Not a single rupee spent under Central Sector Schemes in FY23 with new payment mechanism yet to go live

Shishir Sinha | | Updated on: Apr 18, 2022

Indian currency and banking safe | Photo Credit: Mohammed Haneefa Nizamudeen

New mechanism aims to cut down borrowing cost

Central Ministries and Department are not able to spend under various Central Sector Schemes (CS) in the current fiscal till date as new mechanism for flow of funds is yet to be operationalised. Indications are that some relaxation may be made soon to tide over this bottleneck that is blocking all payments.

Budget documents show there are total of 740 Central Sector schemes with total allocation of over ₹11.81-lakh crore. However, some of schemes will not be affected as they are in exempted category.

“Each rupee spent has to go through either Treasury Single Account (TSA) or the new mechanism implemented through scheduled commercial banks. Since there is no model operationalised as on date, not a single rupee has been spent so far under Central Sector Schemes,” a senior official told BusinessLine. Expenditure Department has directed all the Ministries and Departments to follow the new mechanism, titled ‘Revised Procedure for flow of Funds under Central Sector Schemes’, from April 1 which will supersede all previous instructions.

Two models

Under the new mechanism, there are two models – Model 1 (M1) prescribes implementation through Treasury Single Account and applicable for Central Sector Schemes with annual outlay of more than ₹500 crore. Money will be routed in M1 to the vendor/supplier through the RBI. Schemes under this model are implemented without the involvement of State agencies. Model 2 (M2) involves payment to vendors trough schedule commercial banks. Schemes under the second model are implemented by agencies of the State governments exclusively or in addition to the central agencies.

Under M1, Ministry or Department will designate an Autonomous Body as the Central Nodal Agency. Each of CAN will open an account with RBI for each of the scheme. Under M2, there will be CNA for each of the Central Sector Scheme and it will open an account with scheduled commercial bank. All transactions will take place from these accounts. However, there are issues with the new mode payment. One is the capacity of the bank to manage these transactions and alignment of the mandated agencies with the banks which has not yet taken place. The payments are thus not going through.

Cash management

The new mechanism aims to help the Centre manage the finance and cash betters. Earlier, after approval, funds were allocated and disbursed to various ministries, departments, autonomous bodies and States. This system needed to bechanged because funds were not being utilised and sitting idle in bank accounts. The Budgetary provision for borrowing to meet part of the expenditure as revenue is not sufficient. Given the borrowing cost, such a system puts further strain on the exchequer and necessitates ways for innovation. One such innovation is Treasury Single Account or TSA.

According to the International Monetary Fund (IMF) Working Paper, a TSA is a unified structure of government bank accounts that gives a consolidated view of government cash resources. Based on the principle of unity of cash and the unity of treasury, a TSA is a bank account or a set of linked accounts through which the government transacts all its receipts and payments. The principle of unity follows from the fungibility of all cash irrespective of its end use. While it is necessary to distinguish individual cash transactions for control and reporting purposes, this purpose is achieved through the accounting system and not by holding/depositing cash in transaction-specific bank accounts. This enables the treasury to delink management of cash from control at a transaction level.

However, until the new system is perfected, it is likely that the government will make relaxations so that the departments and ministries are able to make the necessary payments.

Published on April 18, 2022
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