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Utilisation of public funds - Part 1
1.0 INTRODUCTION
In the field of improving public expenditure management, the role of institutional arrangements in influencing budget outcomes in three areas is important: in aggregate fiscal discipline, strategic allocation of resources and operational efficiency. Performance-focus, link between policy making, planning and budgeting, well-functioning accounting and financial management systems and appropriate links between budgeting and other systems of the Government are important features of efficient utilisation of funds.
The concept of outcome budgets play an important role in improving end utilisation of public expenditure in Central and State Governments. However, there have been several limitations that impede widespread practical use of the outcome-based budgeting. These include segmentation of expenditure between Plan and Non-Plan, absence of a hard budget constraint, lack of incentives to Ministries to reallocate resources, non-availability of information on costing of services, problems in budget and accounting classification, inadequate information systems on transfers of resources to states and absence of robust financial management information systems. The Eleventh Plan document (2007-2012) raised many of these issues while discussing financing of the Plan. The High Level Expert Committee was asked to examine some specific issues and make recommendations.
2.0 THE PLAN AND NON-PLAN DISTINCTION
The evolution of the planning process in India led to classification of expenditure into Plan and Non-Plan. In the initial years of planning, the emphasis was to direct capital investment in sectors according to priorities of each Plan. The bulk of plan expenditure was capital expenditure and the aim was to increase the productive capacity of the economy. However, the composition of the plan expenditure in both Centre and States has changed over time, as the bulk of the plan expenditure is now revenue expenditure. Over a period of time, several issues cropped up from the distinction between Plan and Non-Plan.
2.1 Current scheme of expenditure classification
The expenditure of the Government is classified into functional heads. The functional classification signifies broadly the function of Government, for which the expenditure has been incurred, and the activity on which the expenditure has been incurred. The functional classification being followed as of now, is a six-tier structure with a hierarchy of major, sub-major, minor, sub-head, detailed heads and object head. The first tier of the functional classification, called the major head denotes the functions of the Government that are discharged through the expenditure.The second tier of functional classification provides the description of sub functions.
The third tier, denoted by the minor head, indicates the objective of the Government being achieved through that particular expenditure. Below the minor head are the two tiers of sub heads (fourth tier) and detailed heads (fifth tier).
The sub-head indicates specific schemes or activities of the Government under which the expenditure has been incurred and the detailed head indicates various components of the schemes or sub schemes. The sixth tier of object head provides details about the object of expenditure. Thus, this forms a two dimensional classification, where the expenditure is classified into object heads for each functional head. The division provided by Plan/Non-Plan classification is laid over the functional and object classification. This division cuts across the entire classification hierarchy into two columns.
2.2 Plan and Budget
The division originates from the budgeting exercise where the Non-Plan expenditure is estimated first. Since the Non-Plan expenditure is of a committed nature, it is mostly budgeted, based on historic parameters. After estimation of the Non-Plan expenditure, the resources (both tax and non-tax) are estimated. The amount of resources left after meeting the Non-Plan expenditure is called the Balance from Current Revenue (BCR) and is a part of the non-debt resources that is available for plan expenditure. The second part of non-debt resources is the Miscellaneous Capital Receipts (MCR), taken on net basis. These non-debt resources added to the amount of net borrowing, planned to be incurred, would give the total amount of resources available for plan expenditure. This amount is called the Gross Budgetary Support (GBS) for Plan. The Gross Budgetary Support is then allocated into sectors, down to development heads and finally to plan schemes. These allocations are then formatted into budgetary classification. The Plan and Non-Plan budget put together comprise the expenditure budget of the Government. The natural corollary of this budgetary practice is that while the Non-Plan envelope is based broadly on the requirement of the departments depending on the expenditure items that are more or less committed, the plan envelope is broadly based on the availability of resources.
2.3 Expenditure classified as Plan
Plan expenditure in the Government, generally signifies expenditure taken up under development schemes during a particular Five Year Plan. However, some of these schemes can be continued from a previous plan or some may be 'spill-overs'. At the initial stages of the exercise of preparation of a Five Year Plan, Planning Commission issues detailed instructions directing what should be classified as 'Plan Expenditure'. The plan schemes are mostly expected to be limited to a Five Year Plan period. But they may have implications that may extend beyond the plan period.
2.4 Major issues relating to Plan/ Non-Plan distinction
Due to the compulsion of coalition politics and vested political interest, the policy regarding what should get classified as plan expenditure and what should get classified as Non-Plan expenditure has been losing clarity. Besides, a notion has widely gained ground among the policy makers and officials across all levels that plan expenditure is good and Non-Plan is bad. This bias in favour of Plan expenditure and against Non-Plan expenditure has led to a situation in which essential Non-Plan expenditure, like maintenance of assets, is neglected. This has also led to a motivation for showing higher plan expenditure and higher plan sizes, both at Central and State levels. Further, several factors, such as shift of plan focus from capital to revenue expenditure and the process of transferring expenditure of old schemes to Non-Plan, at the end of each Five Year Plan mean that correspondence cannot be drawn between plan and development expenditure.
Plan and Non-Plan distinction in the budget is neither able to provide a satisfactory classification of developmental and non-developmental dimensions of Government expenditure nor an appropriate budgetary framework. It has, therefore, become dysfunctional.
Therefore, it was recommended that Plan and Non-Plan distinction in the budget should be removed. At the Central Government level, Planning Commission may be responsible, for the sake of convenience and domain knowledge, for guiding the overall development priorities of the Government, setting of outcome targets and review of performance of Ministries/Departments. Ministry of Finance may be responsible for guiding the fiscal policy, preparation of budget and financial decisions. Planning Commission may be responsible for consolidation of the Five Year Plan covering all Services based on the inputs from the Ministry of Finance. The annual budgeting process may need to be revised to facilitate output and outcome-based budgeting within a multi-year framework.
3.0 COMPREHENSIVE FRAMEWORK OF TRANSFERS TO STATES
The resources flow from Centre to States by way of assignments and transfers. The states' share in central taxes (tax devolution) is an assignment. The transfers from the Centre to States include Non-Plan and Plan transfers. The Non-Plan transfers comprise Finance Commission grants and other Non-Plan grants. The important plan grants that are transferred from Centre to the States are of four types:
- State Plan Schemes that include Normal Central Assistance (NCA) and other Scheme based Central Assistance (CA)- which are also known as ACA Schemes;
- Centrally Sponsored Schemes (CSS), for which funds are routed through consolidated fund of states;
- Centrally Sponsored Schemes (CSS), for which funds are transferred directly to State/District Level Autonomous Bodies/Implementing Agencies, and
- A small portion of FC grants treated as Plan grants.
The Non-Plan transfers such as Finance Commission grants and other Non-Plan grants are transferred to the states through treasury route. As regards plan schemes, resources are transferred through treasury route or direct transfer/society route.
A major problem faced today is in generating scheme wise information from the accounting classification due to absence of a one-to-one correspondence with schemes and heads of accounts. The present six-tier budget and accounting classification has several problems.
Functions are repeated under the Revenue, Capital, and Loans sections. A significant proportion of Union Government expenditure takes place in the form of transfers to states. These transactions are recorded under the Major Heads 3601 and 3602. The sub-classification under these heads has not kept pace with the changing pattern of plan assistance. Also, there is no provision to show State-wise breakdown of such transfers. Further, separate heads for transfers to states (which should be an object head) and for resources meant for north-eastern areas (geographical attribute) within functional classification results in not being truly functional.
The minor head is a very critical level and needs an extensive review. There has to be some level of budgeting and accounting that relates to broad objectives of the Government for a given function to which eventually outcomes can be linked.
This would also enable reporting on cost incurred by Government under various items of expenditure for a particular objective and to achieve a desired outcome. A related issue is non-reporting / non-availability of information in the State Finance Accounts of significant amount of resources being devolved on states through direct Central Assistance outside the State Consolidated Funds. The problem gets compounded due to lack of uniform coding for plan schemes across the states.
3.2 Central Plan Scheme Monitoring System (CPSMS)
The Central Plan Scheme Monitoring System (CPSMS) is being currently setup by the Controller General of Accounts in collaboration with the Planning Commission, to serve as a comprehensive management information and decision support system, for monitoring of the plan schemes of the Government. CPSMS has the challenging task of integrating tens of thousands of implementing agencies through a common system, so that fund movement is tracked at each successive stage starting with the initial release from the Centre till the money actually reaches the ultimate beneficiaries. CPSMS portal is operational now. Over 1000 Plan schemes of the Government of India have been mapped on this system and more than 75,000 sanctions for release of funds have been captured. Nearly 20,000 programme implementing agencies have been registered with the system. Ministry-wise, Scheme-wise, State-wise, District-wise, NGO-wise, Individual-wise data of releases from GOI is now centrally available on CPSMS on a real-time basis.
A unique feature of CPSMS is its close interfacing with the Core Banking Solution (CBS) of the individual banks to obtain information on movement of funds from one level to another, and from one agency to another on a real-time basis. This feature will help in efficient and effective cash management. Several major banks in the country have agreed to join the CPSMS interface and it is expected that all banks would be part of this network. CPSMS also seeks to have interface with State treasuries and State AGs to obtain real time expenditure information for schemes for which funds are transferred from the Central Ministries to the consolidated fund of the states. On full implementation, the system would provide a platform on which the management at each level would be able to monitor fund utilization under various developmental schemes operated through treasury route or society route. CPSMS is expected to provide customized information of funds deployment and utilization vertically under each scheme, to programme managers and horizontally across schemes in one geographic area for senior management and political functionaries. Inputs provided by the system would be vital for programme management and policy planning. The information on fund utilization is also planned to be placed in the public domain for greater public awareness, public participation in the policy making and execution and toward enhanced transparency in Government operations.
3.3 Change in Classification of Budget and Accounts
The Union Ministry of Finance has constituted a Committee headed by Controller General of Accounts recently for revision of the List of Major and Minor Heads of Accounts of the Union and the states. Issues related to accounting of plan schemes and the need for developing a mechanism, to provide a comprehensive view of the transfers to states, are under active consideration of this Committee, which will address structural deficiencies of the current system and develop a new design which will be computer friendly and which will enable flexible multidimensional views of expenditure data and a comprehensive view of the transfers to states.
COMMENTS