The Report of the High-Level Expert Committee on Efficient Management of Public Expenditure chaired by Dr. C. Rangarajan (and better known as the Rangarajan Committee Report) was tabled in Parliament in July 2011 and I had been waiting for it to be publicly available since then. The Report finally found its way to the internet (this is the link). To those concerned about the “High Level” and “Expert” adjectives, the Report does not disappoint. I had earlier blogged on why the committee was mulling over merging plan and non-plan expenditure. This time I summarise the Rangarajan Committee’s take on fund flows in centrally sponsored schemes (CSS).

As you would be aware, CSSs are specific transfers from the central government (GOI) to the state government and are meant to help the latter “to plan and implement programmes that help attain national goals and objectives”¹. A case in point is the Sarva Shiksha Abhiyan whose aim is to achieve universal enrolment in elementary education. Other examples include the goal of livelihood security through the National Rural Employment Guarantee Scheme and of rural housing through the Indira Awaas Yojana. While the GOI is responsible for formulation and (to a considerable extent) financing, state governments are in charge of implementation. Many schemes also require a financial contribution from the state (eg. SSA funding is split between GOI and states in a 60:40 ratio).

CSSs can be classified in 2 types – Treasury mode or Society mode depending on the fund flow mechanism. In this blog, I will describe the Treasury mode of fund transfer, institutional measures to keep track fund flows and finally, issues with the transfer system.

What does the fund flow mechanism look like in the Treasury mode?

The treasury mode gets its name from the fact that funds to implementing agencies are are routed through respective state budgets, or the state treasuries. An example of such a CSS is the ICDS. Fund flow occurs as follows:

1. The approved amount is first sanctioned by the concerned administrative ministry (for instance, the Ministry of Human Resource Development in the case of education, or the Ministry of Health and Family Welfare in the case of health) or the central government’s Ministry of Finance.

2. A sanction letter is issued by the GOI and copies are sent to the State government and state Accountant General (AG).

3. The Pay and Account office of the GOI then issues an advice letter to the RBI asking it to transfer funds to the State government’s treasury.

4. RBI completes the transfer and confirms this by issuing a clearance memo to the State Government and the AG.

5. The state finance department now approves the budgetary allocation and sanctions the withdrawal of funds.

6. Finally, the concerned department/agency withdraws funds

The flow chart below summarises the process described above. The last box is simply an example of a voucher (more on vouchers in the next section).

How are funds tracked? Is there a monitoring mechanism?

Funds are tracked through a system of vouchers. Expenditures are routed through the treasury and vouchers have to be submitted to the AG for all expenditures incurred. Since computerisation of account compilation, funds can be tracked till the state government spends through state departments or transfers the fund to the Implementing Agencies (usually local bodies) for various schemes.

Interestingly, the AG’s office captures funds transferred to local bodies by the state treasury at the time of release and books it as expenditure. However the treasury system does not capture actual expenditure by local bodies.

Hence, in a nutshell there is a fairly effective monitoring system but it does not track expenditure at the last mile.

What are the pros and cons of the Treasury mode of fund transfer?

Pros

1. The system can track expenditure to the object level (the economic type of expenditure – details here) as vouchers for each transaction are available with the treasury or the AG.

2. Expenditure is compiled by the Auditor General, and is audited by the Comptroller and Auditor General’s office.

3. There is a well-defined system of cash management and bank reconciliation which provides information on cash flows at any point of time. Hence the system is amenable to monitoring and review at all stages barring the last.

Cons

1. Releases are booked as expenditure in central and state government accounts – GOI accounts treat transfer to states as Grants-in-Aid and book them as final expenditure. Similarly, releases by States to IAs are treated as final expenditure in State accounts. Since actual expenditure cannot be tracked, one does not have complete information on end use of funds in real time.

2. Money not released by the government (GOI or state) by the end of the financial year gets lapsed, i.e., does not get carried over to the next year. This often results in GOI and states pushing funds out without looking at actual utilisation.

3. The exact dates of interim stages like administrative or financial sanction in the state Government that often involve concurrence of the Finance Department are almost impossible to obtain.

4. Statements don’t match! Department accounts and expenditure statements provided to GOI by states are often not reconciled with accounting records of the AG, sometimes for years. This raises concerns about the accuracy of data and thereby of actual expenditure reported.

This just about sums it up for the Treasury mode. My next blog will be about the Society mode of transfer, which if possible, is way more complicated. Watch this space!

References

Report of the High-Level Expert Committee on Efficient Management of Public Expenditure, July 2011, Government of India, Planning Commission, New Delhi available here

Policy Note on Public Financial Management and Accountability in Centrally Sponsored Schemes (Draft), May 2005, The World Bank, India available here