PUBLIC FINANCIAL MANAGEMENT IN INDIA: REFORMS AND SCOPE FOR INNOVATIONS 26th Annual International Consortium on Governmental Financial Management (ICGFM) International Conference PFM in the 21st Century The PFM Architecture, Institutions, And Tools to Meet the Challenges of the Modern World April 29 – May 4, 2012, Miami, Florida – USA
Pratap Ranjan Jena National Institute of Public Finance and Policy New Delhi
FUNCTIONS AND FINANCES IN THE INDIAN FEDERATION |
The Constitution defines functional responsibilities and financial powers of the Union and states and the relationship between them y
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Three lists – Union, State and Concurrent
The taxation Th i powers off both b h the h llevels l off government are demarcated based on the economic and administrative rationale The borrowing and foreign exchange entitlements are controlled by the Central Government The Constitution recognizes that the States’ tax powers are inadequate to meet their expenditure needs and therefore, provides for the sharing of revenues from central taxes – Central Finance commission Central Ce t a support suppo t to state p plans a s – Planning a g Co Commission ss o oof India da
PFM INSTITUTIONS PROVIDE UNIFYING STRUCTURE |
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Legislative control system both at policy making and implementation level are similar at Union and State levels Centrally prescribed accounting and reporting structure Comptroller and Auditor General of India (CAG) y Controller general of accounts (CGA) y
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Unitary external audit by CAG is intended for effective financial administration y
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Fiscal integrity, managerial accountability, and programme accountability
General Financial Rules (GFR) - A compendium of general provisions relating to rules and procedures dealing with fi financial i l managementt Considerable interface in administrative structure at both the levels
SOUND PFM SYSTEM: AN ACKNOWLEDGEMENT |
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Improving delivery of public services, establishing accountability framework, and proper implementation of pro pro�poor poor policies have remained key concerns Expanding scope of the central programmes in the area of rural infrastructure, poverty eradication, employment creation, and social sector spending, particularly in education and health necessitated strengthening PFM systems High level Government Committees and Statutory Bodies like Administrative Reform Commission, Finance Commission, Expert committee on Expenditure Management have provided reform recommendations K Elements: Key El t Emphasis E h i on performance f orientation, i t ti establishing t bli hi medium term expenditure framework, adopting rule based budget management, g , and improving p g capacity p y and technical efficiency y
PERFORMANCE BUDGET: A PAST ATTEMPT |
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Search for result oriented system led the Government to introduce the Performance budget in 1968 to provide a link between public spending and physical targets The experience of performance budget since its adoption sshows ows tthat at not ot much uc modification od cat o was atte attempted pted to link tthee budgeting decisions to performance indicators The major impeding factor in this endeavor was unsatisfactory performance measurement The introduction of performance budgeting, however, resulted in refining the accounting classification system for the budget in mid-seventies which was upgraded periodically
OUTCOME BUDGET: RENEWED ATTEMPT TO MAKE THE BUDGET PERFORMANCE ORIENTED |
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The outcome budget, g , claimed to have been designed g to move beyond the traditional line item system to clearly defined outcomes of all government programmes was introduced in 2005; further Strengthened in 2007 Lot of faith has been placed on this initiative that has the objective of converting outlays to outcomes and bringing about improvements in the quality of governance Considered as a kind of model for the State Governments to follow to improve sub-national budgeting framework Key steps: defining measurable outcomes, standardizing the unit costs of delivery, delivery benchmarking standards, standards capacity building, effective monitoring and evaluation
SOME ISSUES IN OUTCOME BUDGET |
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Strong management process in the Government organized for achieving results and delivering services The emphasis on quantifiable outcome in the new version as the ‘end objectives of State intervention’ is a challenging proposition iti Focusing on outputs would have been a better way to ensure managerial accountability Establishing a direct link between level of funding and performance may not be possible due to the role of political concerns and value judgments involved in resource trade-off y
It would be sensible if the performance information contained in the individual outcome budgets play active role in the decisions relating to programme formulation and resource allocation.
PERFORMANCE MANAGEMENT | |
Performance Monitoring and Evaluation System (PMES)’ for Departments was introduced in 2009. The PMES provides a framework to measure performance of all schemes and projects run by the departments Results Framework Document (RFD) - a record of understanding between the departmental Minister and the Secretary of the department, providing physical performance indicators to be gay year achieved during y The RFD is designed to express main objectives of the department, actions proposed to achieve these objectives, and progress made in achieving these objectives during the year y Vision and mission statements, prioritized objectives, and physical performance indicators are contained in this document y Performance scores and incentives for better performance y
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The PMES needs to be effectively integrated with the outcome budget
MEDIUM TERM PERSPECTIVE IN EXPENDITURE PLANNING |
In India it was maintained that the five year plans provide the basis for a multi-year perspective for resource allocation y
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Breaking up the medium term five year plans into annual plans, integrating them with annual budgets, and further monitoring of their progress was considered as important innovations
The development planning-budgeting link in India, however, has not been smooth Key Reform Recommendations: The 13th FC recommended for tightening the integration between the h multi-year li f framework k provided id d b by MTFP and d annuall b budget d exercise y High g level Expert p Committee on Expenditure p Management g recommended developing a multi-year expenditure framework (three year), to be updated in the light of resource availability, with sectoral priorities and performance – similar to MTFF approach y
FISCAL RULES AND BUDGET MANAGEMENT |
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Fiscal rules are designed to address the open-ended budgetary process accommodating spending demands producing expansionary i fi fiscal stance resulting i in i higher i deficit fi i and debt burden The fiscal rule was adopted in India in the form of Fiscal Responsibility and Budget Management Act (FRBM) in 2003 The FRBM act was adopted p with specific p targets g to achieve fiscal deficit to GDP ratio of 3 per cent both by Central and State Governments by 2008-09 and balance the revenue account The Act also had features aimed at improving transparency and bringing in an element of multi-year perspective in the budgeting system
POST FRBM FISCAL DEVELOPMENTS |
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The success of fiscal rules was closely related with the growth performance of the country necessitating revision when the economy slowed down The real test of the fiscal rules came during 2008-09, when the national ti l growth th rate t slowed l d down d sharply h l to t 6.8 6 8 per centt from f an average of 9.4 per cent in the preceding three years y
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Expansionary fiscal stance by the Central Government through fiscal stimulus packages - tax cuts and expenditure hikes
The fiscal rules needed to be redefined with a longer time horizon beyond 2008-09 The revised road map for fiscal consolidation was suggested by the Thirteenth Finance Commission with an extended time horizon up to 2014-15
GROWTH AND FISCAL DEFICIT
DIFFICULTIES IN ADHERING FISCAL RULES |
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Factors like political willingness to accept the constraints put by the fiscal rules that counter the tendency of open-ended conventional i budgeting i During cyclical downturn or economic shock, the latter being more destabilizing destabilizing, it becomes difficult to hold on to the fiscal rule The tendencyy of expanding p g the scope p of p populist p Government programmes and subsidies which have large expenditure commitments in the future years needs to be restricted to emphasize fiscal discipline Believing that higher revenue collections to continue interminably and support the future year budget commitments may not be in the interest of a sound fiscal management.
DELEGATION OF FINANCIAL POWERS: CHARTER FOR FINANCIAL ADVISORS |
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The process of decentralization of financial powers within the Government is institutionalized through system of Integrated Financial Advisors (FA) – similar to the system of Chief Executive Officer (CFO The FAs function as ‘eyes and ears’ of the Ministry of Finance The role, authority as well as accountability of the Financial Advisers were revised through a charter in 2006 with objective of enhancing their capacity to meet the emerging challenges y
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REVISION OF
To assist the departments in achieving their objectives, facilitating implementation of the approved programmes
Capacity building is a key requirement to empower the FAs in addition to support from the administrative ministry
EFFORTS TO ADOPT ACCRUAL ACCOUNTING | | |
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Gradual switchover to accrual based accounting system was accepted in principle National Municipal Accounting Manual incorporates the principles of accrual accounting Government Accounting Standards Advisory Board (GASAB) was entrusted to prepare a detailed roadmap and an operational framework to adopt accrual based accounting system Th GASAB roadmap The d envisages i a transition i i period i d off 10 to 12 years y
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The operational p framework details,, the p plan of transition encompassing accounting and treatment of assets, liabilities, revenue and expenses and the final accounts of the Government consistent with the provisions of the Constitution
Doubts regarding costs and benefits, complexities and risks involved while adopting accrual accounting and administrative preparation and key requirement of capacity building weighs heavily on the transition path in India
INTERGOVERNMENTAL TRANSFERS AND PFM CONCERNS |
The performance management framework in Centrally Sponsored Schemes (CSS) is stretched over various agencies starting from the central to State Government for which monitoring the service delivery and fixing accountability for results has become difficult The big ticket CCS bypass the state budgets and are routed through implementing agencies y Out of formal CAG audit y The information on availability funds and actual expenditure by the service delivery units - a school or a health service unit unit, at the far flung areas is not complete y
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Central Plan Monitoring System launched to map flow of funds, expenditure details, and reporting Proposal to transfer the resources to the State budgets
EXTERNAL AUDIT |
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The CAG, the Supreme Audit Institution (SAI) enjoys considerable independence and its scope to follow the trail of public i money is i considerable i The auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI) have been suitably adapted In addition to regular g audits the CAG has expanded p the scope p of performance audit of programmes of various departments The follow-up of the audit reports needs strengthening The parliamentary committee (PAC) that scrutinizes only selected portion of the audit observations to recommend remedial actions y The audit observations not selected by the PAC was not given importance by the departments y
OTHER INSTITUTIONAL IMPROVEMENTS |
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The Government has attempted to strengthen debt and cash management by establishing an independent Debt Management Office in Ministry of Finance Cash management has been tightened through putting monthly and quarterly limits on expenditures by the spending departments Autonomous Fiscal Council to assist the Government in addressing its fiscal tasks in a professional, transparent and effective manner is proposed A new procurement policy with stringent anti corruption measures has been adopted by the Cabinet Use of ICT in treasury automation at state level, supporting informed planning, budgeting, and effective monitoring systems
CONCLUDING OBSERVATIONS |
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The PFM system appears consistent with well-established budgeting, accounting, audit and legislative control systems Scope for improving efficiency of government spending and d public bli service i d delivery li b by strengthening t th i institutional i tit ti l framework is quite considerable Reform intents should match the outcomes The discontinuities should be avoided by putting in place a comprehensive time bound plan The political involvement and willingness to steer the changes needed for effective reforms