India: Public Financial Management Performance Assessment Report

Posted by Pratap Ranjan Jena (, National Institute of Public Finance and Policy, New Delhi

The PFM Performance Assessment Report for India (Download INDIA_PEFA2010[1]) at the central Government level (carried out during the period March 2009 to June 2009) provides a comprehensive assessment of the current status of the PFM system following the Public Expenditure and Financial Accountability (PEFA) framework. The performance of PFM systems, procedures, and practices are assessed based on six critical dimensions of the PEFA framework; credibility of the budget, comprehensiveness and transparency, policy-based budgeting, predictability and control in budget execution, accounting, recording and reporting, and external scrutiny and audit. Some of the major assessment results are summarized here. The assessment indicates both the strengths and weaknesses of the existing PFM system and serves as a baseline against which progress on PFM performance can be measured over time.

While the role of PFM systems in contributing to fiscal discipline, strategic resource allocation through better programme management, and improving service delivery has gained attention in India in recent years, the focus and implementation of reform initiatives in this regard leaves much to be desired. The initiatives to improve the PFM systems and processes in recent years include the introduction of outcome budget in 2005-06 to move to clearly defined outcomes of all government programmes, adoption of rule based fiscal management by enacting the Fiscal Responsibility and Budget Management (FRBM) Act, appointing a Task Force to suggest reform measures to strengthen internal audit, initiating the process to move to an accrual based accounting system, revising the responsibilities and duties of the Financial Advisors placed in spending departments in a system of delegated financial powers, and tightening cash management through monthly expenditure limits. However, the intents did not match the outcomes due to discontinuities and indifferent implementation. The achievement of economy, efficiency, and effectiveness in PFM systems has remained elusive.

The PFM assessment at central government level using indicator-based PEFA framework revealed number of areas where there is significant scope for improvement.  The budget credibility assessed through expenditure and revenue out-turn as compared to the budget estimates, shows that overall budget credibility is affected by the absence of a hard budget constraint, thereby allowing substantial adjustments in the budget during the year through supplementary grants. There is an absence of accurate revenue projection mechanism as the movement of economy and changes in tax administration determine the actual revenue collection. Indeed the spending departments are involved in the budget making process following the budget calendar thereby giving due regard to the government policies in different sectors. However, the departments are not provided with comprehensive expenditure ceilings early in the budget cycle. The department budget estimates are finalized only after the size of the funding for new schemes are communicated by the Planning Commission. In the strictly annual budget cycle, where funds lapse at the end of the fiscal year, a multiyear perspective relating to expenditure commitments for various sectors is absent. A detailed medium-term expenditure framework for sectors is not worked out by projecting expenditure implications of programmes undertaken for outward years. It is maintained that the five-year plans provide the basis for a multiyear perspective for resource allocation.

India has achieved a reasonably high level of fiscal transparency. Comprehensiveness of the fiscal information publicly available has improved in recent years. Progress has been made in informing the common citizen about the policy choices, their implications, and reasons for preference of choices. The budget related documents, accessible after their presentation in the Parliament, contain relevant information on macroeconomic forecasts, FRBM related fiscal policy strategy documents, fiscal deficit indicators, deficit financing sources, government borrowings and debt stock, prior year budget out-turns, and outlines of new tax polices and fiscal data. The consolidated year-end financial statements, the Finance Accounts and Appropriation Accounts, contain detailed financial information for all the departments; but concerns are there regarding the timeliness of submission of such reports.  While the budget classification, based on COFOG functional classification system is consistent with the cash accounting system of GFS manual of 1986, it has a long way to go to establish the accrual accounting based system as provided in advanced standards of the GFS manual. In the intergovernmental fiscal transfer system, while the tax devolutions based on the recommendations of the Central Finance Commission are transparent and formula based, discretionary elements in the form of scheme based transfers are on a rise in the Plan transfers

The predictability and control systems in budget execution is assessed taking into account number of performance of indicators such as effectiveness of tax administration in providing a transparent mechanism with regard to taxpayer obligation, registration and assessment, and effectiveness of collecting tax arrears; predictability of availability of resources; reporting practices relating to cash balances and debt; payroll controls; transparency in procurement; and effectiveness of internal control and internal audit.

• While explicit legal provisions and procedural safeguards exist in central taxes, the scope for administrative discretion is considerable in practice due to large number of exemptions and reliefs, and frequent changes in tax provisions, making the tax laws relatively complex. A structured taxpayer education programme is absent, which adds to the compliance cost. Despite a well laid out tax appeal mechanism, disposal is time consuming. Elaborate legal provisions against delinquent taxpayers have not resulted in effective collection of the taxes assessed due to long running court disputes.

• Efforts are made to improve the predictability in the availability of funds for commitment of expenditure through efficient cash management and planning of market borrowing calendar by stipulating monthly and quarterly ceilings of expenditure for the departments. However, in practice the unevenness of expenditure and rush of expenditure towards the end of the financial year still remains a problem due to weak adherence to the cash management programme. These are symptoms of inadequate internal expenditure controls. The surrender of unspent amounts, "savings," from various grants to the Finance Ministry and excess expenditures not regularized are witnessed regularly as brought out by the Comptroller And Auditor General of India (CAG) in his audit reports. These deviations indicate inadequate programme management and internal control through the year.

• Recording and Management of Cash Balances, Debt, and Guarantees by the government of India have improved significantly and a comprehensive report on central government liabilities is provided in the budget documents. 

• In the absence of an exclusive law governing the public procurement, rules and directives provided in the General Financial Rules (GFR), 2005 and manual on procedures for purchase of goods guides the procurement process. Instructions issued by the Central Vigilance Commission (CVC), supplement these regulations. With the exception of certain control and oversight functions carried out by central authorities, CAG and CVC, no central authority regulates the procurement policies and oversees the compliance with the established procedures.

• The expenditure commitment controls are not effective in India. The budget preparation exercises faults on overlooking expenditure arrears as there is no provision in the budget for the ensuing year to discharge the expenditure arrears of the previous year(s). The year end financial statement, Appropriation Accounts, is prepared on a cash basis reporting cash execution of the expenditure plans approved by parliament and do not report on commitments. The statutory requirements for budget implementation focus exclusively on controlling expenditures with respect to budget appropriations.

• Internal audit has remained a weak link in the financial management system. Internal audit in India is conducted in a routine manner and the result of this audit on improving the financial management system is insignificant. The Task Force on Internal Audit observed that the internal audit in India has a restricted mandate, does not have the ability to evaluate risks. It was also noted that that no standards have been evolved for internal audit in India and it did not have the required independence for its effective functioning.

The parliamentary scrutiny and approval of budgetary process, despite having elaborate constitutional provisions, is not exercised rigorously through examination and debate of the budget law to bring in parliamentary accountability. The deterioration is evident in the treatment of the external audit reports submitted by the CAG by the Public Accounts Committee (PAC). The PAC’s examination of the audit report is not comprehensive, as the committee over the years has scrutinized only a limited portion of the audit reports. While the recommendations made by the PAC were taken seriously by the executive, its scope was limited as the PAC considers only a small portion of the audit reports. The Action Taken Notes submitted by the departments and units audited by the CAG relating to other audit observations not examined by the PAC were largely formal rather than substantive.

To add a few lines on PEFA framework; it is very useful and robust framework to assess the functioning of the PFM systems and processes. In addition to the indicators set, it provides opportunity to describe the ongoing reforms and institutional improvements. However, it has rigidness in so far as the requirements for grading the performance indicators. Some flexibility should be provided in grading the indicators as the PFM systems are country specific and even without conforming strictly to international practices, yield results.

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