Frameworks
The Constitution of India enshrines principles of social justice, equality, and welfare. Fundamental rights and directive principles of state policy lay down the framework for promoting social, economic, and political justice. In other words, India is a welfare state. By virtue of this, the government, both at the center and the states, spends a considerable amount of money on various developmental initiatives. For example, social sector expenditure as a share of total expenditure for the years 2023–24 is 18% of the union budget (around $100 billion). This is a considerable amount, and it is important to ensure it is efficiently spent. How do we think about public sector expenditure efficiency?
(This framework is derived from M. Govinda Rao’s book Studies in Indian Public Finance.).
Input vs Output
First of all, it is important to separate between input, output, and outcome. We often come across articles and commentaries on how much money the government sets aside for different sectors. For example, after every union budget, there is a guaranteed op-ed criticising the outlays for the education sector, which is usually around 2% of the GDP. Remember, as far as public expenditure efficiency is concerned, this is only level 1, i.e., input. The money the government spends on a particular scheme or intervention is the input. If the government sets up 2 lakh schools in the country, it doesn’t mean that the students studying in these schools will be educated. Although inputs get considerable attention in the media, and although governments play up inputs as the end all be all, inputs are only level 1.
Level 2 is output. When the government spends money on setting up schools, the expected outputs are: school infrastructure, teachers, textbooks, etc. Outputs are the most immediate results that we see when money is spent on a particular intervention.
Inputs to Outputs
The transition from inputs to outputs depends on two factors:
Allocative Efficiency
Prioritizing which goods and services to spend on determines allocative efficiency. Not all areas where there are gaps need government interventions. Some of these gaps are better addressed by markets; some of these gaps can be addressed later. For example, capital expenditures help in capital formation and creation of positive externalities. But subsidies tend to distort prices and should be employed only when other less distorting approaches are unavailable. Although such decisions - where to allocate funds - need considerable economic thought behind them, fundamentally, it is a political decision.
Technical Efficiency
This is achieved when different inputs are used in an optimal combination. For example, Direct Benefit Transfers have reduced leakages in subsidies, and including members of society to monitor teachers has increased teacher attendance. Factors like “targeting expenditures to intended groups, choosing appropriate technology to deliver services, assigning the task of delivery to appropriate levels of government,” etc. influence technical efficiency.
Outcome
There is one more level: outcome. Outcome simply refers to the impact the input and output have had on the lives of people who are beneficiaries of the particular policy intervention. In various sectors in India, government expenditure efficiency is measured against input and output alone. This is not enough, since outputs without outcomes do not bring about any real change or solutions. For example, even if we ensure adequate teacher salaries (input) and optimal teacher attendance (output) in a school, as long as students don’t get educated, the intervention has directly achieved almost nothing of value for the citizens.
But outcomes are not easy to achieve. Efficiency in public expenditure may result in better output, but not necessarily outcomes. M. Govinda Rao has this to say about outcomes:
Efficiency in outcomes is determined by a number of exogenous factors in addition to efficient outputs. While it may not be possible for the governments to control the exogenous factors determining the outcomes in the short term, the best they can do is to ensure output efficiency and put in place the policies changing the structure of incentives and accountability towards outcome targets.
In the education sector, although it is impossible for government to absolutely ensure outcomes, it can at least monitor outcomes at regular intervals and change inputs accordingly.
Thumb Rule: Allocative efficiency and technical efficiency need to be considered when inputs and outputs of a policy intervention are drawn. Based on periodic review of outcomes, adequate changes need to brought in the way inputs are planned and outputs are defined.