authorities and needless anxiety among the pensioners.

The government would do well to formally clarify the position in the next couple of days. A simple solution could be to shift defence pensions from category B to category A and issue a formal press notification, giving it a wide publicity.

For the organisations covered by category C also, such as the Coast Guard and Border Roads Organisation (BRO), it is going to be tough, though not impossible, to keep the expenditure within 5 per cent in each of the three months of the quarter. They, as well as the services and other organisations covered by category B, will have to pull out all the stops to abide by the guidelines stipulating the monthly cap on expenditure.

The situation calls for a two-pronged strategy to deal with the emergency. One, to the extent possible, the priority should be to make contractual payments as the businesses, which are going to be the key to economic recovery, are badly in need of cash at the present juncture. Two, all new proposals for procurement of goods and services and carrying out other activities should be screened and those which can be deferred, even on pain of suffering some consequences which the services and other organisations could live with, should be put off for the time being.
This will inevitably mean being ruthless in shelving all expenditure proposals which do not have immediate relevance, preventing wasteful expenditure, adopting cost-saving methods of working, and making a beginning in enforcing jointness.

Long Term Impact

The economic situation is unlikely to improve any time soon. The government’s resources will remain under stress for a considerable time due to severe constraints on its ability to raise additional resources and pressing demand from other sectors of the economy and the state governments for fiscal packages. This raises the possibility of the current year’s allocation being slashed later this year. In fact, it may take a few years before the situation comes back to the normal.

In the circumstances, all organisations under the administrative control of the MoD, including the services, would do well to draw up emergency expenditure plans for the current year as well as for the next five years or so, which is what it might take for the situation to normalise. These plans must take into account the financial constraints faced by the government and should not be premised upon fanciful assumptions about the availability of funds.

The present crisis is as much of a challenge as an opportunity to infuse financial realism in defence planning and bring about concomitant reforms in the quickest possible timeframe. There has been no dearth of ideas about how this can be done. Several committees have made numerous recommendations in the past. It is time to act upon them.

• 1. Office Memorandum F. No. 12 (13)-B(W&M)/2020, Department of Economic Affairs (Budget Division), Ministry of Finance, April 08, 2020.  
• 2. Ajay Banerjee, “Budget cap won’t hit pensions”, The Tribune, April 11, 2020.