The Hindu Business Line : Fiscal checks bypassed affect financial health

CONCERNED over the deteriorating fiscal situation, the Government introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in December 2000. The revised version of the same (based on the recommendations of the Standing Committee) became an Act in August 2003. One of the main features, besides the measures to reduce the fiscal and revenue deficits within a timeframe, is that the Centre should in each financial year place before both Houses of Parliament three statements on medium-term fiscal policy, fiscal policy strategy and macroeconomic framework, along with the annual financial statement and `demand for grants'.

At the sub-national level, too, some States have initiated measures to provide statutory backing to fiscal reforms through enabling the fiscal responsibility legislation; the objective being to eliminate the revenue deficit and contain the fiscal deficit in the medium-term. While five States have so far passed Fiscal Responsibility Acts (FRAs) — Karnataka (2002), Kerala (2003), Tamil Nadu (2003), Punjab (2003) and Uttar Pradesh (2004) — the others have either drafted the Bill or signalled their intention to move in this direction.

The Acts impose quantitative and time-bound targets on the revenue and fiscal deficits, mandate the production of multi-year budget forecasts in line with these targets and call for biannual reporting requirements of performance against these targets. Though State-level FRAs share some common features with the Central legislation, there are some differences.

The RBI, as the banker and the debt manager of State governments, has, therefore, been sensitising the States on various fiscal matters, such as constituting a committee to frame a `Model fiscal responsibility legislation' at the State level. The report is in the process of being finalised (RBI Bulletin, April 2004).

While the decision of both the Central and State governments to do some belt-tightening to improve the fiscal health of the economy is welcome, there arises the question whether there were no checks and controls thus far over public finance?

In India, there are three stages of control over public finance — parliamentary/legislative, administrative and audit. And at different stages, control can be exercised through: i) preparation of budget; ii) parliamentary/legislative approval of budget; iii) realisation and utilisation of funds according to the approved budget; iv) scrutiny of accounts and audit reports by the Comptroller and Accountant General (CAG); and v) parliamentary/legislative scrutiny through the Public Accounts Committee (PAC), the Committee on Public Undertakings (CPU) and also the Estimates Committee.

Central, State budgets

The first stage of control is exercised by the Executive Government through preparation of the annual Budget and giving shape to its policies, plans, programmes, and so on. Budgeting is an estimation of resources and expenditure in a widest possible sense so as to achieve the socio-economic goals. Accuracy is key in making Budget estimates for any financial year. It is true that estimates can never be totally accurate, but the extent of variation between Budget estimates and the actuals at both the levels of government is a worrisome factor.

The next stage is parliamentary/legislative control. It is exercised at the time of approving the annual Budget. The discussions centre around the Budget speech of the Finance Minister (which usually give indications of the economic policies, tax proposals, policies and projections of the Government) and on `demand for grants'. Though detailed discussions on `demand for grants' take place, not all the demands are covered for want of time. When the period fixed for discussions of `demands for grants' is over, no further discussion is allowed by the Speaker, and the demands not discussed are also taken as approved by the floor.

After the approval of the annual Budget, the Executive Government exercises control over public finance through rules, regulations and procedures framed by it. The controls, among others, include: a) delegation of financial powers; b) collection of revenue/receipts and remission of dues; c) provision of funds; d) sanctioning of expenditure, remission of revenue; and e) control over expenditure.

It is important that Parliament/State legislature know how the money has been spent. Discussions of the budgetary process will be incomplete without this. This examination is ex post facto done through the Comptroller and Auditor General (CAG).

The CAG derives its powers mainly from Articles 149 to 151 of the Constitution and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. The CAG, independent of the Executive, scrutinises whether the financial policy of the Government, as approved by the legislature, has been implemented according to the statuary provisions, and the rules, regulations and orders made thereunder. (Under Article 266 of the Constitution, no money out of the Consolidated Fund of State shall be appropriated, except in accordance with law and for the purposes and the manner provided in the Constitution.)

But, in practise, this system has not been that effective. When major irregularities are detected during inspection and not settled on the spot, the CAG issues inspection reports (IRs) to the heads of offices inspected, with a copy to the next higher authorities. The departments are, in turn, required to ensure compliance with the observations contained in the IRs and rectify the defects and omissions promptly and report their compliance to the CAG. But the departments are often slow to act and the number of inspection reports and audit observations pending settlement has been increasing.

Usually, the irregularities in tax collections by the Executive Government include incorrect grant of exemption, application of incorrect rate of tax, non-/short-levy of tax, non-levy of penalty and other such irregularities most of which fall under tax administration. Consequently, many cases are stayed (either by the court or government department or both). This affects the exchequer, by way of interest lost owing to blockage of revenue, disabling the government in the allocation of resources and ultimately not contributing to the public.

Though audit reports point out the irregularities and the amount of uncollected revenue, the Central/State governments generally do not accept all of them. Even the amount accepted as uncollected is not totally recovered.

There is also a tendency on the part of the Executive to keep the audit queries pending for long or circumvent the real issues by evasive replies. Consequently, those responsible for the omissions and commissions remain unaffected. Continuance of this attitude will seriously disturb the fiscal administration.

There are irregularities in expenditure too. The objective of appropriation audit is to ascertain whether the expenditure so incurred is in conformity with the law, relevant rules, regulations and instructions. The oft-recurring irregularities are:

The amount drawn from the Contingency Fund remains un-recouped;

Difference between actual and estimated recoveries;

Non-receipt of explanations for savings or excesses;

Amounts sanctioned in relaxation of treasury control but not included in the supplementary estimates;

Withdrawal of funds in advance of requirement. Financial rules provide for withdrawal of money on Abstract Contingent (AC) bills by drawing and disbursing officers either on the authority of standing orders or specific sanction of government. Detailed Contingent bills in respect of AC bills drawn more than a month earlier are required to be submitted before the presentation of the next AC bill at the treasury.

In Personal Deposit Accounts, non-reconciliation of accounts with treasury, temporary diversion of funds, poor monitoring of the utilisation of scheme funds, and so on.

The CAG reports relating to the accounts of the Union and the States are submitted to the President/Governor of the State for being laid before Parliament/State legislature.

After this, the parliamentary/legislative committees, that is, the PAC and CPU, study these reports and make necessary recommendations and submit their reports to the State legislature. These reports are, however, not discussed in the House. Is this not essential for the good of the economy?

Thus though FRAs are welcome, unless the checks already in place are implemented effectively it would be difficult to achieve the goal of improving the fiscal health of the Centre and the States.

(The author is Associate Fellow, Centre for Economic and Social Studies, Hyderabad. The views are personal. The author can be reached at nsreedevi@cess.ac.in.)

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