India is a Union of 25 States. The responsibilities and powers (including financial) of the Union and the States, and the relationship between them, are set out in the Constitution of India. The legislative powers are detailed in three lists-Union, State and Concurrent. The Union list includes matters of national interest such as foreign affairs, railways, posts and telegraphs, currency and coinage, and inter-state trade and commerce while the State list contains matters of regional interest such as law and order, health, agriculture, irrigation, power, rural and community development. Certain matters of common interest, such as economic and social planning, have been placed under the concurrent legislative powers of the Union and the States. In the event of a clash between the laws of the Union and the States in the concurrent area, the laws of the former prevail.
The Constitution allots separate legislative heads of taxation to the Union and the States. Borrowing and foreign exchange entitlements are controlled by the Union. The residual powers of levying taxes not mentioned in the State list and the Concurrent list also rest with the Union. The division of fields of taxation between the Union and the States is based on economic and administrative rationale. The power to levy taxes with an inter-state base, and where uniformity in rates is desirable, is vested in the Union Government, but the power to levy taxes that are location- specific lies with the States. However, certain taxes are levied by the Union but are collected and retained by the States, while certain other taxes and duties are levied and collected by the Union but their net proceeds are assigned to or shared with the States.
The Constitution provides for payment by the Union of grants-in-aid of revenues to the States. The Government of India is also empowered to make loans to the States or give guarantees in respect of loans raised by them. There is also provision for grants by the Union or a State for any public purpose.
The audit of the accounts of the Union and of the States is a Union responsibility. Accordingly the accounts of the Union and of the States are to be kept in such form as the President of India prescribes on the advice of the Comptroller and Auditor General of India (CAG). There is thus a unified system of auditing and accounting, facilitated by Parliament enacting a law governing the duties, powers and conditions of service of the CAG known as the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act 1971.
The financial management systems and accountability mechanisms, both at Union and State levels, are almost the same except in certain details. Unless specifically mentioned, the systems detailed below in respect of the Union apply also to the States.
1.1 FINANCIAL PROCEDURE
The executive authority of the Union is vested in the President of India who exercises this authority either directly or through officers in accordance with constitutional provisions. However the President has been placed under a firm constitutional obligation to act in accordance with the advice tendered by the Council of Ministers headed by the Prime Minister. In the States it is the Governor who discharges the executive functions of the State with the aid and advice of the Council of Ministers headed by the Chief Minister.
The financial year in India is from 1 April to the 31 March of the following year. The annual financial statement of receipts and expenditure of the Government is required to be placed before the Parliament/State Legislature which, in each case, confers specific authority for raising revenue through taxation and incurring expenditure. In this regard, no tax can be levied or collected except by authority of law while, similarly, no moneys can be appropriated from the Consolidated Fund except in accordance with law and for the purposes and in the manner provided in the Constitution.
1.2 CONSTITUTION OF FUNDS
The Constitution of India provides for the creation of three separate funds both at the Union and State levels.
The demarcation of moneys received by the Union or a State Government into three separate funds is based on a rational basis. All the moneys whether received by way of tax or non-tax revenues, or from any other source where the ownership of the moneys vests with the Government, form part of the Consolidated Fund. Moneys received by or on behalf of the Government where the Government acts as a trustee form part of the Public Account. The nature of the Contingency Fund is self-evident. No moneys can be withdrawn from the Consolidated Fund for incurring any expenditure without prior approval of the Parliament or the State Legislature through a process of legal appropriation. Therefore unforeseen expenditures, or expenditure in excess of approved appropriations, are met from the Contingency Fund. The Parliament of India and the various State Legislatures have passed laws establishing such Contingency Funds.
2.1 APPROPRIATION PROCEDURES
Although the Indian Constitution does not mention the term 'Budget', it provides that the President shall in respect of every financial year cause to be laid before both the Houses (The Houses are the House of the People (Lok Sabha) and the Council of States (Rajya Sabha)) of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year. This statement, known as the Annual Financial Statement, is the main fiscal or budgetary document of the Government.
The estimates of expenditure embodied in the Annual Financial Statement are required to show separately :
The estimates are also required to distinguish expenditure on revenue account from that on capital account. A further classification of expenditure is made on the basis of its being a part of 'Plan Outlay' or non-plan, i.e. expenditure which is part of normal governmental activities or maintenance expenditure.
The expenditure of the following nature is charged on the Consolidated Fund and is not subject to Vote of Parliament:
The expenditure estimates which form part of the Annual Financial Statement are divided into different Demands for Grants. The Demands for Grants, as mentioned earlier, show separately the revenue and capital, and the charged and voted expenditure. Similarly, estimates of receipts are classified in the tax and non-tax categories and also those which are on revenue account and others which are on capital account (in common with public loans). The Demands for Grants (voted portion) are submitted before the Lok Sabha and put to vote. This House has the power to assent or refuse to assent or reduce the amount of the Demand. The Demands relating to 'Charged' expenditure are not subject to any vote, but Parliament is free to discuss any of these Demands and express its opinion for the consideration of the Government. The Demands for Grants before they are submitted to the Parliament require a specific recommendation of the President (or Governor in the case of a State).
After the Demands for Grants have been approved by the Lok Sabha (or the State Legislative Assembly), an Appropriation Bill to authorise the Government to withdraw moneys from the Consolidated Fund is required to be introduced and passed by the Parliament (or the State Legislature). It is through the medium of this Appropriation Act that the constitutional requirement of parliamentary financial control is met.
A similar procedure is mandatory for providing supplementary or additional funds required in a particular financial year, and for regularising any excess expenditure over the approved appropriations. For this purpose, Supplementary Demands for Grants or Demands for Excess Grants have to be presented and relevant Appropriation Acts passed.
2.2 VOTES ON ACCOUNT
Since India has an annual budget cycle in respect of each Appropriation, the entire budgetary process is to be completed, according to constitutional and legal requirements, for the next financial year, before the end of the current financial year i.e. before 31 March. In a country of the size of India with widespread activities of the Government, the budgetary process has to start at least six to seven months before the commencement of the next financial year. The process of estimation starting from the lowest activity centre up to the apex level of the Ministry of Finance and the Cabinet has to be completed at least a month before the commencement of the next financial year. Therefore, normally by end of February, the budget estimates and other related documents are presented to the Parliament. It is, however, not possible always to complete the entire legal process of consideration, discussion and approval of the estimates and related appropriation and other finance bills before 31 March. In order therefore to enable the Executive to carry on the activities of the Government uninterruptedly, the mechanism of allowing supplies in the interim for a part of the financial year has been provided through the medium of Vote on Account.
The Council of Ministers headed by the Prime Minister is collectively responsible to the Parliament. Each Minister holding a portfolio for formulating departmental policies is individually responsible (as part of that collective responsibility) to oversee the implementation and ensure the efficient working of the administrative machinery under his charge.
Individual Ministers are responsible to the legislature for actions of their respective civil servants, who, in turn, are ministerially accountable. Accountability is made more specific and is ensured by a complex set of organisational and procedural devices.
3.1 MINISTRY OF FINANCE
The control over finances of Government has traditionally been confined to the Ministry of Finance. With the phenomenal growth and the complexity of Government activities, several powers have been delegated to Administrative Ministries, but the Ministry of Finance continues to have the overall responsibility of co-ordination and control. For speedy and effective discharge of their functions in financial matters which include planning, programming, budgeting, internal control, monitoring and evaluation, an Integrated Financial Adviser is attached to each Administrative Ministry. The Integrated Financial Adviser acts both as internal and external financial adviser. He functions as internal financial adviser in the exercise of powers delegated to the Ministries under the Delegation of Financial Power Rules, and acts as an external financial adviser on behalf of the Ministry of Finance in respect of matters outside the delegated financial powers of the Administrative Ministry.
The Ministry of Finance has issued detailed regulations on financial management and control to be followed uniformly in the Government of India. In addition, the Ministry is responsible for framing rules relating to the maintenance of accounts of the Union and of the States, on the advice of the CAG.
3.2 ADMINISTRATIVE MINISTRIES
The basic responsibility for the administration of each department's activities is entrusted to the Head of the department concerned, who is guided and controlled by the Administrative Ministry. In financial matters each head of the department is thus responsible for the collection of revenue and control of expenditure pertaining to his department, the receipt and disbursement of which are usually effected at various places and through various persons. The Ministries also exercise financial control over public enterprises set up under each of them. The Permanent Secretary of each Ministry who is the Chief Accounting Authority for that Ministry, discharges this function through and with the assistance of the Controller of Accounts and the Financial Adviser.
Once the Appropriation Bill (Vote on Account) or the Appropriation Bill relating to the whole year, as the case may be, is passed by Parliament, the Ministry of Finance advises the other Administrative Ministries of the Grants made by the Lok Sabha and the Appropriations sanctioned by Parliament. Each Ministry of the Union Government may distribute the funds, where necessary, among the controlling and disbursing officers subordinate to it. Unspent balances are unavailable for utilisation in the following year. Officers incurring or authorising expenditure from public moneys must comply with the prescribed standards of financial propriety.
The various Ministries are responsible for the control of expenditure against the financial grants and appropriations placed at their disposal, control being exercised through the respective Controlling Officers. For this purpose there are well laid down procedures and management information systems. All anticipated savings in the grants are surrendered to the Ministry of Finance, before the close of the financial year, for possible reappropriation as permissible under the rules of appropriation.
3.3 TRANSFER OF APPROPRIATION
No expenditure can be incurred which may have the effect of exceeding a grant authorised by law for a financial year, except after obtaining a supplementary grant or an advance from the Contingency Fund. Since voted and charged portions-in common with the revenue and capital sections of individual grants-are distinct and reappropriation inter se is not permissible, an excess in any one portion or section is treated as an excess in that particular grant. However, reappropration of funds from one primary unit of appropriation to another such unit within a grant may be sanctioned by a competent authority at any time before the close of the financial year, subject to certain restrictions.
3.4 OTHER CENTRAL AGENCIES
Besides the Ministry of Finance, the Finance Commission and the Planning Commission play an important role in public finances of the country. The Finance Commission makes recommendations relating to the distribution of net proceeds of certain taxes between the Union and the States and the payment of grants-in-aid of the revenues of the States out of the Consolidated Fund of India. The Planning Commission, besides formulating and monitoring development plans, advises the Union Government regarding the desirable transfer to the States of resources essential for developmental outlays. These transfers are over and above those recommended by the Finance Commission. Its recommendations cover among other things, feasible changes in tax rates and efforts, quantum and allocation of borrowings between the Union and the States.
3.5 ROLE OF THE RESERVE BANK OF INDIA
The Reserve Bank of India, which has been set up as a Central Bank by an Act of Parliament is the repository of all cash balances of the Government of India and of all the States except in the case of two States. It plays a vital role in assisting the Government in the economic management of the country, particularly the monetary system. The Government of India borrows from the Reserve Bank against issue of treasury bills for replenishing its cash balance from time to time. The State governments also obtain ways and means advances as bridging loans from the Bank which are repayable within a specified period.
The Reserve Bank has been entrusted with the responsibility of management of public debt raised by the Government of India and of the States including maintenance of detailed accounts of all the loans floated. The Bank has also been entrusted with the complete control of foreign exchange of the country.
3.6 PRIVATISATION
In India there has been a growing awareness among the public sector policy makers and executives of public enterprises of the need to take various remedial measures to correct adverse trends in public enterprises. There is a quest for increasing efficiency, optimising performance and ensuring better financial results. With the exception of a few small public enterprises which have been wound up, there has been no concrete case of 'privatisation' in India, as it is commonly understood. However the Government of India has recently sold limited shares of some public enterprises to mutual funds and has announced its intention of selling up to 49 percent of equity to certain financial institutions and to the public.
The Comptroller and Auditor General of India (CAG) plays a crucial role in parliamentary financial control. The Indian Constitution provides for a unitary and independent audit by the CAG. The audited Appropriation and Finance Accounts are submitted along with the audit reports of the CAG to the President of India or the Governors of the States according to whether they relate to the Union or the States. These accounts and reports are then caused to be laid before the Union Parliament or the State Legislatures concerned.
The primary function of the audit of the CAG is to verify the accounts to ascertain (1) whether the moneys shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged and whether the expenditure conforms to the authority which governs it and (2) whether the assessment, collection and allocation of revenue have been properly done. The Appropriation and Finance Accounts are accordingly examined under the directions of the CAG and certified as to their correctness subject to his observations in his Reports on the Accounts submitted under Article 151 of the Constitution.
The jurisdiction of the CAG extends to the audit of Government commercial enterprises, as well as to bodies and authorities substantially financed from Government revenues. The CAG also examines the accounts relating to grants and loans given by the Government to other bodies. There is also an enabling provision in the Act passed by the Union Parliament in 1971 to take up the audit of any other bodies or authorities with the approval of, or at the request of, the President or the Governors as the case may be.
The CAG has the authority to make regulations on the scope of audit. Such regulations are not subject to the approval of either the Government of the day or the Parliament. Thus, the CAG has complete discretion to regulate the scope of his audit. Apart from the traditional forms of audit, commonly known as the appropriation audit and regularity audit, the discretionary forms of audit (the propriety audit and the efficiency-cum-performance audit) developed by the CAG have assumed significance from the viewpoint of 'accountability' in a comprehensive sense. The audit looks beyond the mere regularity of expenditure to its prudence and economy and to a general examination of the efficiency and effectiveness with which an organisation is discharging its financial responsibilities.
The powers of the CAG to have access to documents and information in connection with audit of accounts have been enhanced under the Act of 1971. Earlier, in certain cases he was obliged to accept a simple statement of facts derived from a book or document which the highest executive authority certified as secret. Now, no such restriction exists and the CAG can call for any document as long as it is considered relevant to the transactions to which his auditing duties extend. Further, the Act specifically enjoins that the administration shall afford all facilities for his inspection and comply with his request for information in as complete a form as possible and with all reasonable expedition.
4.1 RELATIONSHIP WITH PARLIAMENTARY COMMITTEES
The audit reports of the CAG, other than those relating to commercial enterprises, are considered by the Public Accounts Committees. The Committees on Public Undertakings consider the audit reports relating to commercial enterprises. The various committees examine the many audit reports on a selective basis, assisted by the CAG or his Principal Audit Officers as follows:
Informal assistance is also given to the individual members and the secretariat of the committees so as to enable them to have a proper understanding of the issues dealt with in the relevant audit report. In India the audit reports as such are not generally discussed in the Parliament or State Legislatures. However the recommendations of the committees are by convention considered as the recommendations of the entire Parliament. Hence, the assistance given by the CAG and his office to the Financial Committees is in effect assistance to the entire legislature. Even in regard to those issues dealt with in the audit reports which have not been taken up by the committees for detailed oral or other examination, notes on remedial action taken by individual departments of government are required to be submitted to the committees, after the notes are vetted by the Audit Department.
The Public Undertakings Committee of Parliament, besides considering some of the reports of Comptroller and Auditor General, carries out its own examination of the working of a number of public commercial enterprises. There is a need here for closer coordination between the CAG and the Committee in selection of the subjects for audit appraisals of public undertakings to avoid duplication of efforts.
4.2 AUDITING STANDARDS
As pointed out earlier, the CAG has full authority to determine the scope and extent of his audit. The auditing standards followed in India have evolved over many years during which state audit has been practised in this country. These auditing standards have been incorporated in various manuals issued by the CAG for the guidance of his officers. Specific criteria and procedures of audit have also been laid down in separate manuals on various audit disciplines.
In the audit of the financial statements of commercial departments of the government or of the many public enterprises, Generally Accepted Auditing Standards (GAAS) as applicable to comparable enterprises in private sector are observed. The CAG has, however, the right to issue directions to the professional accountants who conduct the primary audit of public sector companies, indicating to them the manner in which the audit of such enterprises is to be conducted. The CAG also reviews the performance of such auditors.
5.1 ESTIMATES COMMITTEE
In addition to the financial surveillance of the Public Accounts Committee and the Committee on Public Undertakings, the Estimates Committee examines the estimates of the Governments to determine the financial propriety of planned revenues and expenditures, subject to policy constraints. The Estimates Committee subsequently reports on any economies, improvements in systems, or reforms, which may be effected. Where necessary, alternative policies to achieve increased efficiency and economy in administration are suggested. It is also one of the functions of this Committee to recommend the form in which the budget estimates are to be presented to Parliament.
5.2 SUBJECT COMMITTEES
Other parliamentary committees have been established recently for the specialised examination of government activities in such fields as agriculture, environment and forest, and science and technology. Although these specialised committees and the Estimates Committee may utilise the information contained in the various audit reports of the CAG, so far there has been no established convention of the CAG assisting them in their examination and reporting activities.
6.1 DEVELOPMENTAL PLANS AND BUDGET
The traditional budget is generally an incremental line-item budget based on historical or empirical methods of estimating revenues and expenditures. Soon after national independence, the Government launched comprehensive socio-economic development through five year plans, divided into annual plans. Apart from a detailed planning process, these involved three major concerns:
6.2 PROGRAMME AND PERFORMANCE BUDGETING
Following national independence, there was a growing awareness by legislators, taxpayers and budget authorities of the need for a structural change in the budget so that additional budgetary input could be compared with additional output. In 1965 the United Nations published a Manual for Programme and Performance Budgeting and suggested that the developing countries could adopt this technique with the view to obtaining a better return on resources. The Indian Government appointed a high-level Administrative Reforms Commission which recommended the introduction of a performance budget as an instrument for budgeting in terms of physical inputs and outputs, in addition to budgeting purely on financial terms.
As a result of this recommendation performance budgets were developed taking into account international practices in conjunction with the national planning structure. The Planning Commission, which acts as the apex body of planning in India for all sectors, substantially performs the planning functions of the budget, in contrast to other countries where these are handled by the Ministry of Finance, the Treasury or other budgetary authorities. Performance budgets in India are prepared in addition to the budgetary documents required under constitutional or other legal provisions. Emphasis is placed on comparing the effects of financial inputs with physical outputs. These budgets provide various performance indicators in both financial and physical terms.
6.3 ZERO-BASE BUDGETING
Following a considerable period of investigation and examination, zero-base budgeting was adopted in India in 1986 as a technique for determining expenditure budgets. Accordingly the Ministry of Finance instructed all the administrative ministries to review their respective programmes and activities in order to prepare expenditure budget estimates based on the principles of zero-base budgeting. Although this budgeting system has not yet been fully implemented in India, it is envisaged that the following essential steps should be taken by all ministries and departments:
There has been some resistance by ministries and departments to the full implementation of zero-base budgeting. However a much more stringent degree of scrutiny and cost benefit analysis with clear prioritization of activities and programmes will have to be done if budgetary imbalances are not to be allowed to go beyond control.
6.4 BUDGET CLASSIFICATION
The estimates of receipts are made under three main divisions viz. Revenue Receipts (all direct and indirect taxes, non-tax receipts and interest on loans and advances); Capital Receipts (internal debt, external debt and repayment of loans and advances) and Public Account (debt other than that falling under Capital Receipts, deposits, advances, etc.).
The estimates of expenditure from the Consolidated Fund fall into two categories-Non-plan expenditure and Plan expenditure. Each comprises expenditure on revenue account and on capital account, including loans and advances separately.
7.1 PLANNING
The Government of India has constituted a body known as the Planning Commission with the Prime Minister as its Chairman and members comprising eminent personalities from the various fields of economics, agriculture, education, industry, social sciences and public administration. Socio-economic development planning attempted by the Commission covers the entire country including the States. Nationwide coordination is obtained through the National Development Council represented by the Chief Ministers of all the States. The planning process takes into account (i) the required growth rate of the Gross Domestic Product (GDP), (ii) the growth rates for various sectors of economy, (iii) the sources of funding, and (iv) the methodology of achieving the planned goals. The Planning Commission also examines and gives its expert advice on various projects and programmes.
The five year plans are formulated and are then de-segregated into annual plans. The annual plans are then prepared in respect of each sector. These are further demarcated between the Union Government and States. Thereafter, the process of entrustment to various ministries and departments takes place. The orientation of the budgets in India is largely determined by plan outlays, their composition and sources of funding.
7.2 ORGANISATION FOR BUDGET MANAGEMENT
The Finance Minister, assisted inter alia by the Budget Division of the Department of Economic Affairs of the Ministry of Finance, has responsibility for producing the budget, in the form of the Annual Financial Statement and such supplementary budgets as may be needed during a year for the Government of India (other than for the railways). The Budget Division is responsible for issuing all instructions and guidelines for the preparation of budget estimates and for monitoring the timely receipt of the same from all the Ministries concerned. The railway budget is prepared separately and presented to the Parliament a few days in advance of the general budget. The railway budget figures (net) are, however, also incorporated in the general budget to give an overall picture of the financial position. The Railway Budget is presented to Parliament by the Minister of Railways.
7.3 BUDGET STEPS
The General Financial Rules prescribe the broad guidelines, procedures and forms for the preparation of budget estimates of receipts and expenditure by the ministries. In addition, the Budget Division issues a circular, normally during September each year, known as the 'Budget Circular1 for the next financial year (which is 1 April to 31 March as indicated earlier) for preparation of the Revised Estimates of the current financial year and the budget estimates of the ensuing financial year. This circular gives detailed instructions about the preparation of estimates of receipts and expenditure, the required format and the various statements that are to be appended to the estimates. It also specifies the processes to be followed and their scheduled dates.
The estimating authorities prepare the detailed estimates of receipts separately for each Major Head of account. For each Major Head, break-up of minor/detailed heads (to be in conformity with the accounting classification) is given, taking into account the actuals for the past three years. Relevant notes are given to highlight any individual items of significance or explanation for any major variation with reference to past actuals. The detailed estimates of expenditure are prepared by the estimating authorities by each unit of appropriation (sub/detailed head) under the prescribed Major and Minor Heads of Account separately for Plan and Non-plan expenditure. The estimates of Plan expenditure are made on the basis of the approved plan allocations intimated by the Planning Commission.
The estimating authorities forward the budget proposals to their departmental heads for consideration and onward transmission to the ministries administratively concerned. These ministries scrutinise the estimates, make modifications where necessary, and transmit these revised estimates to the Financial Adviser for further examination and processing. The Financial Adviser ensures the correctness of accounts classification, makes modifications as may be called for in his judgement in the context of economy and other considerations, consolidates the estimates for each programme/organisation to present a complete picture of their financial costs, and obtains approval of the Secretary (Expenditure) in the Ministry of Finance, wherever necessary. Departmental budgets are then forwarded to the Budget Division. While the prescribed date for receipt of the estimates of receipts by the Budget Division is normally not later than the end of December, the date for estimates of expenditure is 31 October. The estimates of departmental receipts and expenditure received in the Budget Division are duly scrutinised and then accepted for incorporation in the Budget.
The CAG provides the Union and State Governments with any information requested from time to time regarding accounts for the compilation and maintenance of which he is responsible. The CAG also renders all reasonable assistance sought by the respective Governments in the preparation of their annual financial statements (budget estimates).
Before finalising the budget proposals the Finance Minister holds informal meetings with organisations representing industry, agriculture and other key sectors. He also meets leading economists to ascertain their views on matters having a bearing on the fiscal policies of the Government. The budget proposals are placed before the Parliament by the end of February. The railway budget, as already mentioned, is presented separately a few days in advance of the general budget.
7.4 PUBLIC DEBT
The task of finding sufficient resources to fund plan outlays has become exceedingly difficult. Additionally, in common with most developing countries, India has also had to face the impact of several adverse global economic and fiscal developments. Unavoidably there has been the need to import a necessary minimum of raw materials, machinery, equipment and even technology. Such imports have considerably strained the foreign exchange resources of the country. In view of the above problems, India, in common with many other countries, has had to resort to large scale borrowings both from the domestic economy and through international sources.
The Constitution of India empowers the Union and State Governments to borrow under certain conditions and within certain limits. The Government of India can borrow upon the security of the Consolidiated Fund of India within such limits as may be fixed by law by the Parliament from time to time. A State Government can borrow only within the country upon the security of the Consolidiated Fund of the State within such limits as may be fixed by the Legislature of the State. The consent of the Government of India is necessary for raising a fresh loan in case the Union government has already guaranteed an outstanding loan of the State or if the State owes a debt to the Union Government.
DOMESTIC BORROWINGS : Following are the main sources of borrowings by the Government of India :
In addition, India has a very large network of voluntary schemes for promoting savings by individual investors. Known as National Savings Schemes, these have contributed substantial amounts to the resources needed by the Government.
The public sector enterprises have also been allowed to negotiate public borrowings through the medium of bonds, public deposits, and other financial instruments. These may be required to be guaranteed by the Government.
EXTERNAL DEBT : Following are the main sources of borrowings by the Government of India for meeting foreign exchange requirements :
Some financial assistance is also available as an outright grant, or at a very nominal interest rate, or as a long term deferred credit. However most of the financial assistance comprises loans with varying terms regarding the repayment period and interest rates.
The major phenomenon of public debt in India has been its increasing size and cost in terms of interest burden. Similarly, the large liability for external payments and other related factors have caused a severe strain on the external value of Indian currency. Although the Constitution provides for limits on borrowings, the Government has so far not acted on this provision.
7.5 BUDGET DOCUMENTS
Apart from the Annual Financial Statement and the Demands for Grants, the following documents are also presented to Parliament as part of the overall budget:
Later in the budgetary process, the Ministry of Finance produces a document known as 'The Economic and Functional Classification of the Central Government Budget'. This gives an appreciation of the impact of Government receipts and expenditure on the other sectors of the economy by regrouping the budgetary aggregates in terms of economic magnitudes-for example, the amount spent on capital formation directly by the Government and transferred to other sectors of economy.
The discussions relating to the annual budget in Parliament take place in two stages. In the first stage general discussions centre around the budget speech of the Finance Minister. In the second stage, detailed discussions take place on the 'Demands for Grants'.
8.1 ROLE OF DEPARTMENTS IN SPENDING AND CONTROL
The relevant administrative ministry has the main responsibility for ensuring that (i) expenditure is incurred for the approved purpose, (ii) it is within the sums allotted, (iii) it has been incurred under the authority competent to sanction it, and (iv) due prudence has been shown in its incurrence. As ministries have delegated their powers to lower functionaries, the basic responsibility is shifted to the particular functionary concerned, but overall responsibility remains with the administrative ministry.
As per rules, no public authority can incur any expenditure or enter into any liability involving expenditure or transfer of moneys for investment or deposit from government account unless such expenditure or transfer, as the case may be has been sanctioned by general or special orders of the Government or by any authority to which power has been delegated in this reagard. No expenditure can be incurred against a sanction unless funds are made available to meet the expenditure by valid appropriation or reappropriation. The government authorities have to comply with rules prescribed in the General Financial Rules and the Delegation of Financial Power Rules in all financial matters. The designated controlling authorities have to ensure not only that the total expenditure is kept within the limits of the authorised grants but also that the funds allotted to spending units are expended in the public interest and on objects for which the money was provided.
In order to maintain proper control, the controlling officer obtains information on not only what has actually been spent from the grants but also what commitments and liabilities have been and will be incurred against them. He must be in a position to assume, before the Government and Public Accounts Committee, complete responsibility for departmental expenditure and to explain or to justify any instance of excess expenditure or financial irregularity that may be brought to notice as a result of audit scrutiny or otherwise. In the discharge of his ultimate responsibility for the administration of a grant, or a part thereof, placed at his disposal, every controlling officer must satisfy himself not only that adequate provisions exist within the departmental organisation for systematic internal checks calculated to prevent and detect errors and irregularities in the financial proceedings of his subordinate officers and to guard against waste and loss of public money and stores, but also that the prescribed checks are effectively applied.
As regards receipts, it is the duty of the departments concerned to ensure that the dues of Government are correctly and promptly assessed and paid into the treasury/bank. All moneys received by or on behalf of Government either as dues of Government or for deposit, remittance or otherwise are required to be brought into Government Account without delay in accordance with the prescribed rules and regulations.
In view of the volume of expenditure particularly in regard to large projects and programmes, the system of 'Financial Advisers' has been established at the Union level. Prior to 1976 there were two separate functionaries, namely, Internal Financial Adviser and Associated Financial Adviser. A system of Integrated Financial Advisers is now operative. This system ensures the availability of in-house expert advice to administrative ministries and departments.
In regard to the financial powers which have been delegated to the ministries, the Financial Adviser acts as a part of the administrative ministry and his advice can be overruled by the ministry concerned. However, in those areas where the financial powers have not been delegated, this functionary acts on behalf of Ministry of Finance. In such areas he can be overruled only with the approval of the Ministry of Finance.
8.2 INTERNAL AUDITING
In India major importance is attached to the system of internal audit in Government. It is recognised that the continuing examination of the accounting and financial records, of systems and procedures, and of compliance with stated management policies, are essential elements of internal audit and a positive help to public administration. Accordingly each ministry and department of the Union Government has a special unit under the direct control and supervision of Financial Advisers.
All ministries and departments prepare their own internal audit manuals which detail the duties and functions of the internal audit unit. The findings of this unit are submitted to the permanent secretaries of the ministries concerned.
The audit by the CAG also lays a great deal of stress on the adequacy of internal audit systems. In those instances where the CAG is of the opinion that these systems need to be strengthened, appropriate comments and recommendations are made in his reports.
8.3 AUDIT COMMITTEES
In order to ensure speedy action on audit findings, instructions are issued by the Ministry of Finance either on its own initiative, or on the basis of suggestions by the CAG or on the recommendations of the Public Accounts Committee. These instructions require the (i) specification of time limits, (ii) designation of responsible officials and (iii) appointment of audit committees.
9.1 ROLE OF EXECUTIVE DEPARTMENTS
Responsibility for monitoring the progress of expenditure against a Grant devolves on the executive which is ultimately responsible for keeping the expenditure within that Grant. In order to make control of expenditure against appropriations an operative reality, an efficient monitoring system has been established. A monthly return indicating separate plan and non-plan expenditure figures is prescribed to be furnished by the spending authorities. The consolidated information shows the sanctioned grant and the progressive total of expenditure incurred from month to month for a ministry as a whole. The system also provides for reconciliation of the departmental figures with the accounts figures. The ministries also obtain the details of physical progress of developmental schemes. These details include the budget provision, the progressive expenditure and the physical progress of each scheme in addition to the reasons for any financial and physical variations. The data relating to the progress of expenditure and the physical progress of the schemes are analysed every month and remedial action as considered necessary initiated.
The Accounts Officers under the Financial Adviser of each Ministry also keep a watch over the progress of expenditure and report to the departmental head concerned immediately if there is the likelihood of any grant being exceeded. Such financial surveillance provides an additional control mechanism to enable timely action by the executive.
9.2 OTHER AGENCIES
For effective control and monitoring of implementation of the developmental programmes and schemes, the Government of India has recently set up a separate Ministry of Programme Implementation. This ministry closely monitors the implemenation of major public sector projects and programmes. It also assists various other ministries in the preparation of Annual Action Plans and in the review of associated performance reports. For monitoring and generation of periodical reports, the system has been computerised by developing requisite data bases.
The National Informatics Centre, set up as a nodal agency, has developed several data bases and continuously monitor all plan and non-plan programmes through a computer network known as NICNET which provides the data required by various users. The main users of such data presently are the Prime Minister's Office, Planning Commission and Ministry of Programme Implementation. The computer network is being extended to cover district treasuries in the States as well.
One of the most distinctive features of the system of Government Accounts in India is the minute elaboration of the financial transactions of Government. Both receipts and payments, are differentiated and classified in detail. Further, the uniform classification of transactions enables financial comparisons between Union and State governments.
The following three developments are worth mentioning in this context:
These developments resulted in the government accounting authorities making the following responses:
The major information inputs provided by the accounting authorities to the government are in the form of:- (a) Monthly and Annual Accounts, (b) Finance Accounts, (c) Appropriation Accounts and, additionally (d) Combined Finance and Revenue Accounts.
10.1 TYPE OF ACCOUNTING SYSTEM
The government accounts in India are kept on a cash basis. Therefore, only actual receipts and payments during the financial year are taken into account with no outstanding liabilities or accrued income included. All cash appropriations lapse at the close of the financial year.
Although the government accounts are maintained on cash basis, a need has been felt for maintaining the relevant accounts on a commercial basis (reflecting accrual accounting) in the case of those government departments where functions are purely or largely of a commercial nature. For this purpose proforma accounts are kept on commercial accounting principles for those commercial units under a ministry or department. For the major government commercial departments-such as Railways, and Posts and Telecommunications-detailed capital and revenue accounts are prepared and presented separately. This enables the public to see the complete picture inter alia about cost of services rendered and the return from investments.
While the question of government accounts being maintained on an accrual basis was being discussed and considered, it lost a great deal of its relevance in view of the emergence of a very large public sector in India. In compliance with the policy of the government to have a planned economy, massive investments have been made by the Government in various public enterprises. Since a large segment of governmental activity of a commercial, industrial and trading nature is being carried out by public enterprises based on commercial principles, the objective of accrual accounting is inherent in the model adopted.
10.2 CLASSIFICATION OF TRANSACTIONS
The conventional pattern of classification followed organisational lines, consisting mainly of the listing of receipts by various types of taxes, and expenditures by reference to the spending department rather than to its objects or purposes. With the phenomenal growth and diversity in the functions of governments involving huge outlays, accounts acquired a new dimension. Accordingly the necessity for a more meaningful classification of transactions for presentation of government operations in terms of functions, programmes and activities became increasingly apparent. A study team subsequently established by the Government of India, with the Deputy Comptroller and Auditor General as convenor investigated the feasibility of devising a uniform classification for the budget, accounts and plan, and of presenting the objectives and purposes of government expenditure clearly in terms of functions, programmes and activities. Following the recommendations, the classification of transactions on a function-cum-programme basis was introduced from 1 April 1974.
While the functional approach to classification is now well established, the divergence between plan programmes and accounting classification increased over the years. To bring about a closer correlation between plan schemes and Accounts Heads, the government constituted a committee which included a representative of CAG to review the existing classification and rationalise the Account Heads where required. As a result of this review in consultation with the CAG, the new accounting classification came into force from 1 April 1987. While the basic principles and broad structure of accounts were retained, certain new sub-sectors were introduced, a new coding pattern was devised and other changes initiated so that expenditure on plan programmes could be extracted directly from the accounts. The list of Major and Minor Heads of Accounts of Union and States published by the Government of India gives the relevant details.
10.3 MAIN DIVISIONS OF ACCOUNTS
Following constitutional requirements government accounts are maintained in the following three categories:
Part I Consolidated Fund
Part II Contingency Fund
Part III Public Account
In Part I, there are two main divisions of the Consolidated Fund. The first division comprises the section 'Receipt heads (Revenue Account)' dealing with the proceeds of taxation and other receipts classed as revenue and the section 'Expenditure heads (Revenue Account)' dealing with expenditure met therefrom. The second division comprises the following sections :
In Part II, the transactions connected with the Contingency Fund set up by the Government of India or of a State are recorded. To complete the classification, Part III shows transactions relating to Debt (other than those included in Part I), 'Deposits', 'Advances', 'Remittances' and 'Suspense'.
Within each of the divisions and sections of the consolidated fund, the various transactions are grouped into sectors, such as 'General Services', 'Social Services' and 'Economic Services', These sectors have sub-sectors before their division into Major Heads of Account. In Part II- (Contingency Fund), there is a single Major Head to accommodate all transactions of the Contingency Fund. In the case of Part III (Public Account), transactions are grouped according to sectors and sub-sectors which are further sub-divided into Major Heads of Account.
10.4 ACCOUNTING STANDARDS
As mentioned earlier, the Constitution envisages that the accounts of the Union and the States are to be kept in such a form as the President may on the advice of the CAG prescribe. The word 'form' has a comprehensive meaning so as to include the prescription not only of the broad form in which the accounts are to be kept but also the appropriate heads under which certain transactions or classes of transactions have to be entered. Accordingly accounting standards have been established in rules and regulations mandated by the Union Government on the advice of the CAG.
As regards the accounts of public enterprises and departmental commercial organisations, accounting standards are prescribed by the Indian Companies Act and professional accounting bodies. The Institute of Chartered Accountants of India accordingly has issued accounting standards which are implemented where relevant in this context. A representative of the CAG is generally associated with the standards setting process.
Figure 2
Initially the CAG had the responsibility of compiling and maintaining the accounts of the Union and the States. He has now been relieved of this responsibility for the Union. The annual accounts in relation to Railways, Defence, Post and Telecommunications are produced by the respective departments of the Government of India. The Appropriation Accounts of the remaining departments and the Finances Accounts of the Government of India as a whole are produced by the Ministry of Finance. Responsibility for the production of the annual accounts of the State Governments is vested in the Accountants General, who are officers under the CAG.
11.1 STEPS IN THE ACCOUNTING PROCESS
In view of the vast size of the country and widespread activities of the government, both at the Union and the State levels, the task of maintaining Government Accounts is indeed a formidable one. The process involves:
Accounts, as elsewhere, are a systematic record of various activities and functions expressed in financial terms and maintained by activity centres. Such accounts are classified as initial accounts. In the States they are maintained at the level of Sub-Treasuries and Treasuries. (A Treasury corresponds broadly to one administrative unit of a State known as 'District' and each 'District' has a number of Sub-Treasuries broadly corresponding to sub-divisions of a District). In India the Treasuries were formerly very important units of the fiscal system, and the points at which the public accounts originated. Into these financial centres were paid the receipts of government and from them were disbursed payments on behalf of the Government. Until the introduction of a new system (discussed later) and marked spread of government-owned banks, Treasuries and Sub-Treasuries were widely dispersed, functioning as bankers to the government, with the Reserve Bank of India at the apex. Later another major bank of the country (State Bank of India) commenced operations with many branches as a supplementary agency of the Reserve Bank of India. The cash balances of the Treasuries formed part of the Government Account.
After 1975, two major developments took place :
As previously mentioned, prior to 1976 responsibility for compiling and consolidating the accounts was not vested in executive departments but in the Accountants General under the aegis of the CAG (except in the case of Defence Department, Railways and a few other departments). With the formation of the new departmental accounting organisation, the responsibility of the Accountants General to maintain the accounts of Union Civil Departments was transferred to the former.
Before these developments took place, the revenue and other receipts and the payments made from Treasuries were recorded and compiled into two separate accounts for the transanctions of (i) the Union Government, and (ii) the State Governments. The classification of each item of receipt and payment according to its functional and administrative unit was made by the departmental offices. A list of payments (supported by payment vouchers) was sent by the Treasury Officers to the Accountant General twice a month and that of receipts once a month. Detailed rules were framed for the payment of moneys into and withdrawal of moneys from the Treasuries and their accounting.
In the case of departments-such as Railways, Posts and Telegraphs, Defence, Public Works and Forest-the receipts realised were paid into the Treasuries in total and accounted for only as receipts of those departments. The detailed accounts of such receipts were kept by the departmental offices concerned. Similarly, sums withdrawn from the Treasuries (or a linked bank) by those departmental offices appeared in the Treasury accounts merely as payments on behalf of those departments-detailed accounts being maintained by the departmental offices. From the initial accounts supported by payment vouchers rendered by the various treasuries and other departmental offices, the Accountants General compiled and consolidated the accounts in the form of Appropriation and Finance Accounts.
The accounting position changed considerably after 1976. While the Accountants General, as functionaries of the CAG, are still compiling and maintaining the final Government Accounts at the State level, the responsibility at the Union level no longer lies with the Accountants General. This has been transferred to a separate functionary, namely, the Controller General of Civil Accounts. Similarly functions of the Treasuries and Sub-treasuries, as recipients and disbursers of cash, have largely been transferred to the banks, while at the Union level the Treasuries have practically ceased to play any effective fiscal role.
The Government Accounts have necessarily to comply with the budgetary structure of the country. Since budgets in India are on an annual basis, governmental transactions are also finalised in the accounts on an annual basis. However, the government Accounts of each financial year are kept open for a certain period in the following year for adjusting transactions which took place in the previous financial year. This is considered necessary in order to allow certain inter-departmental adjustments, corrections of misclassifications, clearance of certain transitory heads (Suspense Heads), and other relevant adjustments.
11.2 FORMAT OF THE PUBLIC ACCOUNTS
FINANCE ACCOUNTS : These accounts show the receipts and outgoings of the government for the year, together with the financial results disclosed by the revenue and capital accounts, the accounts relating to public debt, and liability and assets of the government. The Finance Accounts are generally prepared in two parts:
Part I - Summarised Statements
Part II - Detailed Accounts and Other Statements.
APPROPRIATION ACCOUNTS : These are accounts of the expenditure, voted and charged, of the government for each financial year compared with the amounts of the voted grants and appropriations charged for different purposes as specified in the schedules appended to the Appropriation Acts. These accounts are complementary to the above accounts of the annual receipts and disbursements of government (Finance Accounts).
COMBINED FINANCE AND REVENUE ACCOUNTS OF THE CENTRAL AND STATE GOVERNMENTS IN INDIA : These present the accounts of all governments in India on a common and comparable basis. They are prepared by the CAG, mainly from the figures contained in the respective Finance Accounts of the governments concerned.
12.1 ROLE OF THE SAI
With the advent of the planned era in India following national independence, there was a major growth of economic development and social welfare activities. This growth necessitated an attendant increase in both revenue and capital expenditure, and in receipts and borrowings to match such expenditure. These new responsibilities of the government and the complex nature of its expanded activities called for a change in the nature and scope of audit. Consequently audit by the SAI has evolved from an accountancy and regularity check to evaluation of the end results of the operations of government, including considerations of economy, efficiency and effectiveness.
The audit by.the SAI is conducted under a Planned Programme covering the accounts, systems, procedures, projects and programmes on the basis of the documents and information submitted to the Indian Audit and Accounts Department. Field audits of the various organisations involved are an essential part of the overall programme. The initial audit findings are taken up with the appropriate authorities for remedial action through audit notes and inspection reports. Important audit findings, performance reviews of projects and programmes, and comprehensive appraisals of public enterprises and other bodies and authorities are processed for inclusion in the reports of the CAG which are laid before the Parliament or the State Legislatures as the case may be. Apart from the certification of the Appropriation Accounts and Finance Accounts of the Union and of 25 States and submission of separate audit reports on about 260 statutory corporations and other autonomous bodies for which the CAG is the sole auditor, the CAG brings out a large number of reports every year. These reports are of the following categories:
| Union | States |
| Civil | Civil |
| Defence | Receipts |
| Railways | Commercial |
| Posts and Telecommunications | Autonomous Bodies |
| Direct Taxes | |
| Indirect Taxes | |
| Scientific Departments | |
| Autonomous Bodies | |
| Commercial |
The reports of the CAG after presentation to the legislature concerned are remitted to the related committees of Parliament and Slate Legislatures for consideration and appropriate recommendations to the executive for remedial action which is further followed up by the committees.
12.2 THE PARLIAMENTARY COMMITTEES
Though Parliament itself does not govern the country, it exercises supervision over executive action in various ways through the purposive use of parliamentary procedures and a system of committees, although there is no constitutional provision for such committees of Parliament. As mentioned earlier, Parliament has set up three financial committees, viz. Public Accounts Committee (PAC), Committee on Public Undertakings (COPU) and the Estimates Committee, to assist effective parliamentary control over public finance.
The PAC examines the accounts showing the appropriation of sums granted by the House fort he expenditure of the Government of India, the annual finance accounts of the Government and such other accounts laid before the House as the Committee may think fit. Since 1962-63 the Committee has also examined the revenue receipts.
In scrutinising the Appropriation Accounts of the Government of India and the Report of the Comptroller and Auditor Genera! thereon, it is the duty of the Committee to satisfy itself that :
Even though the Parliament discusses the budget estimates for a sufficiently long period, there is often neither the time nor the flexibility to discuss the details and the technical aspects of the estimates. The Estimates Committee was therefore constituted to examine the estimates. The functions of this committee are detailed in Section 5.1 of this chapter.
Thirdly, COPU examines the reports and accounts of the public undertakings, including the audit reports of the CAG thereon. It is the function of this Committee to see whether the affairs of the public undertaking are being managed in accordance with sound business principles and prudent commercial practices.
The reports of the various committees are presented to the Parliament. The Government is required to inform the PAC/COPU within six months of the action taken by it on the recommendations of the committees. The committees, in turn, consider the Government's replies and present their further report known as the 'Action Taken Reports' incorporating their views on the action taken by the Government.
An adhoc committee, known as the Railway Convention Committee, is also constituted to review the rate of dividend which is payable by the railway undertaking to the general revenues in addition to other ancilliary matters in connection with railway finances vis-a-vis general finances, and make recommendations thereon.
12.3 OTHER AGENCIES
The Department of Public Enterprises of the Government of India analyses and monitors the annual performance of each public enterprise within the jurisdiction of COPU and submits to the government and parliament a combined annual performance appraisal of the public enterprises.
The Planning Commission undertakes selective monitoring covering major projects/programmes and important sectors. It also reviews the progress of the plan each year mainly in financial and some times in physical terms based on the detailed information obtained from central ministries and state governments during the formulation of the annual plan for the next year. The results of this review are given in the annual plan document. In addition the Commission brings out the mid term review of the Five Year Plans.
In India financial accountability and fiscal management systems covering budgeting, accounting and auditing, have evolved over more than a century.
This evolution has been in response to the changes in the political, social and economic environments nationally during this period. However the budget as an instrument of planned development and accounting as an aid to decision-making are relatively new concepts. Similarly, the transformation of audit from a relatively simple device to ensure mere regularity of government expenditure against budget appropriations in a colonial situation to an important organ of the democratic polity, engaged in sophisticated performance evaluation of public financial operations in a planned economy, is a phenomenon of post-Independent India.
Future reforms in the systems will have to address, among other things, the development of comprehensive management accounting and information systems capable of achieving effective financial control and accountability. With the vast increase in the financial transactions and their reflective activity centres adequate and reliable internal audit arrangements have to be instituted or strengthened. Further, a climate conducive to appropriate administrative responsiveness to the requirements of effective financial management, accounting and auditing will have to be created.