SESSION 5:

Session Learning Objectives:

At the end of the session, the participants will be familiarized with key points of recommendation of high level expert committee on efficient management of public expenditure headed by Dr. C. Rangarajan and fund flow mechanism and concepts thereon will be clearer to them.

Session Overview:

In this session, we will discuss:

The key points of. Recommendation Of High Level Expert Committee On Efficient Management Of Public Expenditure Headed By Dr. C.Rangarajan, Comprehensive Framework For Thorough Overview Of Transfers To State, Central Plan Scheme Monitoring System (CPSMS), Change In Classification Of Budget And Accounts, Transfer Of Funds To States/District Level Bodies And Accountability Concerns, Modes Of Fund Transfer Under CSS (Fund Flow Mechanism), Auditing Arrangements.

Session Structure:

1. Recommendation Of High Level Expert Committee On Efficient Management Of Public Expenditure Headed By Dr. C.Rangarajan

2. Comprehensive Framework For Thorough Overview Of Transfers To State

3. Central Plan Scheme Monitoring System (CPSMS)

4. Change In Classification Of Budget And Accounts

5. Transfer Of Funds To States/District Level Bodies And Accountability Concerns

6. Modes Of Fund Transfer Under CSS (Fund Flow Mechanism)

7. Auditing Arrangements

Exercise and Group discussion

Background:

The 11th Plan document raised several conceptual issues arising out of the present structure ofplan financing. The classification of expenditure has an important bearing on the overallexpenditure management. The distinction of expenditure into Plan and Non-Plan categories hassignificant implications for efficient management of public expenditure. The revenue and capitalcategorization also requires a fresh look in the post-FRBM scenario in view of the need forsubstantial resource transfers to States and local bodies. The transfer of Central resources toStates through various types of schemes and multiple modes of transfer have posed problems inobtaining a comprehensive overview of transfers to States as well as in effective monitoring ofexpenditure. There are also issues concerning accountability of funds directly transferred toimplementing agencies in States. The Eleventh Plan document also referred to innovativemethods of financing of projects such as public private partnerships and new administrativemechanisms of implementation and the need, in this context, to clarify the scope of the publicsector plan. In response to these issues, Planning Commission set up a High Level ExpertCommittee under the Chairmanship of Dr.C.Rangrajan, to suggest measures for the efficient management of public expenditures.

COMPREHENSIVE FRAMEWORK FOR THOROUGH OVERVIEW OF TRANSFERS TO STATE:

BACKGROUND

  • The resources flow from Centre to Statesby way of assignments and transfers. The States'share in central taxes (tax devolution) is anassignment.
  • The transfer of resources from theCentre to States may also be classified as Non-Plan and Plan transfers.
  • The Non-Plan transferscomprise (1) finance commission grants and (2)other Non-Plan grants.
  • The important plan grantsthat are transferred from Centre to the States areof four types:

State Plan Schemes that includeNormal Central Assistance (NCA) and otherScheme based Central Assistance (CA)-which arealso known as ACA Schemes;

CentrallySponsored Schemes (CSS) for which funds arerouted through consolidated fund of States and

Centrally Sponsored Schemes (CSS) forwhich funds are transferred directly to State/DistrictLevel Autonomous Bodies/Implementing

Agencies and

A small portion of FC grantstreated as plan grants.

  • In addition, the CentralMinistries also implement some schemes directlyin States/UTs which are called Central SectorSchemes but resources under these Schemes arenot generally transferred to States.
  • Among theplan transfers, the distribution of the NormalCentral Assistance is formula based (Gadgil-Mukherjee formula is used) and untied, but fundsmade available under other State Plan (ACA) orCSS are tied to schemes in particular sectors andare subject to centrally prescribed guidelines. Thechart below provides a glimpse of different typesof central resources (Plan and Non-Plan) beingassigned/transferred to States.
  • The Non-Plan transfers such as financecommission grants and other Non-Plan grants aretransferred to the States through treasury route.As regards plan schemes, resources aretransferred through treasury route or directtransfer/society route. A clear framework isneeded for a comprehensive view of the totaltransfers to States and accounting and reportingissues linked to these transfers. This issue isintimately connected to the budget and accountclassification.

PRESENT STATUS

  • A major problem faced by the ControllerGeneral of Accounts today is in generatingscheme-wise information from the accountingclassification due to absence of a one to onecorrespondence with schemes and heads ofaccounts. As a result, the Demands for Grant andthe accounts do not explicitly present budgetaryallocations and outruns on plan schemes andsometimes culling out this information mayrequire extensive manual intervention.
  • The existing system of classification dividesthe Consolidated Fund of India into Revenue andCapital Sections and requires that all expendituresbe categorized into these two broad divisions atthe highest level. At the operational level, allexpenditures are classified using a six-tierhierarchical classification structure, which is asunder:

Major Head - represents majorfunctions of the Government

Sub-Major Head - represents sub-functions of the Government

Minor Head - represents programmesof the Government

Sub Head - represents schemes

Detailed Head - represents sub-schemes and

Object Head - represents the economictype of expenditure.

  • Under this system of classification,functions are repeated under the Revenue, Capital,and Loans sections.
  • Transfers to States arerecognized separately under a common head.
  • Thus, if a plan scheme has components of revenueand capital expenditure incurred directly by theCentre and also has transfers (including loans) toStates/UTs, the data in the accounting books willbe scattered under a number of heads and requirestremendous manual effort in aggregation togenerate scheme-wise information. Thus,considerable effort is required to translateaccounting information into plan formats. Also,there is no standardization in classification ofschemes under different Major heads. Often, ascheme appearing under more than one majorheads is represented through different codes underdifferent Major heads. This lack of uniformityfurther complicates computerized processing ofdata.
  • A related issue is absence of explicitrecognition of plan schemes at the appropriatelevels in the classification structure. Someschemes, despite having significant outlays, arenot reflected at Minor Head level and, therefore,do not get explicitly reported in the FinanceAccounts.
  • A significant proportion of UnionGovernment expenditure takes place in the formof transfers to
  • States.These transactions are recorded under the Major Heads 3601 and 3602.The sub-classification under these heads has notkept pace with the changing pattern of planassistance. Also, there is no provision to showState-wise breakdown of such transfers. Thislacuna leaves several information gaps in theaccounts, in so far as this area is concerned.
  • Similarly, heads like 3601-Grant-in-Aid to Statesalso interfere with the functional requirementwhere even grants for urban development(JNNURM) or Irrigation (AIBP) is classifiedunder this head. Actually, Grants-in-Aid shouldbe only an object head.
  • Further, functional heads should be reallyfunctional and any other dimension should notinterfere with this quality. For example, there isno reason why a functional major head like 2552-North Eastern Areas, exists as it does not signifyany function of the Government. Increasingly,since there has been an expressed identified needof demarcating the expenditure of theGovernment on North Eastern Area, evenexpenditure on education in North Eastern areasis shown in the budget under 2552. This is ageographical attribute camouflaged as functionalattribute.
  • The minor head is a very critical level andneeds an extensive review. There has to be somelevel of budgeting and accounting that relates tobroad objectives of the Government for a givenfunction to which eventually outcomes can belinked. This would also enable reporting on costincurred by Government under various items ofexpenditure for a particular objective and toachieve a desired outcome. This purpose can beserved at the minor head and the minor headshould align with broad objectives of theGovernment for the function represented by themajor/sub-major head. Below minor head, canbe schemes represented by sub heads and detailedheads that have been taken up to meet theparticular objective indicated by the minor head.
  • Thus, while Education can be a major head,elementary education may be a sub major headunder education (as it is today) anduniversalization of primary education may be aminor head. Schemes like Sarva Shiksha Abhiyanand Mid-Day Meals scheme should be below thisminor head. It also may happen that a scheme istargeted towards more than one main identifiableobjectives of the Government. In such a case, thescheme should separately be shown under all therelevant minor heads with separate allocations.
  • A related issue is non-reporting / nonavailability of information in the State FinanceAccounts of significant amount of resources beingdevolved on States through direct Centralassistance outside the State Consolidated Funds.The problem gets compounded due to lack ofuniform coding for plan schemes across theStates. There have been suggestions to introduceuniform accounting codes for all plan schemesacross the Union and the States so that eachscheme is identified uniquely throughout thesystem. This is seen to help consolidateinformation on plan expenditures incurred at thegrass-root level and correlate actual expenditureswith the Central releases.
  • To ensure that this system works withoutdistortions, there are certain prerequisites. Thefirst is that the integrity and compliance of theclassification maintained is impeccable. For this,it has to be ensured that the initial set ofaccounting heads are as exhaustive as possibleand any addition to this set is done only aftercareful consideration and ensuring that theaddition meets the basic principle of accountingclassification. Then, whenever a new item ofexpenditure is added, its classification needs tobe correctly decided as per the classificationstructure laid out and finally, wheneverexpenditure is incurred, it is classified under thecorrect head. Lack of such effort has made headslike "other items" and "other expenditure" as themost commonly used heads.
  • Another issue that leads to weakening ofthe accounting classification is the structure ofFinance Accounts. As of now, the FinanceAccounts show the expenditure details up to theminor head level across all sectors. This is one ofthe reasons for bringing major schemes, or anyother set of expenditure for which there has beena demand to be reported separately in the FinanceAccounts, to the minor head level since this waythey can find place in the Finance Accounts as aseparate entry. There is no reason why the FinanceAccounts should report expenditure till the minorhead uniformly. Finance Account can bereformatted in a relatively flexible format wherethe detailing should depend on the importance ofthe line item. This way, the classificationhierarchy need not adjust to the reportingrequirement.
  • The sixth tier denoted by the object head,is the most important tier of accounting. Itprovides another dimension to the accountingclassification common across the entire spectrumof functional classification. This classification isvery important to ascertain the nature ofexpenditure under each scheme. Thus, this tier isvery important for distinguishing expenditure onsalaries, establishment, travel, subsidies, grant-in-aid, major and minor works, maintenance,materials and supplies etc. Since the object headsare common, they provided consolidatedinformation on the expenditure of Governmenton each of the class across a collection of schemes.This classification is essential to indicate the costof inputs in delivering a service or a certain set ofservice and achieving a certain set of objectives.
  • Planning Commission has also beensuggesting that accounting classification shoulddistinctly recognize the various categories oftransfers, namely, (a) untied transfers, (b) grantsfor specific purposes against which States are notrequired to submit utilization certificates, and (c)advances for incurring expenditure that requiresubmission of utilization certificates. Suggestionshave also been made that the grants under
  • Centrally Sponsored Schemes to States and othersub-national implementing agencies be shown inthe books of Union Government as 'Transfers'and not as 'Expenditure'.
  • A uniform coding is expected to facilitateidentification of each scheme uniquely throughoutthe system of devolution of money from theCentre to the grass-root level agencies and helpconsolidate information on plan expendituresincurred at the grass-root level and correlate actualexpenditures with the central releases.

CENTRAL PLAN SCHEME MONITORING SYSTEM (CPSMS)

  • One of the major actions taken to mitigatethis challenge has been the inception of theCentral Plan Scheme Monitoring System(CPSMS). The Central Plan Scheme MonitoringSystem (CPSMS) is being currently setup by theController General of Accounts in collaborationwith the Planning Commission to serve as acomprehensive management information anddecision support system for monitoring of the planschemes of the Government. A web-basedapplication has been developed and deployed bythe CGA for real time on-line tracking of fundsdisbursed by the Union Government undervarious development schemes. CPSMS has thechallenging task of integrating tens of thousandsof implementing agencies through a commonsystem, so that fund movement is tracked at eachsuccessive stage starting with the initial releasefrom the Centre till the money actually reachesthe ultimate beneficiaries.
  • CPSMS portal is operational now. Over1000 plan schemes of the Government of Indiahave been mapped on this system and more than75,000 sanctions for release of funds have beencaptured. Nearly 20,000 programmeimplementing agencies have been registered withthe system. Ministry-wise, Scheme-wise, State-wise, District-wise, NGO-wise, Individual-wisedata of releases from GOI are now centrallyavailable on CPSMS on a real-time basis. Withthis, CPSMS now has complete information onreleases made by the Union Government.
  • A unique feature of CPSMS is its closeinterfacing with the banking network in thecountry. In a way, it is designed to link with theCore Banking Solution (CBS) of the individualbanks to obtain information on movement offunds from one level to another and from oneagency to another on a real-time basis. Thisfeature has the benefit to give us the capability tointroduce near 'Just-in-Time' release of funds toimplementing agencies, which can result in hugeefficiency gains from the point of view of cashmanagement.
  • Several major banks in the country haveagreed to join the CPSMS interface and it isexpected that all banks would be part of thisnetwork. With the banks joining in the system,the second phase of the project would capturethe utilization of Central funds by theimplementation agencies. CPSMS also seeks tohave interface with state treasuries and State AGsto obtain real time expenditure information forschemes for which funds are transferred from theCentral Ministries to the consolidated fund of theStates.
  • On full implementation, the system wouldprovide a platform on which the management ateach level would be able to monitor fundutilization under various developmental schemesoperated through treasury route or society route.CPSMS is expected to provide customizedinformation of fund deployment and utilizationvertically under each scheme to programmemanagers and horizontally across schemes in onegeographic area for senior management andpolitical functionaries. Inputs provided by thesystem would be vital for programmemanagement and policy planning.
  • The information on fund utilization is alsoplanned to be placed in the public domain forgreater public awareness, public participation inthe policy making and execution and towardsenhanced transparency in Governmentoperations.

CHANGE IN CLASSIFICATION OF BUDGET AND ACCOUNTS

  • A Committee headed by Controller Generalof Accounts has been constituted by theGovernment recently for revision of the List ofMajor and Minor Heads of Accounts of the Unionand the States. The Committee has representationsfrom the Office of the C&AG, the BudgetDivision, Planning Commission, NationalInstitute of Public Finance and Policy and thestate Governments of Assam, Maharashtra andTamil Nadu. The Committee has been tasked tosuggest a new list of accounting heads inreplacement of the existing list of major and minorheads keeping in view the needs forsimplification, rationalization andstandardization across national and sub-nationalGovernments and improved reporting of transferpayments from one level of Governance toanother.
  • Accordingly, the issues related toaccounting of plan schemes and the need fordeveloping a mechanism which could provide acomprehensive view of the transfers to States areunder active consideration of the Committee.Internally, office of the Controller General ofAccounts is working on a revised classificationstructure, with the objective of simplifying theaccounting of schemes and bridging the existinginformation gaps. The endeavor is to address thestructural deficiencies of the current system anddevelop a new design which will be computerfriendly and which will enable flexible multidimensional views of expenditure data.

RECOMMENDATIONS

  • The Committee has noted that the processfor a comprehensive review in the present budgetand account classification is in an advanced stageand has been circulated to all States with requestsfor furnishing comments. Some of the entitieshave also provided suggestions regarding codingand technical aspects. The comments of thevarious stakeholders are under consideration.
  • The proposed multidimensionalframework with independent hierarchies forevery dimension is a much desired improvementover the current single dimensional structure.The proposed framework may includeindependent dimensions in respect of Functions,Programmes and Schemes, Economic Object,Recipient of funds, Geography and Beneficiary.It should take into consideration proposals putforward by an IMF Mission in 2007 on therequest of the Ministry of Finance and thestructure proposed under UN's Classification ofFunctions of Government[1] (COFOG) andcompatible with Government Statistics andFinance Manual(GSFM, 2001). It willfacilitate easy slicing and dicing of information.Various obstacles posed by current classificationin presenting a comprehensive view of Centralresources transferred to States can be addressedthrough this new framework. For example,functional classification should be trulyfunctional. The economic classification shouldenable all sorts of information to prepareimproved costing of schemes and linking theoutlays/expenditure to outcomes. The recipientclassification may provide State-wise or district-wise information on transfer of resources. It canpotentially provide information even on cashtransfers to individuals. The Committee alsorecognizes that successful development andimplementation of the new classification willrequire adequate consultation with multiplestakeholders, changes in existing software ofCentral and State Governments and widespreadtraining to staff.
  • The Committee recommends that proposedclassification and coding system must provideuniform codes for Central programmes, sub-programmes and schemes which areimplemented in States so that comprehensiveview across the country is facilitated.
  • The Committee recommends that theCPSMS should be extended to enable trackingof utilization of funds for all Central Schemesin all States for which resources are eithertransferred through treasury route or societyroute. There should be a clear distinction betweenreleases of funds and their actual utilization sothat mere releases from a higher level entity to alower level entity are not a subterfuge forexpenditure. The information flow should beseamless, real-time and transaction-based usinginformation technology. This may requireinterface of Central IT systems such as CPSMSwith State treasuries and AG offices as well asCBS of banks. When implemented, it would bepossible to have utilization certificates to belinked with and supported by transaction-levelinformation to ensure tracking of funds up tothe final beneficiary.
  • The Committee is of the view that changesin budget classification and accounting beingworked out by a Committee (headed by CGA)and the new IT interfaces being planned betweenCentral, State and Banks to keep track of resourceflow together have the potential to provide acomprehensive view of the extent of Centralresources transferred to States and their agenciesand their utilization across different Schemes.The same system can also provide similarinformation for schemes of State Governments.The citizens can also be empowered withinformation on flow of resources and utilizationthrough a portal. This will effectively promotetransparency and accountability.

TRANSFER OF FUNDS TO STATES/DISTRICT LEVEL BODIES AND ACCOUNTABILITY CONCERNS