Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
CONTENTS
Section 1.Theme One: Strengthening PFM Legal And Institutional Framework
1.1Legal and Institutional Framework
1.2Fiscal Responsibility Legislation In Karnataka
1.3Updating PFM Manuals and Codes
1.4Strengthening Internal Financial Advisors
Section 2.Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
2.1Budget Process
2.2Passing Full Budget before start of the Year
2.3Comprehensiveness of Budget Documentation
2.4Credibility of Budget – Expenditure Outturn and Composition
2.5Credibility of the Budget- Revenue Forecasting and Outturn
2.6Supplementary budgets
2.7In-year Adjustments to Budget Allocation – Rules of Re-Appropriation
2.8Predictability of Availability of Funds
2.9Estimation of Salaries
2.10Managing Public Investment Funding
2.11Rationalization of Schemes
2.12Departmental Medium Term Fiscal Plans
2.13Strengthening Legislative Scrutiny of Budget
Section 3.Theme Three: Strengthening Accounting, Reporting, Controls, and Transparency
3.1Accounting and Reporting
3.2Treasury Management
3.3Cash Management
3.4Subsidies- Targeting, Accountability and Transparency
3.5Payroll Controls - HRMS
3.6Procurement (KTTP and E-Procurement)
3.7Public access to Key fiscal information
Section 4.Theme Four: Improving Fiscal Assets and Liability Management System
4.1Government Guarantees
4.2Off Budget Borrowings
4.3Investments in Government Companies
4.4Debt Management Recording and Reporting
4.5Loans and Advances
4.6Monitoring Arrears of Payments
4.7Unencashed Cheques
Section 5.Theme Five: Strengthening Audit and Legislative Oversight
5.1Effectiveness of Internal Audit
5.2External Auditing - Responsiveness
5.3Strengthening Karnataka State Accounts & Audit Department (KSAD)
5.4Legislative Review – External Audit
Section 6.Theme Six: Improving PFM in Local Self Governments
6.1Local Self Governments - Overview
6.2Urban Local Bodies and PRIs – Common Issues and Recommendations
6.3Urban Local Bodies –Recommendations
6.4Panchayat Raj Institutions –Recommendations
6.5Accounting Reforms - Urban Local Bodies
6.6Accounting Reforms – Gram Panchayats
Section 7.Theme Six: Improving PFM in State Owned Enterprises (SOE)
Section 8.2014 Reform Action Plan – Suggested Next Steps
Section 9.Annexures
9.1Assessment of internal audit function in Karnataka – C&AG
9.2Note On Internal Audit Practices in GOI and other States
9.3Note on Legislative committees
9.4Note on IFMIS
LIST OF TABLES
Table 1: Legal Framework of Public Financial Management in Karnataka
Table 2: Numerical Rules in Karnataka Fiscal Responsibility Act and status of compliance
Table 3: Budget Documentation 2013-14 in GoK
Table 4: Comprehensiveness of information included in Budget Documentation in GoK
Table 5: Budgeted vs. Actual expenditure of GoK, net of debt service
Table 6: Primary and Compositional Expenditure Variance
Table 7: Compositional Expenditure Variance of > 5% in GoK Departments
Table 8: Transactions in the Contingency Fund
Table 9: Budgeted and Actual Revenue of GoK
Table 10: Comparison of RE and Actuals with Original Budget
Table 11: Revenue out turn of Own Resources compared to Original Budget
Table 12: Revenue Outturn for Commercial Tax Department
Table 13: Revenue Outturn for Excise Department
Table 14: Supplementary Estimates as a percentage to Original Estimates in GoK
Table 15: Karnataka - Original and Supplementary Estimates and Savings
Table 16: Financing the Supplementary Estimates
Table 17: Powers of Re-appropriation in GoK
Table 18: Trend of issue and quality of Re-appropriation Orders in GoK
Table 19: Delegation of Financial Powers presuming concurrence of Finance Department
Table 20: Actual Expenditure as % of total for the quarter and cumulative
Table 21: Decrease in Rush of Expenditure
Table 22: Pace of Expenditure in Government of India
Table 23: Public Investment or Plan Expenditure in GoK
Table 24: Status of IGAS and IGFRS
Table 25: Progress of Reconciliation of Revenue and Expenditure
Table 26: Personal Deposit Accounts not closed at end of financial year
Table 27: Outstanding Utilization Certificates
Table 28: Outstanding Utilization Certificates in Sample States
Table 29: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Govt. of Karnataka
Table 30: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Sample States
Table 31: Key Recommendations made by XIII CFC for Disclosure in Budget/Finance Accounts
Table 32: Modules of KII
Table 33: Cash balances of GOK
Table 34: Major Explicit Subsidies in Karnataka
Table 35: Comparison of KTTP with Rajasthan Procurement Act
Table 36: Details of progress in e-procurement
Table 37: Public availability of year-end financial statements
Table 38: Public availability of State External Audit Reports in Karnataka
Table 39: Aggregate Guarantees Issued and Outstanding
Table 40: Off Budget Borrowings in SOE/SPVs of Government of Karnataka
Table 41: Provision of Debt Servicing in State Budget for Urban Local Bodies
Table 42: Book Value of Investments of Government of Karnataka
Table 43: Reconciliation issues in Investments
Table 44: Borrowings or Public Debt of Government of Karnataka
Table 45: Public Debt level (Total Liabilities) prescribed by KFRA compared to actual (percent of GSDP)
Table 46: Debt Sustainability Analysis conducted by the C & AG for GoK
Table 47: Institution-wise outstanding of Loans and Advances in GoK
Table 48: Arrear of Expenditure Bills in Public Works Department, Karnataka
Table 49: Unencashed cheques under major head 8670
Table 50: Effectiveness of Internal Audit
Table 51: Status of Compliance of Inspection Reports – Revenue Sector
Table 52: Status of reply to Draft Audit Paras
Table 53: Status of pending Action Taken Reports
Table 54: Status of Meetings of Audit Ad Hoc Committees
Table 55: Pendency of Revenue leakage reported by C&AG in Commercial Tax Department
Table 56: KSAD strengths and weakness
Table 57: Status of outstanding audits as on 31.03.2014
Table 58: Mandate of Legislative Committees for review of external audit reports
Table 59: Financial assistance to ULBs & PRIs (Rs. in crores)
Table 60: Accounts and audit report – Current Status
Table 61: GPs Accounts Current Status in Panchatantra
Table 62: Profile of SOEs in Government of Karnataka
Table 63: PFM Issues in Karnataka PFM – Status of 2004 PFMA Recommendations
Table 64: Action and suggested next steps for implementation
Table 65: Year wise Number Reports issued by CoPA
Table 66: Year wise Number of Hearings held by CoPA
Table 67: Year wise Number of Hearings held by CoPU
ACRONYMS
AFS / Annual Financial Statements / IFA / Internal Financial AdvisorsAG (A&E) / Karnataka Accountant General (Accounts and Entitlement) / IFAC / The International Federation of Accountants
AG (Audit) / Karnataka Accountant General (Audit) / IFMIS / Integrated Financial Management Information System
ALMC / Asset Liability Monitoring Cell / IGAS / Indian Government Accounting Standards
AMS / Audit Monitoring System / IGFRS / Indian Government Financial Reporting Standards
ATR / Action Taken Report / IPSAS / International Public Sector Accounting Standards
BE / Budget Estimates / KBM / Karnataka Budget Manual
C&AG / Comptroller and Auditor General (India's Supreme Audit Institution) / KFC / Karnataka Financial Code 1958
CCO / Chief Controlling Officer / KFRA / Karnataka Fiscal Responsibility Act, 2002
CGA / Comptroller General of Accounts / KII / Khajane II
CoLB / Committee on Local Bodies and Panchayati Raj Institutions / KPR Act / Karnataka Panchayat Raj Act, 1993
CoPA / Committee on Public Accounts / KSAD / Karnataka State Accounts Department
CoPU / Committee on Public Undertakings / KTC / Karnataka Treasury Code 1963
CSS / Centrally Sponsored Schemes / KTTP Act / Karnataka Transparency in Public Procurement Act, 1999
CTD / Commercial Taxes Department / LOC / Letter of Credit
DCB / Demand Collection Balance / MCE / Manual of Contingent Expenditure 1958
DDO / Drawing and Disbursing Office / MIS / Management Information Systems
DEAS / Double entry accrual based accounting system / MTFP / Medium Term Fiscal Plan
DMA / Directorate of Municipal Administration / NLTA / Non-Lending Technical Assistance
DMTFP / Departmental Medium Term Fiscal Plan / OBB / Off Budget Borrowings
DoFP / Delegation of Financial Powers / PAC / Public Accounts Committee
DOT / Directorate of Treasuries / PD Account / Personal Deposit Account
DPAR / Department of Personnel & Administrative Reforms / PEFA / Public Expenditure and Financial Accountability
DPE / Department of Public Enterprises / PFMA / Public Financial Management and Accountability
DRSC / Departmentally Related Standing Committees / PMS / Project Management Software
DSS / Directorate of Small Savings / PPP / Public Private Partnership
EIU / Economic Intelligence Unit / PRI / Panchayat Raj Institutions (Rural Local Governments)
ERC / Expenditure Reforms Commission / PSE / Public Sector Enterprises
FC / Central Finance Commission / SOE / Public Sector Undertakings
FD / Finance Department of GoK / PWD / Public Works Department
FMRC / Fiscal Management Review Committee / RBI / Reserve Bank of India
FRBM / Fiscal Responsibility and Budget Management Act, 2003 / RDPR / Department of Rural Development and Panchayati Raj
FRL / Fiscal Responsibility Legislation / RE / Revised Estimates
FY / Financial Year / RTI Act / Right to Information Act, 2005
GASAB / Government Accounting Standards Advisory Board / SE / Supplementary Estimates
GDP / Gross Domestic Product / PFMA / State Finance Accountability Assessment
GFS / Government Finance Statistics / SFC / State Finance Commission
GIA / Grants in Aid / SPV / Special Purpose Vehicles
GoI / Government of India / TP / Taluk Panchayats (Block level Rural Local Government)
GoK / Government of Karnataka / UC / Utilization Certificates
GP / Gram Panchayats (Village level Rural Local Government) / UDD / Urban Development Department
GSDP / Gross State Domestic Product / UID / Unique Identification
HoD / Head of Department / ULB / Urban Local Bodies (Urban Local Governments)
HRMS / Human Resource Management System / VOA / Vote on Account
IAW / Internal Audit Wing / WRD / Water Resources Department
IDF / Institutional Development Fund / ZP / Zilla Panchayats (District level Rural Local Government)
Page 1
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 1.Theme One: Strengthening PFM Legal And Institutional Framework
1.1Legal and Institutional Framework
Framework of key PFM Institutions in Karnataka
- Karnataka follows a parliamentary system of governance, modeled on the Westminster system, with three distinct branches of government namely the Legislature, the Judiciary and the Executive. Karnataka has a bi-cameral Legislature consisting of two Houses: the Legislative Assembly comprising of members directly elected through adult franchise, and the Legislative Council with members elected or appointed by various groups through an electoral college[1]. The Governor, who is the constitutional Head of State, is appointed by the President of India. The Council of Ministers, headed by the Chief Minister, exercises all executive powers of the state. The Chief Secretary is the head of the administrative service.
- The State Government is organized by departments primarily on functional lines. There are 37 departments under 28 Administrative (or Secretariat) Departments dealing with subjects such as finance, planning, public works, health, education, social welfare, and energy. These Administrative departments are responsible for policy formulation and also oversee the “field” departments attached to them. Each Administrative department is headed by a Principal Secretary or Secretary (an officer of the Indian Administrative Services – IAS), who reports to one or more ministers. Administratively, Karnataka is divided into four revenue divisions (Bangalore, Mysore, Belgaum and Gulbarga), 49 sub-divisions, 30 districts (headed by a Deputy Commissioner of a District Magistrate from the IAS), 176 Taluks (or blocks) and 5630 Gram Panchayats. Other institutional agencies include the urban and rural local bodies, government companies, statutory corporations, boards and authorities and societies.
- The key departments, positions and other internal and external institutions that influence PFM in the state are:
- The Finance Department has a Principal Secretary as head of the department. The Finance Department has overall responsibility for fiscal and financial management, including fiscal policy, aggregate fiscal management, budget formulation and administration, cash management, debt management (asset liability monitoring), and financial reporting. The Finance Department also manages the Treasury (which is a big contributor to PFM) which handles receipts and payments for the State Government. The Finance Department has several major departments under its fold such as commercial taxes, excise, insurance, pension, and small savings.
- The Planning Department[2] has a Principal Secretary as the head of the department that is divided into several divisions (such as plan finance and resources, human development, plan monitoring and information and project formulation) is involved in allocating and approving Plan expenditure, which represent about 40% of total expenditure of the state. The Planning department produces the five-year and annual plans of the state and also spearheads the preparation of the annual Economic Survey of the State.
- The Heads of the Departments - HoD (usually Principal Secretaries or Secretaries) are principal officers responsible for their departments’ activities, for the proper use of funds, and for internal controls within their departments. Departments are responsible for monitoring adherence to budgets, for performance, and for authorizing payment of expenditures. PFMA functions in the departments are looked after by an Internal Financial Advisor (in some of the major departments) or financial advisors deputed from the Finance Department/Karnataka State Accounts Department. The day to day PFM responsibilities are primarily with Drawing and Disbursing Officers (DDO) at all levels of each department who is responsible for all expenditure in the designated office and the main link between the department and the Treasury.
- The State Finance Commission (SFC) constituted under the Constitution of India (Article 243) every five years recommends the principles for the distribution of the net proceeds of the taxes, duties and fees, and grants to be provided by the State to the urban and rural local bodies. In Karnataka, three SFCs have submitted their reports, and the recommendations influence PFM in urban and rural local bodies.
- The Comptroller and Auditor General of India (C&AG) through the offices of the Principal Accountant General – Accounts and Entitlement (PAG – A&E) and Audit (PAG – Audit) play a major role in the PFM environment in the state. The PAG (A&E) is vested with the accounting function of the state it compiles the accounts of Karnataka, and prepares the monthly accounts, and annual accounts of the State Government – the Finance Accounts and Appropriation Accounts – that are tabled in the State Legislature post audit. The AG (Audit) is the external auditor of the government and audits all government departments and entities except the ULBs and Gram Panchayats. The reports of the AG (Audit) provide an account of the working of PFM, and the main reports (six such reports are issued every year) are tabled in the State Legislature. The external independent audit of the local bodies (such as ULBs, Gram Panchayats, universities and funds) is vested in the Controller, Karnataka State Accounts Department (KSAD).
- KSAD is one of the key departments of GoK which supports both accounting and auditing functions[3] for GoK. KSAD functions under the direct control of the Finance Department and is headed by a Controller who is a senior KSAS staff. It provides accounting support function to all departments across the State and auditing services to those organizations which are not audited by C&AG.
- The audit reports of the C&AG and KSAD are subject to Legislative scrutiny by three committees of the Legislature namely the Committee on Public Accounts (CoPA or the Public Accounts Committee – PAC), Committee on Public Enterprises (CoPU) and Committee on Local Bodies (CoLB) and all these oversight bodies have significant influence on PFM as they enforce follow-up of and compliance with audit reports.
Legal Framework for PFM
- The Constitution of India provides the guidance on several aspects of PFM in state governments in India supplemented by the Government of India and the C&AG. The Constitution inter alia: (i) establishes a central role for the State Legislature in authorizing and overseeing the use of public funds; (ii) requires annual budgets to be presented to the State Legislature, and mandates reporting against these budgets; (iii) appoints the C&AG as the auditor for all states as well as the central government; and (iv) regulates domestic borrowings by state governments (and bars external borrowing).
- The PFM structures in Karnataka are embodied in its Budget Manual, Financial Rules and Treasury Code and in the Karnataka Fiscal Responsibility Act, 2002, the Ceiling on Guarantees Act, 1999 and Karnataka Transparency in Public Procurement Act, 1999 that cumulatively contain principles covering budgeting, revenue and expenditure, delegation of authority, accounting, procurement, pay, allowances & pensions, stores, works etc. and are supplemented through circulars issued from time to time. These primary documents are supplemented by Government Orders, the Public Works Department Code, the departmental office procedures and other notifications/circulars issued. Table 1tabulates the legislation, rules, manuals and other key directions that influence PFM in the state.
Table 1: Legal Framework of Public Financial Management in Karnataka
PFM Legislation and Documents / Issued under Authority / PFM Area- Legislation
- The Karnataka Fiscal Responsibility Act, 2002 as amended up to 2011
- The Karnataka Ceiling on Government Guarantees Act, 1999
- The Karnataka Local Fund Authorities Fiscal Responsibilities Act, 2003