| Project Detail |
Project Name Strengthening Domestic Resource Mobilization and Public Financial Management
Project Number 57235-001
Country / Economy India
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
The Knowledge and Support Technical Assistance (TA) aims to strengthen domestic resource mobilization and public financial management in India. It will undertake technical and analytical studies with the objective of increasing the effectiveness of public spending while reducing fiscal risks to Indias macroeconomic environment. The TA will also develop knowledge solutions on mobilization of private sector resources, including through viable public-private partnership frameworks and monetization of existing relevant assets. The TA will support capacity development, including at the level of state government and urban local bodies.
The TA intends to provide upstream knowledge support to the crosscutting thematic priority on domestic resource mobilization and public financial management in ADBs India Country Partnership Strategy (CPS) 2023-2027. The TA is in line with the Country Knowledge Plan (CKP) in which knowledge support is envisaged across all three major pillars (such as attracting market finance for greenfield projects and knowledge management for urban finance projects, raising capabilities of government departments for raising green finance, and financing for housing economically weaker sections) and focus on public financial management to increase capacity across the government to make capital investments and attract private capital, and strengthen financial management of urban local bodies. The TA is also consistent with the focus of ADB Strategy 2030 on providing relevant knowledge products and services as per the needs of the country and strengthen its institutional capacity. The TA will enable ADB to proactively engage with government agencies at national, state and local levels on their strategic priorities and challenges faced in relation to public financial management and domestic resources mobilization, and undertake operationally relevant analytical studies to assist in formulation of the reform agenda and design innovative knowledge solutions tailored to its needs, including in key areas like urban finance.
Project Rationale and Linkage to Country/Regional Strategy
Fiscal policy is a crucial tool for India to meet its development objectives. Strong public and private investments are needed in physical and social infrastructure to facilitate structural transformation of the economy. India has also committed itself to achieve a cleaner and climate friendly economy and to achieve the target of net-zero carbon emissions by 2070. This requires interventions to mobilize climate financing. Another key challenge is to generate resources to strengthen social protection for poor and vulnerable groups and regions to achieve equitable development.
Higher resource mobilization is an important objective for Indias fiscal policy. In the last 15 years, Indias tax to GDP ratio has generally ranged been between 16-17%, which is lower than the average of 34% for OECD countries. To improve revenue, India has undertaken various measures, including simplifying the corporate and income tax regime to expand the tax base by removing certain exemptions. Additionally, the introduction of the Goods and Services Tax (GST) in 2017, which subsumed numerous indirect taxes and is deepening the common market, has helped improve revenue. After a period of teething issues, in fiscal year (FY) 2022-23, average GST revenue per month was higher than INR 1.5 trillion, improving to 6.6% of GDP in 2022-23 from 6.3% in previous year. Tax administration has also been improved through digitization of tax services and initiatives like faceless assessment scheme. Many states have also undertaken their own tax and non-tax reforms, such as the use of technology and GIS-based mapping for property taxes, to improve revenue performance.
In terms of expenditure, the capital expenditure in Union Budgets has increased from 1.5% of GDP in 2017-18 to 3.3% of GDP in 2022-23 as per budget estimates. Moreover, the expenditure management process has also been improved through reforms such as use of direct benefits transfer to intended beneficiaries in their accounts, e-procurement and use of government e-marketplace and use of public financial management information systems. These reforms have led to improved efficiency and transparency of government spending at the Union and state government levels.
Further strengthening of resource mobilization, financial management, and fiscal reforms including especially at the level of state government, state owned enterprises and urban local bodies would help improve the outcomes of the fiscal policy. Some specific challenges are:
Strengthening urban bodies revenues and fiscal management. Cities are an important driver of economic growth and play a crucial role in the process of structural transformation. However, they need appropriate levels and types of investment to play this role, requiring a strengthening of urban financial management in the Indian context. Audited accounts are vital first step for urban fiscal management. The Government of India introduced the guidelines for accrual-based urban local bodies (ULB) accounts in 2004 Accounts Manual in 2004, which can be universalized. The Fifteenth Finance Commission proposed performance-linked grants to ULBs is also an opportunity for increased property tax for municipal resource mobilization. Strengthening urban bodies capacity, raising property tax revenues, and exploring innovative financing like value capture can improve fiscal management. Strengthening capacity of departments to engage with the State Finance Commissions is crucial for rationalizing fiscal relations with local bodies.
Private sector resource mobilization. The National Infrastructure Pipeline of the Government of India includes private capital as a crucial source of financing. This requires design of viable public-private partnership (PPP) frameworks across different sectors and enhanced efforts towards asset monetization, i.e., sale of existing infrastructure assets owned by the Governments to the private sector and other institutional investors. The National Monetization Plan (AMP) is an effort in the direction. This includes financing models such as infrastructure investment trusts (INVITs) and real estate investment trusts (REITs). Currently 20 INVITs have been registered with the Securities Exchange Board of India (SEBI). There is a need to strengthen capabilities, revenue mobilization plans and risk sharing models for public private partnership (PPP) including asset monetization in sectors such as energy, urban, transport and logistics, and health and medical education towards climate change and SDGs to attract private sector capital. This includes capacities to utilize REITs and INVITs with the government and development agencies at various levels (i.e. national, state, sub-state levels).
Strengthening and de-risking state-owned enterprises (SOEs) finances. Finances of SOEs can have implications on government finances through explicit and implicit sovereign guarantees and requirements for periodic budget support. In recent years, the Union Budget has brought off-budget liabilities onto the budget, thereby improving transparency. However, there can be challenges with regards to some SOEs, where financial losses require periodic budgetary support to remain operational. Besides leading to leakages in resources, the off-budget liabilities also give rise to risks for the financial sector and the economy. There is a need to strengthen the financial management of such SOEs, including enhancing revenues, to improve their financial viability. For example, in the power sector, the government has introduced the UDAY 2.0 scheme to improve finances of the state power distribution companies (DISCOMS) conditional on states improving the capacity of the DISCOMs to raising revenues and reduce losses.
Mobilization of states own revenues. Higher own revenue mobilization of states would enable greater development spending. There is considerable variance in the own revenue mobilization across states, ranging between 5-10% of GSDP amongst major states. The state could improve revenue performance through better tax administration, use of data analytics and other technologies to plug revenue leakages and rationalize tax and user fee structures, and expansion of tax base.
Expenditure management and rationalization. Strong expenditure management allows for greater linkages between the expenditure programs and its development impact, while increasing transparency and accountability. Several states have introduced integrated financial management systems that allow for better MIS reporting and financial management. Government of India has also introduced a Single Nodal Agency (SNA) portal for Centrally Sponsored Schemes (CSS) for better public finance management. There is further potential to strengthen expenditure management through clear linkages of government schemes output with outcomes, strategic roadmap, improved budgeting process, auditing and manuals, and further enhancing the use of digitization in public financial management processes to improve transparency and efficiency of the systems. Further, expenditure rationalization to create fiscal space for capital and other productive expenditure by states would also be an important issue to be addressed.
Ramping up climate finance. Government of India has identified mobilizing international and domestic sources of climate finance, especially lower cost finance, as a crucial element in its low carbon development strategy. One of the ways of mobilizing climate finance is green bonds. Government of India has recently prepared a framework for sovereign green bonds which can enable green bond issuances by central government and state governments. The Reserve Bank of India has already started issuing green bonds to fund the Union Governments green projects. Similar efforts can be undertaken at the state level for green and blue bonds and enhancing climate finance for development purposes. Climate budgeting is also another important tool for Governments to embed climate considerations in the budgeting and monitoring process.
All the above challenges require strengthening capacity development within the relevant government departments in states and urban bodies. There is a large variation in the state capacity across different regions in India. Some states with low capacity are unable to fully utilize the available resources with them, for example, resources available through centrally sponsored schemes. The issue is more challenging in relatively poorer states.
The challenges faced in India are wide and varied across regions and are increasingly complex. Upstream knowledge development is important to enable formulation of development strategies that are tailored to the local context, demand-driven and operationally relevant and needs to be complemented by efforts to develop the institutional capacity to undertake the reforms. The studies can utilize best practices from other countries and other regions within India to inform policymakers. The TA will also support innovative solutions in Indian context to strengthen financial sector and domestic resource mobilization.
The TA would complement ADBs strategic approach to engagement with the state governments, which includes strong upstream support. This TA would complement the existing strategic approach by providing upstream knowledge solutions on key public finance issues being faced by states and other local agencies.
Impact
Greater resource mobilization and improved quality of public spending, along with greater private sector participation |
