PFM in India June 2010 Workshop Proceedings

NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY
Public Financial
Management in India
Proceedings of a June 2010 Workshop
Proceedings of a workshop held in New Delhi June 8-9, 2010 by National Institute of Finance and Policy
(NIPFP) to disseminate its Performance Assessment Report of systems of Public Financial Management
(PFM) in the Union government of India. The proceedings summarize the NIPFP research findings and
the workshop participants’ views with respect to possible priorities for PFM reform in four major parts
of the PFM cycle: budgeting, budget execution, accounting and reporting, and oversight.
Public Financial Management in India
Proceedings of a June 2010 Workshop
Contents
Introduction ....................................................................................................................................1
Background to the Workshop ..............................................................................................1
Purpose of the Proceedings ..................................................................................................1
Group 1: Budgeting .......................................................................................................................2

Summary of NIPFP Assessment ..........................................................................................2
Group 1 Report ....................................................................................................................3
Group 2: Budget Execution...........................................................................................................4

Group 2 Report ....................................................................................................................7
Group 3: Accounting and Reporting ...........................................................................................7

Group 3 Report ....................................................................................................................8
Group 4: Oversight ........................................................................................................................9

Group 4 Report ..................................................................................................................10
Annexes:
1 Workshop Agenda .............................................................................................................14
2 Workshop Participants .......................................................................................................16
3 Text of Inaugural Speech by Dr. C. Rangarajan,
Chairman, Economic Advisory Council to the Prime Minister .........................................24
4 Text of Keynote Address by Dr. Avind Mayaram,
Additional Secretary, Ministry of Rural Development ......................................................28
5 Presentation by Dr. Arindam Das-Gupta,
Senior Professor, Goa Institute of Management ................................................................32
6 Presentation by Dr. Pratap Jena, Fellow, NIPFP ...............................................................35
7 Summary Assessment from NIPFP Performance Assessment Report ..............................39
8 Group 1 Presentation..........................................................................................................48
National Institute of Public Finance and Policy ii

Public Financial Management in India Proceedings of a June 2010 Workshop
Introduction
Background to the Workshop
In March 2010, National Institute of Public Finance and Policy (NIPFP) published a Performance
Assessment Report of the systems of Public Financial Management (PFM) in the Union government of
India. The Performance Assessment Report used a PFM performance measurement framework
established by the Public Expenditure and Financial Accountability (PEFA) program. PEFA is a
partnership between the World Bank, the European Commission, the United Kingdom’s Department for
International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of
Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, and the International Monetary Fund.
As of October 2009, over 150 PEFA assessments had been completed in over 100 countries of the world.
NIPFP used publicly-available information to assess the performance of PFM in India at the central
government level, through analysis of performance against the 28 high level indicators of the PEFA
performance measurement framework. The NIPFP study was peer reviewed by the PEFA secretariat, and
is published on the NIPFP website at http://www.nipfp.org.in/. The Summary Assessment from the
NIPFP study is shown as Annex 7 to these Proceedings.
The NIPFP study, like all PEFA assessments, assesses performance against six critical dimensions of
performance of an open and orderly PFM system: (1) credibility of the budget; (2) comprehensiveness
and transparency of the budget; (3) policy-based budgeting; (4) predictability and control in budget
execution; (5) accounting, recording and reporting; and (6) external scrutiny and audit. The study
represents an assessment of current performance only. It does not analyse underlying reasons for
relatively good or relatively poor performance, and it does not contain any recommendations for priority
actions in PFM reform. NIPFP did expect, however, that the report would contribute towards identifying
priorities for PFM reform, and informing efforts to formulate and implement a PFM reform strategy.
On June 8-9, 2010, NIPFP hosted a workshop on PFM in India, using its PFM Performance Assessment
Report as a basis for discussion amongst academics, NGOs and government officials responsible for
aspects of PFM. The workshop attracted approximately 80 participants who were divided into 4 working
groups to deliberate on the implications of the study findings. Annex 1 presents the workshop agenda,
and annex 2 lists the participants.
Purpose of the Proceedings

These Proceedings summarize the findings of the NIPFP Performance Assessment Report and the written
reports submitted by the group chairs following the workshop. The four working groups were as follows:
Group 1: Budgeting
Group 2: Budget Execution
Group 3: Accounting and Reporting
Group 4: Oversight
The annexes to these Proceedings provide the text of speeches made at the workshop, and the contents of
presentations made by speakers and by the group chairs, as well as the Summary Assessment from the
NIPFP Performance Assessment Report. The Proceedings may prove useful for any persons interested in
identifying priorities for PFM reform and in formulating a PFM reform strategy for the Union
government of India.
National Institute of Public Finance and Policy 1

Group 1: Budgeting
Group 1 was asked to consider three key dimensions of PFM performance:
• Credibility of the budget – The budget is realistic and is implemented as intended.
• Comprehensiveness and transparency – The budget and the fiscal risk oversight are
comprehensive, and fiscal and budget information is accessible to the public.
• Policy-based budgeting – The budget is prepared with due regard to government policy.
Summary of NIPFP Assessment

The first 12 of the 28 indicators of the PEFA PFM performance measurement framework are concerned
with budgeting. Those indicators dealing with the comprehensiveness and transparency of the budget
(Performance Indicators 5-10) generally scored A or B. Of the four indicators of budget credibility (PI-1
to PI-4), only 1 was A. Two scored C, and one was not rated. Policy-based budgeting was assessed the
weakest area of budgeting, with scores of C or D.
The credibility of the budget was assessed mainly through two indicators of expenditure and revenue out-
turn as compared to the budget estimates. At the aggregate level the expenditure out-turn (expenditures
net of debt repayments and the donor funded project expenditure) was substantially higher than the
budget estimates for all the three years reviewed (12.95% in 2006-07, 10.62% in 2007-08 and 36.95%
estimated in 2008-09). The increased level of expenditures was made available through the mechanism of
supplementary demands, used for in-year budget adjustments, the primary objective of which is intended
to be to meet unforeseen expenditures. The higher expenditure out-turn as against the budget estimates,
largely in the revenue expenditure rather than the capital expenditure, adversely affects budget credibility,
as it indicates poor planning and implementation of expenditures and non-regard for the sanctity of the
budget estimates. The pattern of revenue out-turn as against the budget estimates shows that revenue
projections have remained a challenge depending upon the growth of the economy and the global market
situation. This was evident when the revenue out-turn as against the budget estimates turned negative in
the year 2008-09 following the international economic crisis and consequent slow down in the growth
rate of the economy. Overall budget credibility is affected by the absence of a hard budget constraint,
thereby allowing substantial adjustments in the budget during the year through supplementary grants, and
the absence of an accurate revenue projection mechanism by which the movement of economy and
changes in tax administration determine the actual revenue collection.
A multi-year perspective in expenditure planning and budgeting has been lacking in India. While attempts
were made in past to initiate medium term fiscal policy, they were given up in latter years. The enactment
of the FRBM Act and stipulation of presenting a Medium Term Fiscal Policy (MTFP) along with the
budget brought back the issues once again into the budgeting system. However, while the MTFP
mandates presentation of three year rolling targets relating to major fiscal indicators such as revenue
deficit, fiscal deficit, tax revenue and outstanding liabilities as percent to GDP, a detailed medium term
expenditure framework for various sectors is not worked out by projecting expenditure implications of
programmes undertaken for outward years. The budgeting thus remains strictly annual without a multi-
year perspective relating to expenditure commitments of various sectors.
It is maintained that the five year plans in India provide the basis for a multi-year perspective for resource
allocation. However, the economic planning and budget differ in their scope and time span. While plans
provide a conceptual framework by focusing on various sectors in the economy, the budget is more
concerned with systems of control over the use of funds by government and pays more attention to

financial aspects. It is not uncommon to initiate major projects and schemes which are not provided for in
the plan. Further, in the context of current budgetary practice, the link between the plan and the budget is
weak. In the process of budget preparation the plan allocations are dispersed over various heads and sub-
heads of expenditure. While the debt information including both from external and internal sources are
regularly reported by the government and Reserve Bank of India, debt sustainability analysis in a multi-
year framework is not carried out; nor are costed sector strategies prepared.
Group 1 Report
Introduction:
To undertake reforms in the Budget, it must first be understood that Budget making is a Constitutional
process drawing its essence from the relevant constitutional provisions supplemented by various
procedures and accounting arrangements drawn up by the CGA and the C&AG and approved by the
Parliamentary Committees. Therefore it may not be appropriate to expect that information as sought by
say an academic would be easily accessed. However, there is room for taking a re-look at the several
Explanatory documents which accompany the Budget so that the information presentation can be tweaked
so as to make it more relevant. A Task Force or similar body can be assigned the job to do so.
In the recent past new innovations have also addressed themselves to this issue of supplying information
that may be required by the general public/stakeholders. Developments in budgeting such as statement of
revenue foregone, plan scheme monitoring, introduction of new MIS statements and other initiatives have
served the purpose of making the Budget presentation more contemporary. IT initiatives in the CGA’s
office as well as in Budget division will further improve the information as well as widen its scope.
Budgeting Process:
Amongst the various issues that are repeatedly flagged for reform relate to credibility of estimates and
large number of supplementary demands for Grants. It has been seen that in the recent past large number
of Supplementary Demands for Grants have become the norm which vitiate the Budget Estimates as
proposed at the beginning of the year. Similarly, large variations between the Budget Estimates and the
Actual numbers indicate that due thought was not given to the formulation of the Budget Estimates. It
was suggested by the Group that perhaps the solution to this may be possible if timelines for the
communication of ceilings are preponed for both Plan as well as Non-Plan. By communicating Plan
ceilings well in advance, say by the middle of January, adequate time would be available with the line
Ministries to work out the schematic allocation of their outlays which currently they are doing in a last
minute rush. Ensuring appropriate allocations would lead to greater purity in the Budget Estimates.
Form and Content:

The group also made some suggestions in the form and content of the Budget documents –it may be
clarified that mostly the suggestions relate to the Expenditure Budget since the Receipts are receiving
adequate attention through various initiatives in Direct and Indirect Tax reforms. Some of the suggestions
discussed by the group are:
• Fungibility of receipts: Cess backed allocations should be discouraged. Such allocations are
counterproductive in an era of Deficit financing. By making all receipts fungible, we are ensuring
that all sectors and schemes compete for allocations on the merit of their requirement and
performance.
• Non lapsable pools: These too are counterproductive given the fact that they merely indicate the
lack of capacity of a scheme/area to utilize its allocations. Placing unspent provisions in a non-

lapsable pool may also be an indication of parking of funds. Basically, to borrow and then to
place scarce and expensive resources in a non-lapsable pool is indicative of bad budgeting.
• Efficiency dividends: these should be built into the budgeting process. Efficiency parameters
should be mapped and ongoing models studied form other countries so that a system of awarding
better performance evolves.
• Delinking of MIS statements from the main budget to be submitted separately immediately after
the budget: Such information is acquiring greater usage with stakeholders’ requirement of further
refinements built in. However, as this is bundled along with the main budget documents, quality
time as well as expansion of information gets constrained by the overall Budget deadlines.
Therefore, the MIS statements can be compiled separately and presented along with the other
post-budget documents such as the Supplementary Demands for Grants, etc. All post budget
reporting documents can thereafter be presented together
• Sectoral MTEF for 5 years: No doubt this should be there. However, to make it more meaningful
the period of the Plan and Finance Commission award should be made coterminous and a detailed
MTEF then prepared.
• On the Plan and non-plan distinction the Group held the view that though not technically
appropriate it serves the purpose of highlighting and earmarking expenditure on
developmental/non developmental goals. Unless an alternate model is put in place which
categorizes between Developmental and non-Developmental expenditure, placing the entire
expenditure under one umbrella would have a crowding out effect and could adversely impact
outlays on Developmental requirements.
• The Group also felt that the Outcome budget should be prepared along with expenditure outlays
so that it could be used as a tool for budget execution-in particular releases should be mapped in
accord with outcomes. TO get better outcomes, the possibility of building in Social Audit into
schemes should also be explored and implemented.
Group 2: Budget Execution

Group 2 was asked to focus on systems to ensure predictability and control in budget execution. This
includes a variety of areas, including transparency of taxpayer obligations and liabilities; measures for
taxpayer registration and tax assessment; effectiveness in collection of tax payments; predictability in the
availability of funds for commitment of expenditures; recording and management of cash balances, debt
and guarantees; effectiveness of payroll controls; competition, value for money and controls in
procurement; effectiveness of internal controls for non-salary expenditure; and effectiveness of internal
audit.

Only 2 of the 9 indicators of performance for this aspect of the overall PFM architecture scored A or B.
The indicator for procurement could not be rated due to a lack of publicly-available information as to the
competition, value for money and controls in procurement actually realized from public spending through
the public procurement system. Six indicators scored C or D.
The central taxes are administered based on explicit legal provisions, which are subject to procedural and
legal safeguards. However, in the Indian tax system the scope for administrative discretion is considerable
in practice due to large numbers of exemptions and reliefs, and frequent changes in tax provisions,
making the tax laws relatively complex. The internal audit system is not strengthened to ensure

accountability of tax collection staff and adherence to established tax administration policies and
procedures in their dealings with taxpayers. Despite various efforts of the government, taxpayers face
difficulties in accessing information on tax liabilities and administrative procedures. A structured
taxpayer education programme covering various aspects of tax payment is absent, which adds to the
compliance cost.
The Indian tax system is, however, marked by a well structured tax appeal mechanism through which the
tax disputes arising out of various provisions relating to tax assessments and penalties are taken up.
Despite a well laid out appeal mechanism, the time taken to dispose of the appeals is long, and a large
number of cases remains pending. The taxpayer registration is maintained by allotting a Permanent
Account Number (PAN) to individuals. The PAN is the key element of maintaining a taxpayer registry
and it is linked with other government registration system. While tax administration in India has adequate
legal provisions to take action against delinquent taxpayers, its ability to collect the taxes assessed is
obstructed by the taxes remaining under dispute, and arrears both in dispute and not in dispute are only
slowly cleared.
Efforts were made to improve the predictability in the availability of funds for commitment of
expenditure through efficient cash management and planning of market borrowing calendar by stipulating
monthly and quarterly ceilings of expenditure for the departments. However, in practice the unevenness
of expenditure and rush of expenditure towards the end of the financial year still remains a problem due to
weak adherence to the cash management programme.
Recording and management of cash balances, debt and guarantees by the government of India have
improved significantly and a comprehensive report on central government liabilities is provided in the
budget documents. Over the years, the coverage and compilation procedures of external debt statistics
have become more comprehensive and the dissemination of external debt statistics too has improved;
India has also been able to comply with both IMF's Special Data Dissemination Standard (SDDS) and
World Bank's Quarterly External Debt Statistics (QEDS). As regards financial assets, the budget provides
information on the government’s opening cash balance, which is maintained by the Reserve Bank of India
(RBI). The RBI maintains the cash balance of the Government and invests in government securities held
in its portfolio for the purpose. While loan guarantees given by the central government are reported in the
budget, complete information on implicit guarantees is absent.
An Integrated Financial Management Information System (IFMIS) incorporating systems for

management of personnel database and payroll records at central government level in India does not exist.
The management of personnel, maintenance of the personnel database, and preparation of payroll are the
prime responsibility of departments and ministries. The personnel database of government employees in
terms of their number, staffing pattern as against approved posts, salary bill are maintained by each
department and ministry. While a direct link between personnel database and the payroll for each month
is not established, the payroll is prepared after reconciling with the previous month’s payroll. Ministries
and departments maintain a service book for each employee where all the personnel details and payroll
data are recorded. Any change in personnel records and the payroll are recorded in the service books of
the Government employees, which are updated regularly. The Budget section of Ministry of Finance
collects the information from every ministry, which is part of their expenditure proposals shown in
demand for grants, and this information enters into the budget estimates of the government.
There is no law exclusively governing public procurement of goods by the departments and ministries.
Rules and directives in this regard provided in the General Financial Rules (GFR), 2005 and manual on
procedures for purchase of goods guides the procurement process. An important number of instructions,
issued by the Central Vigilance Commission (CVC), supplement these regulations. With the exception of

certain control and oversight functions carried out by central authorities such as the Comptroller and
Auditor General and the CVC, no central authority exists that is exclusively responsible for defining
procurement policies and for overseeing compliance with the established procedures. As per the rules and
procedures on procurement stipulated in the GFR the Ministries or Departments have been delegated full
powers to make their own arrangements for procurement of goods. Tenders for contracts above a
threshold size are issued and are reported by the respective departments. In the absence of required
expertise, a Ministry or Department can procure goods through the Central Purchase Organization,
Directorate General of Supplies and Disposals (DGS&D). While rules and principles governing
procurement are published, the data on actual procurement by various departments and ministries of the
Government is not publicly available.
Despite the existence of the financial rules for effective internal expenditure control, the actual practice
falls short of the standard. The unevenness of expenditures during the year that spikes during the last
quarter of the financial year still remains a problem in expenditure control. The surrender of unspent
amounts, ‘savings’, from various grants to the Finance Ministry and excess expenditures not regularized
are witnessed regularly as brought out by the CAG in their audit reports. These deviations indicate
inadequate programme management and internal control through the year. There is also the prevalence of
personal ledger accounts, a device intended to facilitate the designated officer to credit receipts into and
effect withdrawals directly from the account to avoid losing it at the end of the year. Lack of
comprehensive data base limits the ability to manage the assets efficiently. The internal audit, a useful
management tool to control misuse and mismanagement of public funds, has not been effective to serve
the objectives of an effective internal control system.
The expenditure commitment controls are not effective in India. The Appropriation Act, meant for
authorizing withdrawals from the Consolidated Fund for incurring expenditure based on the approved
budget estimates, do not distinguish between commitment and expenditures. The budget preparation
exercises faults on overlooking expenditure arrears as there is no provision in the budget for the ensuing
year to discharge the expenditure arrears of the previous year(s). The year end financial statement,
Appropriation Accounts, is prepared on a cash basis reporting cash execution of the expenditure plans
approved by parliament and do not report on commitments. The statutory requirements for budget
implementation focus exclusively on controlling expenditures with respect to budget appropriations. The
cash management system is not integrated with control over commitments. Lack of an effective cash
management mechanism in the line Ministries and Departments is a stumbling block to implement
commitment control system. The expenditure ceiling, which is communicated to the departments during
their pre-budget meeting with the Ministry of Finance, mostly relate to the line item control. There is no
instrument to assist and guide the Head of the Accounts to know that sufficient unencumbered funds are
available at the time of entering into obligations.
Internal audit has remained a weak link in the financial management system. Internal audit in India is
conducted in a routine manner and the result of this audit on improving the financial management system
is insignificant. The internal audit system has not been updated over several decades and due importance
has not been given to securing ‘value for money’ and accountability. The Task Force on Internal Audit,
constituted by the CAG observed that the internal audit in India has a restricted mandate, does not have
the ability to evaluate risks. It was also noted that that no standards have been evolved for internal audit in
India and it did not have the required independence for its effective functioning.

Group 2 Report
Group-II discussed Budget Execution. The group noted that Budget Execution was assessed by NIPFP as
being the weakest part of the overall system of PFM in India. Keeping in view the vastness of this field,
the Group confined itself to what it considered to be the highest priority areas: procurement, cash
management, and internal control and internal audit.
The Group noted with concern the less than average physical condition of public capital assets, post-
commissioning. It was felt that the process of sanction itself needed review. Most public projects had
very little committed maintenance funds due to which these projects were in a dilapidated condition – a
national loss. The Group therefore suggested the adoption of the PPP model where maintenance costs of
a project should be included in the cost of a project at the sanction stage itself. In addition, service
standards needed to be incorporated in the agreement itself. This would ensure superior maintenance and
continued maintenance funding for departmentally-executed public projects irrespective of the political
priorities of governments. The Group felt that NIPFP was best placed to study the process of
sanction/procurement of/for projects. Further, the Group noted that often advertising for procurement for
projects was done without any detailed terms and conditions to secure the best price from vendors. The
Group therefore suggested that the RFP be accompanied by all terms and conditions of contract. This
would help obtain a better price, ensure accountability, and fruitfully serve the nation for decades.
For the issue of cash management, major sub-issues discussed related to belated release of funds, direct
transfer of funds by GOI to local bodies and NGOs, and lack of actual utilization of funds by recipients
and beneficiaries. Overall, the Group felt that integration of cash management functions was mainly
confined to governments and some executing agencies only. Such integration did not stretch from apex to
the service delivery point. The Group therefore suggested leveraging ICT by way of standardized
software, accounting procedures, etc. that bring about vertical integration of cash management from the
apex level to the service delivery point. This would ensure optimal utilization of funds, particularly
borrowed from the market, and provide greater accountability of executing agencies, including those in
the private sector such as NGOs.
On the issue of internal controls, the Group reserved its opinion, since DPAR is in the process of evolving
a comprehensive risk management framework on the lines of PFM.
The Group observed that the internal audit function in governments was marked by the absence of any
statutory backing and any real independence. Unlike the IFD, the Internal Audit is not fully integrated
with the Ministry. Compounding these is limited capacity, technical and physical; nor is Internal Audit’s
processes institutionalized, unlike that of the CAG of India. The Group also observed that presently only
extracts of Internal Audit reports were being sent to Secretary, MoF (Expenditure) annually. Such system
of internal oversight does not recognize key aspects of timeliness for corrective action, systems failures,
etc. The Group therefore suggested that the Internal Audit function be integrated with the Ministry, akin
to the IFD and provided with enabling statutory basis. Capacity building and further leveraging of ICT
for the internal audit function were also suggested by the Group.

Group 3 was asked to discuss accounting, recording and reporting issues such as the timeliness and
regularity of accounts reconciliations, the availability of information on resources received by service
delivery units, the quality and timeliness of in-year budget reports, and the quality and timeliness of
annual financial statements.


All dimensions of the 4 indicators of performance in this area scored A or B, except for only 2 dimensions
or aspects of performance, namely the scope of in-year budget reports in terms of coverage and
compatibility with budget estimates, and the accounting standards used in the preparation of the
government’s annual financial statements.
Central government accounts are reconciled with those of the accounts kept by the Reserve Bank of India
(RBI), the banker to the government, on a monthly basis. The general banking business of the Central
Government (which includes the receipt, collection, payment and remittance of moneys on behalf of the
Government) is carried on and transacted by the RBI. The Controller General of Accounts (CGA) in the
Ministry of Finance compiles the aggregate accounts of the ministries/departments from the compiled
accounts received from the departmental accounts sections and these accounts are reconciled with the
cash balance of the ministries/departments maintained by the RBI in its Central Accounts Section.
While there are no provisions for presenting a mid-year budget report to the Parliament, the aggregate
monthly accounts prepared by the Controller General of Accounts (CGA), compiled from the
departmental accounts, provide monthly accounts of budget implementation. The monthly accounts of the
central government are important in-year budget reports that are accessible to the general public through
the website of the CGA. These monthly accounts are reviewed and a critical analysis of expenditure,
revenue collection, borrowings and deficit is prepared for Finance Minister. The Finance Accounts and
Appropriation Accounts prepared by the CGA are the consolidated year-end financial statements of the
Government of India. These documents are based on the detailed information for all the
ministries/departments and decentralized units. The year-end financial statements are accessible to the
general public. The accounts for the government sector in India are prepared on a cash basis and the year-
end financial statement reflects this accounting system. However, the year-end financial statements in the
form of Finance Accounts and Appropriation Accounts are presented with a time lag of 8 to 10 months.
Group 3 Report
The group deliberated upon the systemic and procedural problems faced in the existing system of
Government accounting, cash basis versus accrual basis of accounting, issues relating to reporting of
information Accounting Standards, use of IT and possible areas for Business Process Re-engineering.
Due to paucity of time other important issues like gender budgeting, reforms in accounting classification
and consolidation of data and accounting information could not be discussed.
The group felt that the existing accounting system and procedures needs review and revision to simplify
them and make them more user friendly. For example, the existing system of reconciliation between a
DDO or a paying authority and the banks involves multiple stages and creation of heavy balances in
suspense account. These balances have been increasing every year and efforts involved in the process of
reconciliation much more than required for desired results. Some of best practices need to be studied in
close consolidation with the RBI. These need to be revamped by simplification and use of IT system.
Meanwhile, the existing systems and procedures need process re-engineering.
Issues relating to cash balances and accounting that were discussed included Assets Registers, Liability
Registers and GIA registers, consolidation of accounting policies and proper implementation of existing
rules and policies. The group recommends alignment of existing cash basis of Government accounting
with International Public Sector Accounting Standards. This need to be accompanied with sincere efforts
to shift towards accrual accounting as recommended by 12th and 13th Finance Commission. The Group

supports the efforts of GASAB in this regard. However, some important issues in accrual accounting like
valuation of assets particularly in defence, disclosures norms etc. need careful consideration.
On the payment side, some of the good practices being followed in Railways which provides seamless
integration from “proposal to payment”, use of liability register for contractual commitments, e-
procurement and e-bills etc. need to be studied and improved upon. Similarly, creation of standardized
data base for expediting administrative approvals, financial sanctions, committed liabilities vis-a-vis
budget available etc. are required for better formulation and execution of budget.
Financial and reporting management system needs to be made from user friendly, timely and helpful for
decision making. One suggestion is to put the unaudited annual reports in public domain as audit takes
time. Thus reporting structure could also be customized to meet the requirements of both the managers
and users.
Group 4: Oversight
Group 4 was asked to look at the scope, nature and follow-up of external audits conducted by the
Comptroller and Auditor General, and at the scrutiny provided by the legislature, both ex-ante scrutiny of
the annual budget and ex-post scrutiny of the external audit reports.
Legislative scrutiny of the annual budget law scored an A. However, the timeliness of external audit
reports to the legislature and the extent of follow up on audit recommendations resulted in a D overall
ranking for the external audit indicator. Similarly, the timeliness of PAC/COPU examinations of audit
reports and the extent of hearings undertaken on key findings resulted in a D overall ranking for the
indicator on legislative scrutiny of external audit reports.
A unitary audit in federal setup is designed to play a significant role in effective financial administration
of the country. The Constitution of India has provided the Comptroller and Auditor General of India
(CAG) as a high independent statutory authority. The Constitution prescribes exhaustive safeguards for
the independent functioning of CAG. The range of audit performed by the CAG includes regularity
(financial) audit, regularity (compliance) audit, IT audit and performance audit. The audit assists
Parliament in exercising financial control over the executive to ensure that funds approved have been
utilized with due regard to economy and efficiency, and the funds authorized to be raised through taxation
and other measures have been assessed, calculated and credited to the government properly. The Action
Taken Notes submitted by the departments and units audited by the CAG relating to audit observations
other than those examined by the PAC as described in the following paragraph, were found to be largely
formal rather than substantive. In addition, CAG’s reports are sometimes not timely because there can be
a substantial time gap between the occurrence of an irregularity and its reporting by CAG. It reviews
programmes after these have run for a few years.
The audit reports of CAG are examined by a Parliamentary committee called the Public Accounts
Committee (PAC), which makes recommendations to Parliament on various issues involved. However,
the PAC’s examination of the audit report is not comprehensive, as the Committee over the years has
scrutinized only a limited portion of the audit reports. While the recommendations made by the PAC
were taken seriously by the executive, its scope was limited as the PAC considers only a small portion of
the audit reports.

Group 4 Report
Introduction:
Group-IV based its deliberations on the outline of the issues identified by NIPFP for deliberation by the
group. In all, 8 issues were identified in the overview document. These are summarized below:
i. Scope of the CAG DPC Act of 1971: Whether the Act provides adequate power to the CAG to
conduct audit to fulfill his constitutional obligations
ii. Timeliness of audit Reports: Whether reports are timely in view of the perceived delay between
occurrence of an irregularity and its reporting by audit, and the tabling of report before the
parliament.
iii. Audit Procedures: Whether audit reports of the CAG suffer from an excessive focus on
faultfinding, not sufficiently constructive, repetitive, are in the form of scattered observations not
identifying systemic issues or providing a macro level view of functioning of the department.
iv. The Legislative scrutiny of external audit Reports: Whether the follow-up of CAG’s Audit report
is adequate in view of huge pendency in examination of audit reports by the Parliamentary
committees, and the quality of response of the Ministries/Departments.
v. External audit as a management tool: Whether external audit (By CAG) is functioning solely as a
system for policing government organizations.
vi. The functioning of the Audit Committees: Whether the functioning of Audit Committees set up to
review departmental action taken on audit reports is effective.
vii. Co-ordination between external audit and internal audit: Whether there is adequate synergy
between external and internal audit.
viii. The role of CAG in the audit of Local Bodies, NGOs: Whether the level and extent of CAG’s role
in the audit of local bodies, and in the audit of grants and loans to NGOs is adequate.
The deliberations and recommendations of the Group are summarized below:
1. Scope of CAG’s Act:

CAG’s duties and powers are derived from Articles 148 to 151 of the Constitution, which are further
amplified in the CAG’s Duties, Powers and Conditions of Service Act, 1971 (DPC Act). The group was
of the view that as set out in the Act, the powers of the CAG are wide, but more implicit than explicit.
For instance, the expression ‘Audit’ or scope of the audit itself has not been defined either in the
Constitution or the CAG’s DPC Act, 1971. The scope of external audit is, therefore, wide and audit by
CAG can respond to changes, reforms, new initiatives, changing patterns of Government activities,
international developments in the profession and rising expectations of the stakeholders regarding public
accountability without making any amendment to the Act. Similarly, the CAG has the power to
determine the nature and extent of audit and related access to records and to relevant information, and
finally decide on what to include in his audit reports. For this reason, the group felt that the Act gives
wide powers to the CAG, without explicitly spelling it out in all cases. While this loose definition of the
scope of CAG’s audit largely works in his favour in helping him cover new areas of audit with changing
pattern of governance, the Group was of the view that the Act still needs to be modified so as to explicitly
state the power of CAG in relation to the following:
a. Audit of Budgeting: Budgeting is a critical component of the PFM framework. The
credibility of the budget, its comprehensiveness and transparency, its link with the stated
policy of the government and its predictability directly impacts financial management.
Explicitly empowering the CAG to take up audit of Budget will aid in financial management
especially since the CAG’s audit reports regularly point out large variations between the
budgeted and actual figures.

b. Performance Audit: The CAG has been conducting performance audits for more than a
decade now. The Regulation on Audit and Accounts, 2007, framed by the CAG has a
separate chapter on Performance Audit, which both defines and explains the procedure for
conducting such audits. However, performance audit is not explicitly mentioned in the DPC
Act.
c. Audit of PPP contracts: Increasingly, governments are relying on Public Private Partnership
as an instrument for leveraging public finance by attracting private capital. This has been
done with the assumption that private sector investment and management and the underlying
appetite for innovation would lead to timely completion of projects, reduce stress on scarce
public resources and result in better value for money. Looking at the quantum of public
funds involved, and the fact that underlying resource being exploited is a public resource, the
DPC Act should explicitly empower the CAG to take up the audit of all PPP contracts.
d. Access to records of all agencies receiving public funds: In the last decade, we are seeing an
increasing trend in the transfer of public funds for expenditure to a wide variety of agencies,
not all of which come within the scope of audit of CAG as defined by the DPC Act. To
ensure accountability and obtain required assurance, it is essential that CAG be provided
access to records of all agencies receiving public funds.
e. Penal provision for non-production of records: While the CAG is empowered by the DPC
Act to require that any record relevant to his audit be sent to such place as he may appoint for
his inspection, this has not universally led to the records being made available within
reasonable time. Incorporating penal provision in the DPC Act for non-provision of records
may lead to better compliance with the Act, and improved quality of audit.
Finally, the Act needs to formally state that the CAG is the national mentor of public auditing in India.
2. Timeliness in Audit Reporting:

All parties involved in timely tabling of the audit report on the floor of the House should give due
importance to this aspect of financial management. Specifically, it is important that the audited accounts
of the Union or the State for any financial year are available well in time to facilitate budgeting for the
next financial year. It was agreed that all players would co-operate to ensure that the audited annual
accounts are available by September and the audit report on accounts are finalized by December of the
next financial year. Currently, the target set by the CAG for its field formation for finalization of
accounts is in keeping with stated target. In case of State Government wherein the accounts are
maintained by Accountant General (Accounts & Entitlements), and the audit certificate provided by
Accountant General (Audit), the duly audited Annual Accounts (Finance Accounts and Appropriation
Accounts) of the State government are targeted to be ready by 15th September for counter signature by
CAG. The report of CAG on State finances is targeted to be finalized along with reports on Annual
accounts.
3. Revisiting Audit Procedures:

It is perceived that the present audit procedures followed by CAG covering audit planning, execution, and
reporting appear somewhat ineffective in achieving its goal of bringing in executive accountability. This
view emanates from the observation that frequently, the CAG audit reports refer to irregularities which
are already known, and had been reported in earlier years without corrective action by the executive.
Further, the observations appear disjointed and do not provide a macro level view of the functioning of
the department. This issue was discussed by the group, and the group was informed of changes made by
the CAG in the recent past to address some of the issues, including a greater emphasis on performance
audits and integrated audit of departments. The group was of the view that this may be continued, and

that audit planning should be done on improved risk analyses of issue areas and audit reporting should
highlight systemic issues and analyze causes in entirety. The group felt that simply identifying the
irregularity is not sufficient, and that audit should identify the underlying causes, and control weakness if
any which lead to the irregularity being observed year after year. The group was of the view that ICT
(Information and Communication Technology) has multiplier effect on individual productivity and
effectiveness, and it should be used extensively by the auditors in conducting their audits. In addition,
organizations are increasingly conducting their business using IT applications, and audit should try to
conduct their audit by leveraging on the availability of data in electronic format by increasing the level of
substantive testing, and placing lesser reliance on paper documents for audit.
4. Legislative Scrutiny Sufficiency & Transparency:

In view of the fact that percentage of audit observations discussed by the Parliamentary Financial
Committees is miniscule when compared to the total number of observations included in the CAG’s
report submitted to the parliament every year and the resultant pendency in discussion on the reports, the
group felt that the present system of legislative scrutiny of the audit reports is insufficient. This was
further exacerbated by the delayed and formal rather than substantive nature of response in the form of
Action Taken Notes by the concerned Ministries/Departments. The group felt that the two parliamentary
financial committees, PAC (Public Accounts Committee) and COPU (Committee on Public
Undertakings), with 22 members each, needs to be expanded suitably to deal with the large body of audit
reports presented to it, and the increasing complexity of governance. One of the options in this regard
may be through the PAC/COPU setting up Working Groups, Sub-Committees, and Departmentally
related Standing Committees for examining the audit observations featuring in the audit reports. The
group was also of the view that legislative scrutiny may become more effective if the process is made
transparent, say by allowing media to attend the proceedings or by putting the report on proceedings in
public domain. It is recommended that the rules of business of legislative committee be amplified while
clearly defining its core functions and responsibilities.
5. External Audit and Management:

The group was of the view that it is internal audit which when strengthened can become an effective tool
of management in ensuring good governance. External audit and management serve the same larger
purpose, but external audit acts as a ‘tool’ for a larger body of stakeholders and its role as aid to the
auditee management is at best incidental. This issue is elaborated further in paragraph 7 below.
6. Functioning of the Audit Committees:

Audit committees, comprising representatives of audit and government agencies, have been set up to
review the departmental action taken on audit observations. The group was of the view that this body,
serving as an Audit-Executive interface needs to be institutionalized. Nodal agencies need to be created
at both Union and State Governments level for each department for this purpose. The Audit Committee
should have an independent status and deal with matters related to both internal and external audit. All
Departments should be duty bound to furnish information as and when required by this Committee.
Summary of Audit Committees’ deliberations should be in public domain, and should also be laid before
the legislative committees.
7. Internal & External Audit Coordination:

The function of audit has been entrusted to the Comptroller and Auditor-General of India by the
Constitution. Internal audit, as the name suggests, has to be a part of the government organization. Thus,
the audit conducted by the CAG is very clearly, external audit. The Institute of Internal auditor defines
internal auditing as “an independent, objective assurance and consulting activity designed to add value
and improve an organization's operations. It helps an organization accomplish its objectives by bringing

a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control,
and governance processes.” So, while internal auditing aims at assisting the organization in
accomplishing its objectives, external audit is a third party review of the operations of the organization for
consumption by interested stakeholders outside of the concerned organisation. The Group deliberated on
the key difference between external and internal audit, and the different role played by the two. The
Group was of the view that Government internal audit systems are presently very fragile and insufficient
at all levels; and needs to be significantly strengthened. CAG’s external audit should make a strong case
for strengthening of internal audit. The weakness of internal audit at the department level has been
repeatedly highlighted by the CAG in his audit reports by undertaking special review of internal controls.
Once internal audit is on a sound footing, operational synergy should be formally built by external audit
(done by CAG) with internal audit such that external audit can base the extent and duration of audit on the
work done by internal audit. For this, it is essential that the modalities for ensuring non-duplication of
work vis-à-vis the CAG should be formalized. This should be aimed at assisting the CAG in
concentrating on carrying out specialized audit/tasks, while internal audit focuses on routine regular
governance issues within the organisation.
8. CAG’s Audit & Decentralized Governance:

Decentralized governance through Local Bodies as brought about by the 73rd/74th amendment of the
Constitution has been a watershed event in civic governance. The governing bodies so created need
strong institutional support for sustenance and growth in the area of governance. While there has been
increasing devolution of funds to local bodies, the accountability structures are not yet commensurate
with the funds flow, and there is a need for ensuring that devolution and accountability go hand-in-hand.
The group was of the view that the CAG should play a key role in this exercise of decentralized
governance by setting up decentralized and effective audit structures. In this regard, legislation explicitly
stating the CAG to be the National Mentor of Accountability through auditing may be of help.

Annex 1
National Institute of Public Finance and Policy

New Delhi
Workshop on Public Financial Management in India
June 8-9, 2010
Venue - Le Meridien Hotel, New Delhi
Agenda
Tuesday, June 8, 2010
9.30 -10.00 AM Registration
10.00 – 10.10 AM Welcome Note and Overview of the Workshop

Dr. M Govinda Rao, Director, NIPFP and
Member, Economic Advisory Council to Prime
Minister of India
10.10 – 10.40 AM Inaugural Address

Dr. C. Rangarajan, Chairman, Economic
Advisory Council to prime Minister of India
10.40 – 11.00 PM Keynote Address

Dr. Arvind Mayaram, Additional Secretary,
Ministry of Rural Development, Government of
India
11.00 – 11.30 AM Tea/Coffee
11.30 – 11.45 AM PFM in India: Some Observations

Dr. Arindam Dasgupta
Professor of Economics and Finance, Goa
Institute of Management
11.45 – 12.30 PM PFM Assessment in India

Dr. Pratap Ranjan Jena, NIPFP
12.30 – 1.00 PM Introducing the Groups and Group Chairs

Dr. Pratap Ranjan Jena, NIPFP
1.00 – 2.00 PM Lunch
2.00 – 5.00 PM Group Work (3 hours incl. tea)

Wednesday, June 9, 2010
10.00 – 10.30 AM Presentations of Groups 1 and 2
10.30 – 11.00 AM Presentations of Groups 3 and 4
11.00 – 11.30 AM Tea/Coffee
11.30 – 12.00 PM Summary/Next Steps

Dr. M Govinda Rao, Director, NIPFP and
Member, Economic Advisory Council to Prime
Minister of India
12.00 PM – 12.30 PM Valedictory Address

Shri Vinod Rai, Comptroller & Auditor General
of India
12.30 – 12.45 PM Vote of Thanks
12.45 PM Lunch
Group 1: Budgeting
Chair: Smt. Dakshita Das, Controller of Aid Accounts and Audit, Government of India
Group 2: Budget Execution (including cash management, procurement, internal control and audit)
Chair: Dr. Arvind Mayaram, Additional Secretary, Ministry of Rural Development, Government
of India

Chair: Ms. Soma Roy Burman, Chief Controller (Pensions)
Group 4: Oversight (including external audit and legislative scrutiny)

Chair: Shri Niranjan Pant, Director General, (Local Bodies), C&AG, Government of India

Annex 2
List of Persons Attending the Workshop on
Public Financial Management in India
June 8-9 2010
1. Shri D.D. Verma

AS & FA
Ministry of Consumer Affairs, Food & Public Distribution
Department of Food
Room No. 173, Krishi Bhawan
New Delhi 110 001.
2. Shri. Vinod Rai

Comptroller and Auditor General of India
New Delhi 110 002
3. Mr. Amar Nath

Special Secretary (Finance)
Govt. of NCT of Delhi
New Delhi 110 002.
4. Mr. Ajay Kumar Garg

Addl. Secretary (Finance)
Govt of NCT of Delhi
New Delhi 110 002.
5. Mr. Himanngshu Sakhar Das

Principal Secretary
Finance Department
Govt. of Assam
Assam Secretariat, Dispur
Guwahati.
6. Dr. Arindam Das-Gupta

B-401, Grand Landscape
Dada Vaidya Road (Behind Mahalakshmi Temple)
Panaji
Goa – 403001.
7. Shri Mayank Sharma

Joint Controller General of Defence Accounts
Headquarters Defence Accounts Department
Delhi Cantt 110 010.
8. Mrs. Devika Raghuvanshi

Jt. Controller General of Defence Accounts


Delhi Cantt 110 010
9. Mr. Rajneesh Kumar

Jt. Controller General of Defence Accounts
Delhi Cantt. 110 010.
10. Shri K.N. Srivastava

AS & FA
Ministry of External Affairs
164, South Block
New Delhi 110 001.
11. Shri P.R. Devi Prasad

Director, Fiscal Policy Institute, Fiscal Policy Analysis Cell
Finance Department
Govt. of Karnataka, Room No. 36, 8-9 Floor
MSIL Building, Cunningham Road
Bangalore 560 052.
12. Shri Kashmira Singh

Budget Officer
Government of Punjab
Department of Punjab
Chandigarh
13. Shri Harmohan Kumar

Research Officer
Directorate of Financial Resources & Economic Intelligence
Finance Department
Govt. of Punjab
Chandigarh
14. Shri Sushil Pal

Controller of Accounts
CBDT
New Delhi
Email: sushpal@gmail.com
15. Shri Harish Srivastava

Dy. Controller General of Accounts
Office of the Controller General of Accounts
New Delhi
Email: kumarhmm@yahoo.co.in

16. Shri Bhaskar Verma

Ministry of Urban Development
New Delhi
Email: bhaskar.verma@gmail.com
17. Ms. Suman Bala

Ministry of Earth Sciences
New Delhi
Email: ca-moes@nic.in
18. Shri Raju Sharan

Ministry of Finance
New Delhi
Email: rajusharan@yahoo.com
19. Ms. Bandhula Sagar

Jt. Controller General of Accounts
New Delhi
Email: bandhulasagar@yahoo.com
20. Ms. Bharti Das

Jt. Controller General of Accounts
New Delhi
Email: bharti.das@gmail.com
21. Ms. Preeti Jha

Office of the Comptroller & Auditor General of India
New Delhi
Email: jhapreeti@cag.gov.in
22. Shri Satish Sethi

New Delhi
Email: sethiS@cag.gov.in
23. Shri K.S. Gopinath Narayan

Email: narayanKSG@cag.gov.in
24. Shri Yashwant Thakre


New Delhi
Email: thakreYN@cag.gov.in
25. Shri Sarit Jafa

Mumbai
Email: jafaSarit@cag.gov.in
26. Shri L.V. Sudhir Kumar

Kolkatta
Email: sudhirkumarLV@cag.gov.in
27. Shri Jagbans Singh

New Delhi
Email: singhJ@cag.gov.in
28. Shri Govind Bhattacharjee

New Delhi
Email: bhattacharjeeG@cag.gov.in
29. Shri Shantanu Basu

New Delhi
Email: basuS@cag.gov.in
30. Ms. Meenakshi Gupta

New Delhi
Email: guptaM@cag.gov.in
31. Shri Gautam Guha

New Delhi
Email: guhaG@cag.gov.in
32. Shri G. Sudhir

Special Chief Secretary to Government
Finance Department
Govt. of Andhra Pradesh
Secretariat Building
Hyderabad 500 022.

33. Shri Ajit M. Sharan, IAS

Financial Commissioner & Principal Secretary
Finance Department
Govt. of Harayana
Chandigarh
34. Shri Harinder Kumar, IRS

Special Secretary
Finance Department
Govt. of Harayana
Chandigarh
35. Shri Rajeev Ranjan, IAS

Joint Secretary
Finance Department
Govt. of Haryana
Chandigarh
36. Shri Yash Pal, IES

Advisor to Government of Haryana
Finance Department
Chandigarh
37. Shri Ashok Sarin

Joint Secretary
Lok Sabha Secretariat
Parliament of India
New Delhi 110 001.
38. Shri Yogesh Kumar Meena

Dy. Controller of Accounts
Ministry of Health & Family Welfare
Room No. 313-“D”, Nirman Bhawan
New Delhi 110 011.
39. Shouvik Datta

Delegation of European Union of India
9818771109
40. Dr. Anuradha Balaram

Economic Advisor
Office of the Comptroller and Auditor General of India
9, Deen Dayal Upadhyaya Marg
New Delhi 110 024.

41. Smt. Dakshita Das

Controller of Aid Accounts and Audit
Govt. of India
New Delhi.
42. Dr. Arvind Mayaram

Addl. Secretary
Ministry of Rural Development
Govt. of India
New Delhi.
43. Ms. Soma Roy Burman

Chief Controller (Pensions)
Controller General of Accounts
New Delhi
44. Shri Niranjan Pant

Director General (LB)
C & AG
Govt of India
New Delhi
45. Shri Milind Vaikar

Dy. Secretary
Finance Department
Govt. of Madhya Pradesh
Bhopal.
46. Shri M.C. Worthing

US (Budget)
Ministry of Finance
New Delhi 110 003.
47. Ms Shagun Mehrotra

Programme Manager, Development Cooperation
Delegation of the European union to India
49. Dr. UTE Schnmann

Health Advisor
European Union
Delegation to India
65 Golf Links
Ute.schnmann@ec.europa.en

50. Shri Sundar Lal

Director
Institute of Financial Training and Research
Govt. of UP
Lucknow
51. Ms. Ishita Ray, IAS

Secy, Expenditure
Govt. of Kerala
Trivendrum
52. Dr. Jaideep Mishra

Dy. CGA
53. Shri R. Bhattacharya

AS & FA
Ministry of Consumer Affairs, Food & Public Distribution
Department of Food
Room No. 173, Krishi Bhawan
New Delhi 110 001.
54. Shri S. Balshekhar

Additional Secretary
Lok Sabha Secretaria
New Delhi
55. Shri Manoj Sahary

Dir,
Department of Expenditure
56. Ms. Parama Sen

Dir
Department of Expenditure
57. Shri Pandip Kumar
58. Shri Yash Pal

Finance Department
Govt. of Harayana
Chandigarh
Participants from the World Bank

59. Mr. Mohan Nagarajan
60 Mr. Tidiane Toure
61. Mr. Les Kojima

62. Mr. Mohan Gopalakrishnan

63. Mr. Manoj Jain
64. Ms. Barbara Kafka
65. Ms. Jennifer Thomson
66. Mr. Savinay Grover
67. Mr. Puneet Kapoor
68. Ms. Tanya Gupta
69. Mr. Arun Manjula
70. Mr. Roland Lomme
Participants from the NIPFP

71 Dr. C. Rangarajan, Chairman
72. Dr. M. Govinda Rao, Director
73 Dr. Pratap R. Jena
74 Dr. Tapas Sen
75. Dr. Manish Gupta
76. Dr. H.K. Amarnath
77. Dr. Sachidananda Mukherjee
78. Dr. Debdulal Tahkur
79. Dr. Surajit Das
80. Dr. Satadru Sikdar
81. Ms. Alak Matta, Secretary

Annex 3
Dimensions of Public Financial Management

by
Dr. C. Rangarajan
June 8, 2010
I must complement the National Institute of Public Finance and Policy for convening this
Workshop to identify and discuss the important issues in Public Financial Management (PFM) in India. I
understand that this is based on a study sponsored by the World Bank at NIPFP. I am sure that detailed
discussion on various aspects of public financial management based on this study would help to identify
and initiate important reforms needed to strengthen the financial management in the country and making
it more responsive, efficient and accountable.
Ensuring service value for taxpayers’ money has always been a major concern of governments
around the world. Several reforms have been introduced over the years to enhance efficiency and
accountability in government spending. The more recent reforms, in addition, were also intended to
impart greater fiscal discipline and maintain a sustainable fiscal policy. The entire process of budget
formulation, implementation, monitoring and control as well as auditing and accountability has undergone
significant changes over the years. There have been changes in the systems of expenditure management as
well as institutions associated with them. Expenditure management has become all the more important
with public expenditure as a proportion of GDP rising. For the OECD countries, the average is 40.4 per
cent. In India, government expenditures at the Centre and States taken together constitute 30 per cent of
GDP.
A sound PFM system should be comprehensive, transparent, predictable and sensitive to shocks.
Comprehensiveness requires that all expenditure commitments should find a place in the budget and
should be subjected to detailed Parliamentary scrutiny. There is no scope for having off-budget items.
Furthermore, it is important that future expenditure commitments of all policies and various capital works
will have to be properly estimated and taken account of in the budget. Estimating future expenditure
liabilities of current policies and spending programmes is by no means an easy task.
Transparency is necessary for greater accountability. Predictability helps the spending

department plan their public service provisions in a much better manner and minimises cost and time
over-runs by taking only those projects which are feasible within the resource envelop. Perhaps, it is also
necessary to ensure continuity in the budget so that the ongoing projects can be adequately funded. The
recent global financial crisis has shown the need for calibrating counter cyclical fiscal policy and this
would require accommodating changes in the public finance management systems.
In the ultimate analysis, a good PFM system will demand discipline to maintain macro economic
stability and facilitate counter cyclical fiscal policy. It should also provide checks and balances to ensure
spending according to what is affordable besides ensuring that the expenditures are incurred as planned

and reach the intended beneficiaries. In other words, it should ensure that the spending conforms to
policy priorities, besides maximising allocative and technical efficiency.
Like in other countries, in India too there have been number of initiatives towards PFM reform.
The most important of them was the attempt to make a transition from input based compliance budget to
result oriented management based system of financial administration. The government tried to introduce
performance budgeting in the 1970s when performance budgets were prepared for a few Central
ministries. Later, the scope of performance budgeting was expanded to cover all the ministries.
However, over the years the scope was restricted to plan programmes and performance budgets remained
supplementary to the main budget without drawing any attention or being discussed, and without much
impact on either efficiency or accountability. Similarly, the introduction of Zero Based Budgeting (ZBB)
in the late 1980s did not matter much as it became difficult to discontinue the projects and programmes
even when they were found to be of doubtful value.
Another important reform was the introduction of outcome budgeting in 2005-06. The attempt
was to move from the traditional line item system to clearly defined outcomes of various government
programmes. While the intention of bringing out the outcome budget was commendable, much remains
to be done in achieving clarity of outputs and outcomes and institute a system to assess them in an
objective manner. In fact, outcomes in respect of many services can be influenced by a number of
exogenous factors and it may be difficult to link expenditures with outcomes. Instead, it may be desirable
to relate expenditures with measures of outputs. Further, as over 40 per cent of the Centre’s revenues are
transferred to subnational governments and service providing agencies, it seems appropriate to build the
outcome budget from these agencies upwards. Thus, much remains to be done to achieve conceptual
clarity and comprehensiveness in preparing the outcome budget.
Targeting the financial management system to impart fiscal discipline started with the Fiscal
Responsibility and Budget Management (FRBM) Act in 2004. The Act besides determining the fiscal
and revenue deficit targets limited the scope of government borrowing from the Reserve Bank of India
and put a cap on government guarantees. The 12th Finance Commission also made recommendations to
set the targets for fiscal and revenue deficits for States. Until the year 2007-08, the Central government
had considerable success in achieving the deficit targets by bringing down the fiscal deficit from 4.5 per
cent in 2003-04 to 2.7 per cent in 2007-08, although the Act required that it should be brought down to 3
per cent by 2009-10. Similarly, revenue deficit was brought down from 3.6 per cent in 2003-04 to 1.1 per
cent in 2007-08. However, there was a sharp increase in fiscal and revenue deficits in 2008-09 and 2009-
10 (excluding off-budget liabilities), increasing to 6 per cent and 6.7 per cent respectively and revenue
deficit increasing to 4.5 per cent and 5.3 per cent respectively. For 2010-11, the fiscal deficit is budgeted
at 5.5 per cent and revenue deficit at 4 per cent for Central government. For the future, the 13th Finance
Commission has recommended that the fiscal deficit should be further brought down to 4.8 per cent in the
next year and 4.1 per cent in the following year. The target of 3 per cent is to be achieved before 2014-
15. The Centre needs to plan its fiscal path accordingly.
The FRBM Act also mandated that a Medium Term Fiscal Programme (MTFP) should be placed
in the Parliament every year. This has brought in multi year perspective to fiscal management. However,
targets set are too broad and expenditure compression targets were hardly achieved. Much of the

compression in expenditure was in capital expenditures. In any case, as all the targets went overboard in
2008-09 and 2009-10, the Central government has to initiate fiscal consolidation programme again based
on the targets set by the 13th Finance Commission from 2010-11 to 2014-15.
All these imply that the significant reform measures are needed to improve public financial
management system in India and therefore the detailed study undertaken by the NIPFP gains relevance.
This assessment is expected to quantify priorities for PFM reform and put forth a PFM reform strategy for
implementation. The PFM assessment provides a review of prevailing systems and processes with a view
to identifying the problem areas. It brings out both strengths and weaknesses of public financial
management system. Although the coverage of the present exercise is limited to the assessment of PFM
at the Central level, it provides a starting point for discussion on improving the public finance
management at the State level as well.
The framework for the PFM was prepared by the World Bank and the NIPFP study applies it to
evaluate the PFM at the Central level. The framework takes account of a number of factors to evaluate
the (i) credibility of the budget, (ii) comprehensiveness and transparency, (iii) linkage of policies with
budgeting, (iv) accounting, recording and reporting systems and (v) an external scrutiny and audit. In
other words, the performance assessment takes account of all the 4 aspects of public finance management,
namely, budget formulation, implementation, monitoring and control and external auditing.
Credibility of the budget depends upon the accuracy of the forecasting. The analysis at the
Central level shows that in some years, there are significant variations between expenditure put forth in
the budget estimates and actual expenditures. In 2008-09 for example, the actual expenditure of the
Centre was higher than the budget expenditure by about 37 per cent. While the exceptional circumstances
of 2008-09 are understood, substantial deviations have happened even in more normal circumstances.
The recourse to supplementary demands for grants during the course of the year to soften budget
constraint reduces the credibility of the budget.
Comprehensiveness of the budget is an important factor in determining the efficacy of PFM.

Practice of showing expenditures outside the budget not only escapes Parliamentary scrutiny but also
obscures the true nature of the fiscal imbalances. Fortunately, the Finance Minister in the last budget has
declared that the practice of issuing bonds to fertiliser and oil marketing companies will be given up and
the subsidies given to them will be shown in the budget itself. Indeed, there are a lot of expenditure
commitments arising from initiatives of various projects and various policy pronouncements made by the
government from time to time and unless we bring in the accrual accounting system, it is not possible to
make the budgets comprehensive. A true picture of government finances requires that all revenues and
expenditures are accounted on accrual rather than cash basis. This would require significant reforms to be
undertaken. Making the budgets comprehensive also requires a significant upgradation of reporting
systems and oversight on public sector enterprises as well and estimation of the risks from the guarantees
given by the government to the public sector enterprises.
Formulating budgets on the basis of policy pronouncements require considerable augmentation of

capacity. Each of the department has to work out the cost of implementing the new set of policies and
include them if the budgets have to become policy based. When these are done in the context of medium

term fiscal policy, the challenges are formidable. In this regard, there needs to be a strong connection
between policy pronouncements and the expenditure ceiling implicit in the MTFP. Harmony between
political expansionism and fiscal conservatism is by no means an easy task. Indeed a policy based budget
would also require a multi year perspective in resources allocation. While MTFP brings in some multi
year fiscal targeting, policy based multi year framework would require that the expenditures for
continuing schemes should be adequately provided for. In other words, the problems faced by the
spending departments currently for having to spend the amount allocated in the budget before the end of
March in order to avoid the lapse of funds and consequent lower allocation in the subsequent year will
have to be overcome through a proper calibration of multi year budgeting system.
Predictability in expenditure depends on predictability in revenues. This would require

overhauling of the tax administration to provide effective and transparent mechanism to ensure that the
budgeted revenues are indeed collected. It is also necessary to avoid taking up projects outside those
approved in the budget during the course of the year. The more important issue is that the attempt to
achieve the deficit targets in the budgets should not result in overestimating revenues and under funding
of unavoidable expenditures and bringing in large supplementary demands later. In other words,
predictability is closely related to credibility and effective predictability would require effective control
over budget institutions.
An equally important component of budget execution is the system of accounting, recording and
reporting. In order to exercise effective control over the budget, it is necessary to have reliable systems of
accounting and reporting at regular intervals so that if necessary, the government can undertake mid
course correction. The monthly report prepared by the Controller General of Accounts (CAG) is a useful
starting point. Accounting and reporting system is crucial not only for effective budget management but
also to ensure accountability by the spending departments and agencies.
The most important component in the public finance management is the system of external
auditing. Indeed, the office of the Comptroller and Auditor General (C&AG), which is an independent
statutory authority, is an extremely important institution entrusted with the task of external scrutiny of the
expenditures undertaken. The purpose of the scrutiny is not merely to ensure that the rules and
procedures involved in incurring expenditures are followed but also to examine whether expenditures
have, in fact, served the purpose they are meant to do. Often, there are complaints that the focus is more
on the processes than on the outcomes. One should, however, admit that the task of the external auditor is
not easy and considering the volume of work which has constantly been expanding, it is not easy to do
justice to both processes and outcomes.
The NIPFP study makes a detailed analysis of each of the components of financial management
at the Central level in India and it would be in fitness of things that these are deliberated upon in detail to
identify the areas requiring improvement. The listed shortcomings in the system should be addressed by
prioritising them so that we have a comprehensive, credible and accountable system of financial
management with sufficient checks and balances. The study is a starting point and the PFM framework
outlined in the study can be used usefully to develop PFM performance evaluation methodology at the
centre and in different states. I am sure the deliberations in the workshop today and tomorrow will be
extremely useful and productive.

Annex 4
Public Financial Management : The New Dimensions
Ladies and Gentlemen,
At the very outset, I would like to convey the regrets of Secretary Expenditure who could not be here on
account of some pressing and emergent work.
Delivering a key note address can be challenging at most times. When it entails the daunting prospect of
speaking after Dr. Rangarajan, one of the most eminent economists of our times, it becomes almost
intimidating ! Having just heard one of the most comprehensive and lucid expositions on public finance,
I have decided to restrict what I have to say to two emerging realities that are impacting public finance
management and would increasingly continue to do so in times to come. These are:
a. Public-private partnerships (PPPs) as an instrument for leveraging public finance to attract
private
b. Use of IT for managing delivery of services and improving public finance management at the
grass-roots level.
PPPs
The decision to move towards PPPs as a preferred mode of delivery has been based on an analysis of
public expenditure over a period of time. Traditional implementation of public projects has been on the
basis of rate contracts awarded through the tender system. It is now established that this method has not
yielded optimum results and time and cost overruns have resulted in massive sub-optimal utilization of
public resources. The inadequate provisioning for recurring maintenance costs has also resulted in the
rapid deterioration in public assets. Engineering Procurement Contracts (EPC) are decidedly an improved
version of procurement, but the issue of recurring maintenance cost remains unanswered. It is expected
that private sector investment and management and the underlying appetite for innovation should lead to
timely completion, reduce stress on public scarce resources and result in better value-for-money.
Efficiency gains should off-set to a large extent higher private sector borrowing costs. The determination
of ‘reasonability’ of the private sector fee when determined by a robust Public Sector Comparator can
yield expected results. It must be noted that the financial cost of a PPP contract may generally be higher
on account of higher cost of private borrowing because of risk diversification and default risk, and the
unmitigated institutional, regulatory, and political risks. However, while comparing costs between PPP
and public sector spending all costs, including the establishment over-heads (budgeted under the
‘establishment’ head) should be fully accounted for.
It is understood that PPPs are a marriage between the public sector imperative to provide good quality
services at affordable cost and without exclusion and the private sector impulse to make profit. To
optimize the convergence between the two seemingly opposite impulses, public finance is often used
judiciously to cement the relationship. The VGF (viability gap funding), and payment of annuities in
PPPs is one example of creating the right framework for private sector participation.
There are, however, major concerns regarding the PPP format. Some of these are:
1. How to account for contingent liabilities?

a. The issue of compensation for change in law, penalties for authority default and termination
payments is critical. GoI’s exposure to PPP termination payments is approximately Rs. 40,000

crore ($10 billion, 1% of the exposure, which is relatively. Under similar assumptions, we can
calculate somewhat loosely that the combined exposure of 17 state governments could be around
$16 billion and additional exposure of GoI and the state governments combined could increase
by approximately $50 billion in the next five years.
b. Out of the total availability of debt financing for infrastructure in the Eleventh Plan of $206.38
billion, almost 70% would come from domestic bank credit, non-banking financial institutions
and pension/insurance companies, most of these institutions with government interests. Should
these be treated as contingent liabilities of the Government because of the ownership issue? On
the other hand, should all the future likely liabilities be added up for the purpose of
provisioning/disclosure? (It must be noted that disclosure of contingent liabilities would impact
country’s credit rating). The other related issue is that public infrastructure assets will continue
to give economic returns and to large extent commercial returns even after the termination. How
should the asset be valued ? Should there also be an entry on the asset side of the public
partner’s books? How should the apportionment be done?
2. Accounting aspects
a. How does the accounting system distinguish between operating and financial leases? The
substance of a PPP transaction may suggest that it should be treated as a financial lease, whereas
the assets and services rendered by such a lease would indicate these are operating leases.
b. If risk transfer to a private partner is limited, the government can be regarded as the economic
owner of a PPP asset, which it is assumed to obtain under the terms of a financial lease. (This is
the basis of accounting in Australia and the United Kingdom).
c. Accounting for Limited Risk Transfer is also complicated. Under the financial lease approach,
limited risk transfer results in; PPP assets being placed on the government balance sheet; PPP
investment being treated as public investment; and PPP debt being treated as a government
liability. With related transactions – lease interest, amortization and depreciation – the fiscal
accounts are complicated by many imputed entries. Net asset value builds up slowly on the
balance sheet, but the basis on which private partner continues to use the asset is unclear. How
would investment by the parent company be reported in the balance sheet if the assets created
are owned by the public sector? Are we certain that we have guarded against double counting at
the aggregated nation accounts’ level?
In this regard, the EU decision is of interest. It states that :
i. PPP asset should be classified as private sector assets if the private partner bears the
most construction risk, and either most of the availability or the demand risk.
ii. Since the private partner typically bears the construction and availability risk, most
PPP assets are likely to be classified as private assets, even though the government
bears considerable demand, residual value, and other risks.
However, in the Indian context, PPP assets are deemed to be public assets. Classifying PPP
assets as government or private sector assets does not do justice to the fact that PPPs are designed
to share risk according to which party can manage it best. An alternative accounting and
reporting approach would be to record PPP assets on private sector balance sheets, consistent
with legal ownership. The fiscal costs and risks associated with PPPs would then be assessed,
quantified, and disclosed. A similar approach is being considered for private sector accounting of
leases, where the focus is shifting to the assets and liabilities created for each party to a lease
contract. Pending agreement on a general accounting and reporting standard for PPPs, it would
be advisable that Government guarantees should be disclosed as required under the IMF’s fiscal

transparency code and PPP commitments/obligations should be treated as primary spending when
undertaking debt sustainability analysis. Government guarantees should also be taken into
account.
PURA
In this complex universe of PPPs, the Department of Rural Development has added a new dimension
through the redesigned PURA scheme which strives to implement rural public infrastructure projects and
provide services through private sector participation. The strategy is:
a. Management by private sector on commercial considerations
b. Design to align with the objective of rural development
c. Projects based with well-defined risks
d. Optimum risk allocation between Panchayats, GoI and State Govt. and private developers
e. Concession period – 10 years
f. Financing largely through schemes funding
The Business Model is:

a. MoRD schemes to converge in CAPEX provision
b. Execution through private partners
c. Implementation under guidelines of identified schemes
d. Developer may invest some CAPEX on his own
e. Capital Grant up to 35% of the project cost for meeting viability gap for O&M (including
return on investment by the private party)
The schemes to be covered include water and sewerage, village streets, drainage, solid waste
management, skill development etc.
With financing mostly coming from the existing schemes, the assets created being public in nature but
under private control for the concession period and risk being equally shared by the public and the private
partner, PURA would throw up unique accounting issues.
Use of IT for more efficient financial management

Innovative use of IT has considerably improved financial management of the RD programmes. On-line
monitoring of all major MoRD projects has been introduced. From the current fiscal, the fund releases
will be based on MIS reporting by the states and districts. This will ensure better co-relation between
physical and financial progress. To increase transparency in the scheme implementation, maximum
information has been placed in the public domain on the web-site. Electronic transfer of funds has been
ensuring timely fund releases. Under the PMGSY, the operational agencies draw upon payments from a
single State Fund account thereby easing the fund requirement considerably. On account of the
streamlining of financial management of the various schemes, there was net saving of about Rs. 5,500
crores in the budget allocation of the Ministry of Rural development during the year 2009-10.
To ensure efficient and secure IT invironment, adequate safequards have been put in place to prevent data
loss (e.g., back-up, recovery processes, contingency and disaster recovery management). Similarly
effective application controls have been built into the system to ensure completeness and accuracy of
data. This is backed by a robust authorization and data-validation system. Information is regularly
available to management through on-line accounting date, and detailed custom-designed on-line MIS.
MNREGA has been a special case and more complex to implement that the other schemes. It is more so
because it is backed by an Act of the Parliament. With works spread over 2.5 lac panchayats across the

states, leakages and mis-appropriation of public finances has been a major concern. One of the major
causes of misuse is the alleged existence of a large number of ghost workers on the mister-rolls. To
address this issue, the Department of Rural Development is moving towards bio-metric attendance on site.
Consideraring that on an average 70-80 million people are employed under MNREGA at any given time,
the exercise is not only massive but quite challenging.
There are two objectives that this exercise should help in achieving. These are:
a. Primary objective of ensuring biometric attendance on work-sites to eliminate largely ghost
workers and the problem of the local leadership appropriating the job cards. These problems
result not only in financial irregularities but also deny the workers their rights under the Act.
To achieve this, the following processes would be put in place:
i. Collect bio-metric data of all MNREGA workers and create a State Data Warehouse
ii. Put in place a system of taking biometric attendance on site everyday through hand-
held devices and transmit this date through mobile phone or nearest Internet
connectivity to the Data Warehouse for authentication.
In addition, the following two processes would easily fall in place:
i. GPS enabled lat-long coordinates of the work for which bio-metric attendance is
being taken to ensure attendance is on site
ii. Electronic creating of muster-rolls without manual process
b. Long term objective of integrating MIS with the bio-metric data with the purpose of setting
up an integrated process of capturing demand in real time, generating date receipt, allocation
of work, opening of works and reducing the delays in measurement.
c. Even though there are many on-going projects for capturing bio-metric data, the needs of
MGNREGA are very different and to ensure the process is completed in a time bound manner
Department of Rural Development would undertake this exercise independently. However,
the biometric data so collected may be used by the UIDAI for generating UID number for the
MGNREGA beneficiaries and by the banks for payment of wages.
d. The project would be implemented with a one year completion schedule.
e. Both the data collection and warehousing and field operations through biometric devices,
private service providers should be selected and appointed in Public Private Partnership
mode. This would address effectively the issue of technology obsolescence and efficient
uninterrupted operations in the field.
Ladies and gentlemen, the new challenges that would continue to confront all those who manage public
finances would also throw up new solutions. I am confident that what we take away from here in the next
two days would equip up better to meet these challenges.
Thank you.
Arvind Mayaram
Additional Secretary & FA
Ministry of Rural Development
Arvind.mayaram1@gmail.com

Annex 5



Annex 6




Annex 7
India
Public Expenditure and Financial Accountability
Public Financial Management
Performance Assessment Report
Summary Assessment
The objective of this PFM performance report is to assess the current status of the PFM system in
India at the central government level. The assessment is expected to contribute towards identifying
priorities for PFM reform, and informing efforts to formulate and implement a PFM reform strategy. It
will serve as a baseline against which progress on PFM performance can be measured over time. The
assessment indicates both the strengths and weaknesses of the existing PFM system. The approach of the
performance report is based upon careful analysis of existing PFM systems, procedures and practices in
India in recent years as determined through interactions with government officials related to financial
management systems, and reviews of official documents and reports. The report also draws from the
contemporary literature on the subject relating to India.
It needs to be noted that the coverage of the assessment is limited to central government and
leaves out the sub-national governments in the Indian Union. These governments are entrusted with
substantial functional responsibilities spanning both social and economic sectors. In India both the central
and state governments play crucial roles in undertaking mandated functional responsibilities for key areas
of policy regulation, oversight, revenue administration, debt and cash management, budget management,
and monitoring and evaluation. The sub-national governments have a wider service delivery role in the
Indian Union and the information on resource availability at field level in the front line service delivery
units is limited for the central level. However, the PFM system at both levels of government is largely
similar and in some areas a unitary institutional set-up exists that caters to both levels with a similar set of
financial rules and institutional machinery.
The PFM performance review for India at the central level presents an assessment of the 28 high
level indicators of the PEFA Performance Measurement Framework. The report, however, is not intended
to provide recommendations to improve the PFM system in the country in terms of an action plan. The
report also does not provide any specific fiscal policy inputs relating to revenues or expenditures. It is a
diagnostic assessment only. It is expected that the assessments of the PFM system through the various
indicators will assist policy makers in determining subsequent reform efforts.
Integrated Assessment of PFM Performance

The summary of the performance of PFM systems, procedures and practices as measured through
the PEFA indicators is described in the following sections. The six critical dimensions of PFM
performance assessment provided by the PEFA framework are credibility of the budget,
comprehensiveness and transparency, policy-based budgeting, predictability and control in budget
execution, accounting, recording and reporting, and external scrutiny and audit.

Credibility of the Budget

The credibility of the budget was assessed mainly through two critical indicators of expenditure
and revenue out-turn as compared to the budget estimates. At the aggregate level the expenditure out-turn
(expenditures net of debt repayments and the donor funded project expenditure) was substantially higher
than the budget estimates for all the three years reviewed (12.95% in 2006-07, 10.62% in 2007-08 and
36.95% estimated in 2008-09). Internal policy interventions to increase subsidies and to a lesser degree to
raise grants to states were important causes. Scheme-specific grants transferred to the states by the
departments and ministries have been included within the sector expenditures. The increased level of
expenditures was made available through the mechanism of supplementary demands, used for in-year
budget adjustments, the primary objective of which is intended to be to meet unforeseen expenditures.
Through the supplementary demands funds for under budgeted central schemes and fiscal stimulus
packages in the difficult year of 2008-09, when the growth of the national economy plummeted below the
target level, were also provided. The higher expenditure out-turn as against the budget estimates, largely
in the revenue expenditure rather than the capital expenditure, certainly adversely affects budget
credibility, as it indicates poor planning and implementation of expenditures and non-regard for the
sanctity of the budget estimates. Favorable revenue out-turns as compared to the budget estimates during
the first two of these years mitigated the effects of these higher expenditures. This was due to the high
growth of the economy and some timely improvements in tax administration. The pattern of revenue out-
turn as against the budget estimates, however, shows that revenue projections have remained a challenge
depending upon the growth of the economy and the global market situation. This was evident when the
revenue out-turn as against the budget estimates turned negative in the year 2008-09 following the
international economic crisis and consequent slow down in the growth rate of the economy. Overall
budget credibility is affected by the absence of a hard budget constraint, thereby allowing substantial
adjustments in the budget during the year through supplementary grants, and the absence of an accurate
revenue projection mechanism by which the movement of economy and changes in tax administration
determine the actual revenue collection.
Comprehensiveness and Transparency

India has achieved a reasonably high level of fiscal transparency and the comprehensiveness of
the fiscal information publicly available has improved in recent years. Transparency is viewed here as
reflecting the aims of government and the financial results of its operation at the end of the year. The
major objective of fiscal transparency is to inform the common citizen about the policy choices available,
the implications of each choice, and the reasons as to why a particular choice is preferred. Some progress
has been made in this direction. After the adoption of the Fiscal Responsibility and Budget Management
Act (FRBM), the government started presenting fiscal policy strategy documents and projected major
fiscal indicators in the medium term. This has provided better understanding of government fiscal policies
relating to revenue generation and expenditure prioritization. The budget documents also contain relevant
information on macroeconomic forecasts, fiscal deficit indicators, deficit financing sources, government
borrowings and debt stock, prior year budget out-turns, and outlines of new tax polices and fiscal data.
The extent of unreported government operations is limited and the financial operations of extra-budgetary
funds are reported in the budget. However, these are not accounted for in the estimation of the fiscal
deficit.
The budget classification system in India which takes into account the COFOG functional
classification system is consistent with the GFS manual of 1986 based on the cash accounting system.
However, the GFS manual of 2001, which presents advanced standards for compilation and presentation
of fiscal statistics, follows the principle of accrual accounting and its coverage of events is broader than
the earlier version representing cash based transactions. Efforts are now being made to introduce an
accrual based accounting system for government transactions.

The intergovernmental fiscal transfer system is complex due to the existence of various sources of
funding to state governments. In the system of transfer of resources to the state governments, the
discretionary elements have increased over the years. The tax devolutions recommended by the Finance
Commission are transparent and based on a formula devised by taking into account various indicators and
their weights. However, in the actual plan transfers, the relative share of formula based transfers have
declined and discretionary components in the form of scheme based transfers have increased. Under many
of these scheme based transfers, the funds are routed to the implementing agencies out of the state budget.
While a considerable amount of information on the likely flow of resources to the state governments
becomes available to assist their budget estimates, uncertainties remain because of changes in central tax
collections during the year.
More attention needs to be paid to providing public access to key fiscal information, and to
reporting on central government oversight on the public sector enterprises and the details of fiscal risks
arising from the activities of these enterprises. Although the central government has a formal oversight
and monitoring mechanism, the aggregate fiscal risk is not generated and reported in budget documents,
except that of the loan guarantees.
Policy Based Budgeting

The budget preparation in India is guided by a budget calendar, which is generally indicated in
the budget circular issued by the Ministry of Finance for the year. The budget circular is issued in the
month of September and it provides sufficient time to the ministries/departments to complete their budget
preparation before the budget is presented in February. The budget preparation involves participation of
ministries/departments when they submit their initial budget estimates followed by interactions with the
Ministry of Finance, where the budget ceilings are communicated to departments. The departments
finalize their budget estimates after taking into account the expenditure ceilings communicated by the
Ministry of Finance and the plan allocations from the Planning Commission, which determines the size of
funding for new schemes.
A multi-year perspective in expenditure planning and budgeting has been lacking in India. While
attempts were made in past to initiate medium term fiscal policy, they were given up in latter years. The
enactment of the FRBM Act and stipulation of presenting a Medium Term Fiscal Policy (MTFP) along
with the budget brought back the issues once again into the budgeting system. However, while the MTFP
mandates presentation of three year rolling targets relating to major fiscal indicators such as revenue
deficit, fiscal deficit, tax revenue and outstanding liabilities as percent to GDP, a detailed medium term
expenditure framework for various sectors is not worked out by projecting expenditure implications of
programmes undertaken for outward years. The budgeting thus remains strictly annual without a multi-
year perspective relating to expenditure commitments of various sectors.
It is maintained that the five year plans in India provide the basis for a multi-year perspective for
resource allocation. However, the economic planning and budget differ in their scope and time span.
While plans provide a conceptual framework by focusing on various sectors in the economy, the budget is
more concerned with systems of control over the use of funds by government and pays more attention to
financial aspects. It is not uncommon to initiate major projects and schemes which are not provided for in
the plan. Further, in the context of current budgetary practice, the link between the plan and the budget is
weak. In the process of budget preparation the plan allocations are dispersed over various heads and sub-
heads of expenditure. While the debt information including both from external and internal sources are
regularly reported by the government and Reserve Bank of India, debt sustainability analysis in a multi-
year framework is not carried out; nor are costed sector strategies prepared.

Predictability and Control in Budget Execution

The predictability and control systems in budget execution is assessed taking into account
performance of indicators such as effectiveness of tax administration in providing a transparent
mechanism with regard to taxpayer obligation, registration and assessment, and effectiveness of collecting
tax arrears; predictability of availability of resources; reporting practices relating to cash balances and
debt; payroll controls; transparency in procurement; and effectiveness of internal control and internal
audit.
The central taxes are administered based on explicit legal provisions, which are subject to
procedural and legal safeguards. However, in the Indian tax system the scope for administrative discretion
is considerable in practice due to large numbers of exemptions and reliefs, and frequent changes in tax
provisions, making the tax laws relatively complex. The internal audit system is not strengthened to
ensure accountability of tax collection staff and adherence to established tax administration policies and
procedures in their dealings with taxpayers. Despite various efforts of the government, taxpayers face
difficulties in accessing information on tax liabilities and administrative procedures. A structured
taxpayer education programme covering various aspects of tax payment is absent, which adds to the
compliance cost.
The Indian tax system is, however, marked by a well structured tax appeal mechanism through
which the tax disputes arising out of various provisions relating to tax assessments and penalties are taken
up. Despite a well laid out appeal mechanism, the time taken to dispose of the appeals is long, and a large
number of cases remains pending. The taxpayer registration is maintained by allotting a Permanent
Account Number (PAN) to individuals. The PAN is the key element of maintaining a taxpayer registry
and it is linked with other government registration system. While tax administration in India has adequate
legal provisions to take action against delinquent taxpayers, its ability to collect the taxes assessed is
obstructed by the taxes remaining under dispute, and arrears both in dispute and not in dispute are only
slowly cleared.
Efforts were made to improve the predictability in the availability of funds for commitment of
expenditure through efficient cash management and planning of market borrowing calendar by stipulating
monthly and quarterly ceilings of expenditure for the departments. However, in practice the unevenness
of expenditure and rush of expenditure towards the end of the financial year still remains a problem due to
weak adherence to the cash management programme.
Recording and Management of Cash Balances, Debt and Guarantees by the government of India
have improved significantly and a comprehensive report on central government liabilities is provided in
the budget documents. Over the years, the coverage and compilation procedures of external debt statistics
have become more comprehensive and the dissemination of external debt statistics too has improved;
India has also been able to comply with both IMF's Special Data Dissemination Standard (SDDS) and
World Bank's Quarterly External Debt Statistics (QEDS). As regards financial assets, the budget provides
information on the government’s opening cash balance, which is maintained by the Reserve Bank of India
(RBI). The RBI maintains the cash balance of the Government and invests in government securities held
in its portfolio for the purpose. While loan guarantees given by the central government are reported in the
budget, complete information on implicit guarantees is absent.
An Integrated Financial Management Information System (IFMIS) incorporating systems for

management of personnel database and payroll records at central government level in India does not exist.
The management of personnel, maintenance of the personnel database, and preparation of payroll are the
prime responsibility of departments and ministries. The personnel database of government employees in
terms of their number, staffing pattern as against approved posts, salary bill are maintained by each

department and ministry. While a direct link between personnel database and the payroll for each month
is not established, the payroll is prepared after reconciling with the previous month’s payroll. Ministries
and departments maintain a service book for each employee where all the personnel details and payroll
data are recorded. Any change in personnel records and the payroll are recorded in the service books of
the Government employees, which are updated regularly. The Budget section of Ministry of Finance
collects the information from every ministry, which is part of their expenditure proposals shown in
demand for grants, and this information enters into the budget estimates of the government.
There is no law exclusively governing public procurement of goods by the departments and
ministries. Rules and directives in this regard provided in the General Financial Rules (GFR), 2005 and
manual on procedures for purchase of goods guides the procurement process. An important number of
instructions, issued by the Central Vigilance Commission (CVC), supplement these regulations. With the
exception of certain control and oversight functions carried out by central authorities such as the
Comptroller and Auditor General and the CVC, no central authority exists that is exclusively responsible
for defining procurement policies and for overseeing compliance with the established procedures. As per
the rules and procedures on procurement stipulated in the GFR the Ministries or Departments have been
delegated full powers to make their own arrangements for procurement of goods. Tenders for contracts
above a threshold size are issued and are reported by the respective departments. In the absence of
required expertise, a Ministry or Department can procure goods through the Central Purchase
Organization, Directorate General of Supplies and Disposals (DGS&D). While rules and principles
governing procurement are published, the data on actual procurement by various departments and
ministries of the Government is not publicly available.
Despite the existence of the financial rules for effective internal expenditure control, the actual
practice falls short of the standard. The unevenness of expenditures during the year that spikes during the
last quarter of the financial year still remains a problem in expenditure control. The surrender of unspent
amounts, ‘savings’, from various grants to the Finance Ministry and excess expenditures not regularized
are witnessed regularly as brought out by the CAG in their audit reports. These deviations indicate
inadequate programme management and internal control through the year. There is also the prevalence of
personal ledger accounts, a device intended to facilitate the designated officer to credit receipts into and
effect withdrawals directly from the account to avoid losing it at the end of the year. Lack of
comprehensive data base limits the ability to manage the assets efficiently. The internal audit, a useful
management tool to control misuse and mismanagement of public funds, has not been effective to serve
the objectives of an effective internal control system.
The expenditure commitment controls are not effective in India. The Appropriation Act, meant
for authorizing withdrawals from the Consolidated Fund for incurring expenditure based on the approved
budget estimates, do not distinguish between commitment and expenditures. The budget preparation
exercises faults on overlooking expenditure arrears as there is no provision in the budget for the ensuing
year to discharge the expenditure arrears of the previous year(s). The year end financial statement,
Appropriation Accounts, is prepared on a cash basis reporting cash execution of the expenditure plans
approved by parliament and do not report on commitments. The statutory requirements for budget
implementation focus exclusively on controlling expenditures with respect to budget appropriations. The
cash management system is not integrated with control over commitments. Lack of an effective cash
management mechanism in the line Ministries and Departments is a stumbling block to implement
commitment control system. The expenditure ceiling, which is communicated to the departments during
their pre-budget meeting with the Ministry of Finance, mostly relate to the line item control. There is no
instrument to assist and guide the Head of the Accounts to know that sufficient unencumbered funds are
available at the time of entering into obligations.

Internal audit has remained a weak link in the financial management system. Internal audit in
India is conducted in a routine manner and the result of this audit on improving the financial management
system is insignificant. The internal audit system has not been updated over several decades and due
importance has not been given to securing ‘value for money’ and accountability. The Task Force on
Internal Audit, constituted by the CAG observed that the internal audit in India has a restricted mandate,
does not have the ability to evaluate risks. It was also noted that that no standards have been evolved for
internal audit in India and it did not have the required independence for its effective functioning.
Accounting, Recording and Reporting

Central government accounts are reconciled with those of the accounts kept by the Reserve Bank
of India (RBI), the banker to the government, on a monthly basis. The general banking business of the
Central Government (which includes the receipt, collection, payment and remittance of moneys on behalf
of the Government) is carried on and transacted by the RBI. The Controller General of Accounts (CGA)
in the Ministry of Finance compiles the aggregate accounts of the ministries/departments from the
compiled accounts received from the departmental accounts sections and these accounts are reconciled
with the cash balance of the ministries/departments maintained by the RBI in its Central Accounts
Section.
While there are no provisions for presenting a mid-year budget report to the Parliament, the
aggregate monthly accounts prepared by the Controller General of Accounts (CGA), compiled from the
departmental accounts, provide monthly accounts of budget implementation. The monthly accounts of the
central government are important in-year budget reports that are accessible to the general public through
the website of the CGA. These monthly accounts are reviewed and a critical analysis of expenditure,
revenue collection, borrowings and deficit is prepared for Finance Minister. The Finance Accounts and
Appropriation Accounts prepared by the CGA are the consolidated year-end financial statements of the
Government of India. These documents are based on the detailed information for all the
ministries/departments and decentralized units. The year-end financial statements are accessible to the
general public. The accounts for the government sector in India are prepared on a cash basis and the year-
end financial statement reflects this accounting system. However, the year-end financial statements in the
form of Finance Accounts and Appropriation Accounts are presented with a time lag of 8 to 10 months.
External Scrutiny and Audit

The preparation of budget and its approval in the Parliament, provisions for which are enshrined
in the Constitution of India, goes through legislative scrutiny and the Parliament exercises full control
over the annual budgetary system through this mechanism. Without the approval of the parliament no tax
measures can be introduced (barring executive ordinances for temporary measures) and no expenditures
can be incurred by the executive. The process of preparing the budget, discussing it in Parliament, and its
subsequent approval is considered as an effective instrument of financial control of government activities.
To facilitate proper examination of different Demands for Grants leading to more meaningful discussion
in the Parliament departmentally related Standing Committees are constituted drawing members from
both the houses of the Parliament. The Standing Committees consider the demands for Grants of the
concerned ministries/departments and make a report to the House. The Parliament also exercises its
control over the provision of supplementary or additional funds required in a particular year and for
regularizing any excess expenditure over the approved appropriations.
A unitary audit in federal setup is designed to play a significant role in effective financial
administration of the country. The Constitution of India has provided the Comptroller and Auditor
General of India (CAG) as a high independent statutory authority. The Constitution prescribes exhaustive

safeguards for the independent functioning of CAG. The range of audit performed by the CAG includes
regularity (financial) audit, regularity (compliance) audit, IT audit and performance audit. The audit
assists Parliament in exercising financial control over the executive to ensure that funds approved have
been utilized with due regard to economy and efficiency, and the funds authorized to be raised through
taxation and other measures have been assessed, calculated and credited to the government properly. The
audit reports of CAG are examined by a Parliamentary committee, Public Accounts Committee (PAC),
which makes recommendations to Parliament on various issues involved. However, the PAC’s
examination of the audit report is not comprehensive, as the committee over the years has scrutinized only
a limited portion of the audit reports. While the recommendations made by the PAC were taken seriously
by the executive, its scope was limited as the PAC considers only a small portion of the audit reports. The
Action Taken Notes submitted by the departments and units audited by the CAG relating to other audit
observations not examined by the PAC were largely formal rather than substantive. CAG’s reports are
sometimes not timely because there can be a substantial time gap between the occurrence of an
irregularity and its reporting by CAG. It reviews programmes after these have run for a few years.
Assessment of Impact of PFM Weakness

When judged from the perspective of the three main objectives of an effective public financial
management system—namely, aggregate fiscal discipline, strategic allocation and the efficient delivery of
services—many problems exist in India. While efforts of the government and the role of legal and
institutional mechanisms in strengthening the financial management systems are evident in many areas,
the actual practice leaves much to be desired. The adoption of rule based fiscal management by enacting
the Fiscal Responsibility and Budget Management Act helped in monitoring aggregate fiscal indicators,
but its impact on the actual practice of financial management is not clear. The budgeting system in India
is conventional input-based and more concerned with basic financial compliance; but this has not resulted
in establishing effective fiscal discipline. Absence of a multi-year perspective in expenditure planning,
lack of robust macro-economic forecasting on which to base the budget, and inherent weaknesses in
adhering to the procedures laid down in Constitutional and legal provisions have negatively affected PFM
outcomes. The assessment of PFM practices at central level provides little opportunity to measure service
delivery as these are the responsibilities of sub-national government. While the PFM practice at both
central and state government are largely similar the information on actual service delivery and resource
availability to implementing agencies at field levels is limited at the central level leaving few flagship
programmes.
Aggregate Fiscal Discipline

With respect to aggregate fiscal discipline, an elaborate expenditure control mechanism exists in
India; debt strategy and debt management practices are reasonably well developed; rules and regulations
are developed for procurement system; rule based fiscal management is adopted through the FRBM to
monitor and adhere to stipulated deficit indicators; and Parliamentary control over budgetary practice and
expenditure control is established following the Constitutional provisions. At the same time, the absence
of a multi-year perspective in the expenditure planning that indicates future year commitments, a lack of
effective fiscal risk assessment at an aggregate level, the unevenness and the late spike in the annual
spending pattern, surrender of money at the end of the fiscal year in an annual lapsable budget cycle due
to a lack of effective programme management in budget implementation, an absence of a hard budget
constraint, and weak internal control and internal audit system are important weaknesses of the PFM
system that limit fiscal discipline. While external audit in the country is well established and facilitates
the legislative in exercising control over the executive, the process of scrutiny of the audit reports has
deteriorated, adversely affecting its effectiveness.

Strategic Allocation of Resources

Strategic resource allocation in India is affected by the lack of well developed sector strategies
based on government objectives, developing and costing of programmes to achieve those objectives and
linking the resource allocation to the priorities specified in sector strategies. Although the five year
economic plans provide strategic resource allocations at an aggregate level, the five year plans and
budgeting differ looking at their scope and time span. While plans provide a conceptual framework by
focusing on various sectors in the economy, there are divergences between plan and budget in the
resource mobilization and allocation and organizational structure. In the existing budgetary practice, the
programmes referred to as schemes in Indian practice are diffused and do not provide a comprehensive
perspective as to their link with government policy objectives. The cash basis of accounting followed by
the government does not have the capacity to reveal the full outlays either on a programme or a project. In
the existing budgeting system performance information is not included to improve strategic resource
allocation.
Efficient Service Delivery

In the federal arrangement the sub-national governments have wide ranging responsibilities with
regard to service delivery. The central government, however, intervenes in the state subjects through
specially designed central schemes to improve the front line service delivery. The role of central
government in contributing to efficient service delivery through effective monitoring of transfers to
implementing agencies, providing guidance through policy measures and evaluating the performance in
these services become important. The overall financial management system including the efficient
revenue collection, expenditure control, cash and debt management to address liquidity problems,
efficient intergovernmental transfer system are all important elements to facilitate better programme
management and service delivery.
Prospects for Reform Planning and Implementation

The institutional arrangement within the government provides support to initiate reform planning
and implementation processes. The initiatives taken by the government in recent years has put PFM
issues at the forefront. The role of PFM systems in contributing to fiscal discipline, strategic resource
allocation through better programme management and improving service delivery has gained attention in
recent years. The government policies in expanding social sector spending has made it necessary to look
at ways to improve programme management and actual service delivery. Attention is being given to
improve the PFM systems and processes including planning for budgeting, budgeting process, resource
management, internal control and audit, accounting and reporting and external audit. The government has
appointed important study groups to examine various aspects of PFM systems and to recommend reform
measures. A comprehensive view needs to be taken to strengthen the financial management systems in the
country as it will be difficult to deliver through isolated reform initiatives.

PFM Performance Measurement Framework Indicators Summary

Table 0.1
Overall Summary of PFM Performance Scores
Dimension Ratings
PFM Performance Indicator Scoring
Overall
Method i ii iii iv Rating
A.PFM-OUT-TURNS: Credibility of the budget

PI-1 Aggregate expenditure out-turn compared to original approved budget M1 C C
PI-2 Composition of expenditure out-turn compared to original approved budget M1 C C
PI-3 Aggregate revenue out-turn compared to original approved budget M1 A A
PI-4 Stock and monitoring of expenditure payment arrears M1 NR D NR
B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency
PI-5 Classification of the budget M1 A A
PI-6 Comprehensiveness of information included in budget documentation M1 A A
PI-7 Extent of unreported government operations M1 A A A
PI-8 Transparency of inter-governmental fiscal relations M2 B B A B+
PI-9 Oversight of aggregate fiscal risk from other public sector entities M1 C C C
PI-10 Public access to key fiscal information M1 A A
C. BUDGET CYCLE
C(i) Policy-Based Budgeting

PI-11 Orderliness and participation in the annual budget process M2 A D C C+
PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting M2 D D D D D
C(ii) Predictability and Control in Budget Execution
PI-13 Transparency of taxpayer obligations and liabilities M2 C C B C+
PI-14 Effectiveness of measures for taxpayer registration and tax assessment M2 A B B B+
PI-15 Effectiveness in collection of tax payments M1 D A A D+
PI-16 Predictability in the in the availability of funds for commitment of expenditure M1 C B C C+
PI-17 Recording and management of cash balances, debt and guarantees M2 A A A A
PI-18 Effectiveness of payroll controls M1 B B B C C+
PI-19 Competition, value for money and controls in procurement M2 NR NR D NR
PI-20 Effectiveness of internal controls for non-salary expenditure M1 D B D D+
PI-21 Effectiveness of internal audit M1 D C D D+
C(iii) Accounting, Recording and Reporting
PI-22 Timeliness and regularity of accounts reconciliation M2 B B B
PI-23 Availability of information on resources received by service delivery units M1 A A
PI-24 Quality and timeliness of in-year budget reports M1 C A A C+
PI-25 Quality and timeliness of annual financial statements M1 A B C C+
C(iv) External Scrutiny and Audit
PI-26 Scope, nature and follow-up of external audit M1 B D C D+
PI-27 Legislative scrutiny of the annual budget law M1 A A A A
PI-28 Legislative scrutiny of external audit reports M1 D C A D+
Note: NR - Not rated

Annex 8

Annex 9


Annex 10



Annex 11


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NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY

Group 1: Budgeting .......................................................................................................................2

Group 2: Budget Execution...........................................................................................................4

Group 3: Accounting and Reporting ...........................................................................................7

Group 4: Oversight ........................................................................................................................9

National Institute of Public Finance and Policy ii

Purpose of the Proceedings

National Institute of Public Finance and Policy 1

Summary of NIPFP Assessment

National Institute of Public Finance and Policy 2

Form and Content:

National Institute of Public Finance and Policy 3

Group 2: Budget Execution

Summary of NIPFP Assessment

National Institute of Public Finance and Policy 4

An Integrated Financial Management Information System (IFMIS) incorporating systems for

National Institute of Public Finance and Policy 5

National Institute of Public Finance and Policy 6

Group 3: Accounting and Reporting

National Institute of Public Finance and Policy 7

Summary of NIPFP Assessment

National Institute of Public Finance and Policy 8

Summary of NIPFP Assessment

National Institute of Public Finance and Policy 9

The deliberations and recommendations of the Group are summarized below:

1. Scope of CAG’s Act:

National Institute of Public Finance and Policy 10

2. Timeliness in Audit Reporting:

3. Revisiting Audit Procedures:

National Institute of Public Finance and Policy 11

4. Legislative Scrutiny Sufficiency & Transparency:

5. External Audit and Management:

6. Functioning of the Audit Committees:

7. Internal & External Audit Coordination:

National Institute of Public Finance and Policy 12

8. CAG’s Audit & Decentralized Governance:

National Institute of Public Finance and Policy 13

National Institute of Public Finance and Policy

9.30 -10.00 AM Registration

10.00 – 10.10 AM Welcome Note and Overview of the Workshop

10.10 – 10.40 AM Inaugural Address

10.40 – 11.00 PM Keynote Address

11.00 – 11.30 AM Tea/Coffee

11.30 – 11.45 AM PFM in India: Some Observations

11.45 – 12.30 PM PFM Assessment in India

12.30 – 1.00 PM Introducing the Groups and Group Chairs

1.00 – 2.00 PM Lunch

2.00 – 5.00 PM Group Work (3 hours incl. tea)

National Institute of Public Finance and Policy 14

Wednesday, June 9, 2010

10.00 – 10.30 AM Presentations of Groups 1 and 2

10.30 – 11.00 AM Presentations of Groups 3 and 4

11.00 – 11.30 AM Tea/Coffee

11.30 – 12.00 PM Summary/Next Steps

12.00 PM – 12.30 PM Valedictory Address

12.30 – 12.45 PM Vote of Thanks

Group 3: Accounting and Reporting

Group 4: Oversight (including external audit and legislative scrutiny)

National Institute of Public Finance and Policy 15

1. Shri D.D. Verma

2. Shri. Vinod Rai

3. Mr. Amar Nath

4. Mr. Ajay Kumar Garg