This is the 14th Report – Strengthening Financial Management Systems of the Second Administrative Reforms Commission (2nd ARC). This article will be useful for all those IAS aspiring candidates who doesn’t find enough time to go through the 2nd ARC reports for the IAS exams. I have tried to include all the important points mentioned in the report and have made efforts to summarize them as much as I could. ARC reports have gained their importance since the change of the syllabus and as such you should devote atleast a minimum of your time to these reports. This article basically comprises the Chapter 1 Introduction; Chapter – 2 – Public Finance Management (PFM) – Concepts and Principles and Chapter-3 An Overview of the Existing Financial Management System in India. Have a happy learning.
Brief details on Budget
What is a good Financial Management?
Collecting and allocating sufficient resources from an economy and using them effectively and efficiently.
What is a good Financial Operations Management?
Minimizing cost per unit of output and achieving the outcome.
Essential components of a public FMS:
Resource generation
Resource allocation
Expenditure management (resource utilization)
PFM: includes budgeting, accounting, monitoring and evaluation, taxation and other resource mobilization, debt and cash management, budgetary process, accounting systems, information systems and internal and external audit.
Annual Financial Statement/ Budget: A statement of estimated annual receipts and expenditure prepared by each Government and presented to its Legislature.
Types of Budgets:
1. Line Item Budget:
Individual financial statement items are grouped by cost centers or departments.
Compares financial data for the past and estimate for the current/future period.
Major focus is on ensuring that agencies do not exceed the specified allocation.
2. Zero based budget:
Every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it.
Requires a lot of effort in phasing out programmes.
3. Performance Budget:
Reflects the goal/objectives of the organization and spells out performance targets.
Focuses on output and outcomes.
4. Programme Budget:
Aimed at a system in which expenditure would be planned and controlled by the objective.
5. Programming and Performance budgeting system (PPBS)
Aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget.
Involves planning, budgeting and performance measure.
Common elements of the budgetary reforms in OECD (Organization for Economic Co-operation and Development) member countries are:
1. Medium-term budget frameworks – improve fiscal consolidation
2. Prudent economic assumptions
3. Top-down budgeting techniques – improve fiscal consolidation
4. Relaxing central input controls
5. Focus on results
6. Budget transparency
7. Modern financial management practices – accruals, capital charges, carry overs, interest bearing accounts.
About OECD:
Founded to stimulate economic progress and world trade.
Member Countries are Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.
In May 2007, OECD countries agreed to invite Chile, Estonia, Israel, Russia and Slovenia to open discussions for membership of the Organisation and offered a programme of “enhanced engagement” to Brazil, China, India, Indonesia and South Africa. So, India is not a member of OECD.
Core principles of reform for FMS in India:
1. Reforms in FMS are part of overall governance reforms
2. Sound financial management is the responsibility of all government departments/agencies
3. Medium-term plan/budget frameworks and aligning plan budgets and accounts
4. Prudent economic assumptions
5. Top-down budgeting techniques
6. Transparency and simplicity
7. Relaxing central input controls
8. Focus on results
9. Adopting modern financial management practices
10. Budgeting to be realistic
Appropriation Bill: Bill to provide for the appropriation (sum of money allocated officially for a particular use) out of the Consolidated Fund of India to meet the expenditure and grants.
How does it work?
Demand for grants needs to be voted > then passed in legislature as finance bill> then it becomes a Finance Act – for the purpose of approving the expenditure.
Demands for grants passed in the legislature>appropriation bill passed> becomes appropriation act – for the purpose of withdrawing money from Consolidated Fund of India.
Types of Government accounts:
Consolidated Fund:
Includes
Net proceeds of taxes and duties
All revenues received by government
All loans raised by government by issuing treasury bills, loans, etc
Pubic Debt, loan, advances
Contingency Fund:
For the purposes of meeting unforeseen expenditure
Funds are kept at the disposal of the President
Public Accounts:
Includes:
Debt other than those in the Consolidated Fund of India
Deposits, advances, remittances and suspense.
Annual accounts of the Government –
1. The Appropriation Accounts
2. The Finance Accounts.
The Finance Accounts – show the details of receipts and expenditure for all the three Funds in the form of various statements.
Finance are prepared by Controller General of Accounts and submitted to the Comptroller and Auditor General for certification and transmission to the President for being laid on the table of the Parliament.
The Appropriation Accounts – Parliament is informed about the expenditure incurred against the appropriations made by the Parliament in the previous financial year.
Statuary Audit of Finance Accounts and Appropriation Accounts – done by Comptroller and Audit General Of India.
Preparation and submission of Appropriation Accounts to the Parliament completes the cycle of budgetary process.
Fiscal Responsibility and Budget Management Act, 2003:
Three Statements are to be presented to the Parliament, which form a part of the budget documents:
(a) Macro-economic Framework Statement – contains an assessment of the growth prospects of the economy.
(b) Medium term Fiscal Policy Statement – indicates the three-year rolling targets for four specific fiscal indicators in relation to GDP at market prices, namely, (i) Revenue Deficit (ii) Fiscal Deficit, (iii) Tax to GDP Ratio, and (iv) Total Out-Standing Debt at the end of the year.
(c) Fiscal Policy Strategy Statement – seeks to outline the strategic priorities of the Government in the fiscal area for the ensuing year.
The House of the People has the power to authorize the withdrawal of moneys from the Consolidated Fund of India for the following:
Vote on Account
Vote of Credit
Exceptional Grant
Capital Account – for construction, equipment and intermediary maintenance of a project.
Revenue Account – for maintenance and working expenses of the project – adequate replacement of all wastage or depreciation of property originally provided out of capital grants.
Grouping of Accounts:
The Sectors, Major heads, Minor Heads, Sub-heads and Detailed heads together constitute a five-tier arrangement of the classification structure of Government Accounts.
Consolidated Fund:
Grouped into Sectors:
General Services
Social Services
Economic Services
Sectors> Major Heads of Account> Minor Heads> Sub Heads>detailed heads
Example: General Services > Defence > Programmes> schemes and activities> salaries, office expenses, etc.
Contingency Fund:
A single Major Head and all the transactions
Public Account
Grouped into sectors and sub-sectors, which are further sub-divided into Major Heads of Account.
Audit
CAG was relieved of the accounting functions.
Accounting function in the Ministries/Departments has now been delegated to the CGA.
There is no separation of accounts and audit functions at the State Government level.
Responsibility of CAG:
To audit all receipts and expenditures of the payable into/ from the Consolidated Fund of India and of each State and each Union Territory having a Legislative Assembly.
To audit all transactions of the Union and of the States relating to Contingency Funds and Public Accounts;
To audit all trading, manufacturing, profit and loss accounts and balance sheets and other subsidiary accounts, accounts of stores and stock – kept in any department of the Union or of a State.
To audit the receipts and expenditure of bodies or authorities substantially financed by grants or loans from Union or State or Union Territory revenue.
Reports by CAG – examined by the Committee on Public Accounts (PAC).
For Public Undertakings – examined by Parliamentary Committee on Public Undertakings (COPU)
Internal Audit
Internal audit – for monitoring the financial performance and effectiveness of various programmes, schemes and activities.
Internal audit – conducted through the Internal Audit Wings in the Principal Accounts Offices of various Ministries/Departments under the Chief Controller of Accounts/Controller of Accounts
Secretary of the Ministry/Department – acts as a Chief Accounting Authority
Financial Adviser – responsible for internal audit of payments and accounts
Chief Controller of Accounts (CCA)/Controller of Accounts (CAs) – envisages that the internal audit wing would focus on:
• The appraisal, monitoring and evaluation of individual schemes
• Assessment of adequacy and effectiveness of internal controls in general, and soundness of financial systems and reliability of financial and accounting reports in particular;
• Identification and monitoring of risk factors (including those contained in the Outcome Budget); critical assessment of economy, efficiency and effectiveness of service delivery mechanism to ensure value for money; and
• Providing an effective monitoring system to facilitate mid-course corrections.
IFA[Integrated Financial Adviser (IFA)] are made responsible for:
1) Preparation of the budget of the Department/Ministry, distribution of budget allocations to the various wings, departments/formations;
2) Arranging payments directly to the bodies, corporations and authorities of grant-in-aid, loans, etc., as may be sanctioned by the Department;
3) Arranging payments through Pay and Accounts Offices – all pay and allowances, office contingencies, miscellaneous payments, all admissible loans and advances to government servants including provident funds claims;
4) Compilation and consolidation of the accounts of the Department/ Ministry
5) Introduction of a system of management accounting suited to the functions and requirements of the Department/Ministry;
6) Installation of a sound system of internal inspection within the department to ensure both accuracy in accounts and efficiency in operation as a part of the management.
Transfer of funds from the Union to the States due to the inadequacy of sources of generation of revenue takes place through various means:
1. By way of devolution as per the recommendations made by the Finance Commission
2.Through the Planning Commission – Central Assistance, Scheme of Financing of States, Centrally Sponsored Schemes.
The flow of funds from the Union Government to the ultimate implementing agencies for any scheme is through one of these two channels.
i) Funds are transferred to the Consolidated Fund of the State Governments which spend the money through the implementing agencies.
ii) The Union Government transfers funds directly to implementing agencies in the States through normal banking channels.
References:
14th Report – Strengthening Financial Management Systems of the Second Administrative Reforms Commission (2nd ARC)