Financial Management - UPSC PDF Download

Introduction

• Finance is the backbone of all monetized socio-economic systems, as it involves generating, regulating, and distributing the monetary resources needed for the growth and sustenance of organizations. Financial management is a crucial aspect of public systems management, as it helps in integrating various functions such as sales, production, and plant utilization. This, in turn, generates valuable information for decision-making processes, especially in business enterprises. Moreover, financial management is of paramount importance for governments, as most of their activities have financial implications. The main concern is to ensure that limited resources are utilized efficiently, with the aim of achieving national objectives.
• In this unit, we will introduce you to the fundamental elements of the Indian financial management system. We will emphasize the key aspects of resource mobilization and management, as well as analyze different budgeting approaches. The concept of budgetary control will also be discussed, which is essential in maintaining a balanced financial management system.
• Furthermore, we will familiarize you with the important policies and instruments of public debt management, and highlight the roles of the Ministry of Finance, Finance Commission, and Planning Commission in the financial management process. This knowledge will provide you with a comprehensive understanding of the Indian financial management system and its various components.

Budget: Concept and Preparation

A budget is a financial plan that forecasts an organization's revenues and expenses for a specific period, typically one year. It outlines the government's activities and resource allocations, reflecting its priorities and objectives.
The word "budget" originates from the French term 'Baguette,' which refers to a small leather purse or pouch. A budget usually consists of three main components:

• An analysis of the revenues collected, expenses incurred, and changes in the national debt and other financial aspects during the fiscal year immediately preceding the budget presentation. This serves as a basis for understanding the financial performance of the organization and helps identify areas that may require adjustments.
• A projection of the organization's expenditures for the upcoming year, based on current activities and initiatives. This estimate provides a guideline for allocating resources and managing expenses to achieve the organization's goals.
• Recommendations for any necessary changes in tax rates, exemptions, or increases to ensure that the planned expenditures are adequately funded. These adjustments help to maintain a balanced budget and ensure the organization's financial stability.

In summary, a budget is a crucial financial tool that helps organizations plan, allocate resources, and manage their finances effectively. It enables them to make informed decisions about their activities and initiatives, ensuring that they are aligned with their strategic goals and objectives.

Preparation of the Budget

• The process of preparing the budget in India is a meticulous task undertaken by the Ministry of Finance. Every September, the Budget division from the Department of Economic Affairs sends out a circular to various ministries and departments, requesting them to provide their expenditure estimates for the upcoming year. Each ministry and department formulates their spending plans based on their previous year's spending and any new schemes or projects they intend to undertake. These expenditure estimates are submitted to the Ministry of Finance during December or January for review and integration into the main budget.
• Upon receiving the estimates, the Finance Ministry scrutinizes and compiles the expenditure estimates from different ministries and departments. The Ministry may cut down excessive demands, as there are finite financial resources available to the government. Before finalizing the expenditure estimates, discussions take place between the Secretary (Expenditure) of the Ministry of Finance and the financial advisers of the concerned ministries and departments. However, the Ministry of Finance has the final authority over all estimates.
• The Planning Commission reviews the estimates of the plan outlay, while the Department of Revenue in the Ministry of Finance prepares the revenue estimates. The Department of Revenue has records of tax yields from previous years and uses this data to estimate revenues for the coming year. Throughout this process, the Finance Minister remains in close contact with the Secretaries of revenue, expenditure, and economic affairs within the Ministry of Finance.
• As the budget proposals are prepared, the Finance Minister reviews them and makes any necessary changes in consultation with the Prime Minister. The President is also informed about the budget, and the Finance Minister briefs the cabinet about the budget shortly before it is presented to Parliament.

Legislation of the Budget

Once the budget is prepared, it has to pass through the following stages in the Parliament (i) presentation of the budget by the finance minister in both the houses of Parliament, (ii) general discussion on revenue and expenditure proposals, (iii) presentation of demands for grants, and (iv) voting and passing of the Appropriation and Finance Bills.

Presentation of Budget

• The budget in India is presented to the Lok Sabha in two parts: the Railway Budget, which pertains to railway finance, and the General Budget, which provides an overall picture of the Indian government's financial position, excluding railways. The Railway Budget is typically presented in the third week of February by the Railway Minister, while the General Budget is presented by the Finance Minister on the last working day of February each year. In election years, budgets may be presented twice: first to secure a Vote on Account for a few months, and later in full.
• During the budget presentation, the Finance Minister delivers a speech and submits the annual financial statement for authentication. At this time, there is no discussion on the budget. A copy of the budget is also simultaneously provided to the Rajya Sabha. Following the General Budget presentation, the Finance Minister introduces the Finance Bill in the Lok Sabha, which outlines the government's tax proposals for the upcoming financial year. The bill includes proposals for new taxes, modifications to existing tax structures, or the continuation of existing tax structures beyond the period approved by Parliament.
• No discussion on the budget occurs on the day it is presented. Instead, the budget is discussed in two stages: a general discussion followed by a detailed discussion and voting on the demand for grants. After the budget presentation, the Speaker may allocate time for a general discussion, during which the house can discuss the budget as a whole or any specific question or principle involved. However, no motion can be moved at this time.
• Once the general discussion is complete, the House adjourns for a fixed period, during which the demands for grants from various ministries and departments are considered by the departmentally related standing committees. These committees are required to submit their reports within a specified timeframe and make special reports on the demands for grants for each ministry.
• The demands for grants are not formally presented or laid on the table of the Lok Sabha. Instead, they form part of the budget papers and are distributed to members along with the budget documents. A separate demand is typically made for each ministry or department, although the Finance Minister may combine grant proposals for multiple ministries or departments in one demand. Additionally, one ministry or department may present more than one demand.

Discussion on Demands for Grants

• After the budget presentation, the Minister of Parliamentary Affairs meets with leaders of parties/groups in the Lok Sabha to select the ministries/departments whose demands for grants will be discussed in the House. The government then forwards these proposals to the Business Advisory Committee, which allots time and recommends the order of discussion for each demand. A timetable is published to inform the members about the dates and order in which the demands for grants of various ministries will be taken up in the House.
• Once the Standing Committees' reports are presented to the House, discussion and voting on demands for grants proceed on a ministry-wise basis. At this stage, the discussion is limited to matters under the administrative control of each ministry and to each head of demand that is put to the House's vote. Members can express disapproval of a ministry's policy, suggest administrative economy measures, or draw attention to specific local grievances. Cut motions can be moved to reduce any demand for grant, but amendments to such motions are not allowed. Typically, opposition members table these cut motions, which aim to draw the House's attention to the specified matter.

Guillotine

On the last of the allotted days for the discussion and voting on demands for grants, at the appointed time the Speaker puts every question necessary to dispose of all the outstanding matters in connection with the demands for grants. This is known as guillotine. The guillotine concludes the discussion on demands for grants.

Vote on Account

• The whole process of budget beginning with the presentation and ending with discussion and voting of demands for grants and passing of appropriation bill and finance bill generally goes beyond the current financial year. Hence, a provision has been made in the Constitution empowering the Lok Sabha to make any grant in advance through a vote on account to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill.
• Normally the vote on account is taken for two months for a sum equivalent to one-sixth of the estimated expenditure for the entire year under various demands for grants.
• Vote on account is passed by Lok Sabha after the general discussion on the budget is over and before the discussion of demands for grants is taken up.

Supplementary and Excess Demands for Grants

• If the amount authorised to be expended for a particular service for the current financial year is found to be insufficient for the purpose of that year, or when a need has arisen during the current financial year for supplementary or additional expenditure upon some new service not contemplated in the budget for that year, the President causes to be laid before both the Houses of Parliament, another statement showing the estimated amount of that expenditure.
• If any money has been spent on any service in a financial year in excess of the amount granted for the service for that year, the President causes to be presented to Lok Sabha a demand for such excess. All cases involving such excesses are brought to the notice of Parliament by the Comptroller and Auditor General through his report on the appropriation accounts. The excesses are examined by the Public Accounts Committee, which makes recommendations regarding their regularisation in its report to the House.
• The supplementary demands for grants are presented and passed by the House before the end of the financial year, while the demands for excess grants are made after the expenditure has been incurred and after the financial year to which it relates, has expired.

Appropriation Bill

• After the demands for grants have been passed by the House, a bill to provide for the appropriation out of the Consolidated Fund of India of all moneys required to meet the grants and the expenditure charged on the Consolidated Fund of India is introduced, considered and passed. The introduction of such a bill cannot be opposed. The scope of discussion is limited to matters of public importance or administrative policy implied in the grants covered by the bill and which have not already been raised during the discussion on demands for grants.
• No amendment can be proposed to an appropriation bill, which will have the effect of varying the amount or altering the destination of any grant so made or of varying the amount of any expenditure charged on the Consolidated Fund of India.

Finance Bill

• The Finance Bill is introduced in the Lok Sabha immediately after the general budget is presented to the Lok Sabha by the finance minister. The introduction of this bill also cannot be opposed. The scope of discussion on the this bill is vast and members can discuss any action of the Government of India. The whole administration comes under review.
• The Finance Bill seeks to give effect to the financial proposals of the government of India for the next financial year. It also includes a bill to give effect to supplementary financial proposals for any period.
• It submits to the jurisdiction of the House all the Acts, with which it deals, i.e., the Income Tax Act, Central Excise and Salt Act etc. and the House can amend all or any such acts to the extent they are dealt with in the bill. The procedure in respect of Finance Bill is the same as in the case of other money bills.

Approaches to Budgeting

A budget is more than just a statement of income and expenses; it is a plan of action for the upcoming year, detailing programs, activities, and timelines. Traditional budgeting is evolving, with a growing emphasis on performance. Some approaches to budgeting include planning and programming budgeting, performance budgeting, zero-based budgeting, and outcome-based budgeting. This article will discuss the key features of these approaches.

Planning, Programming, and Budgeting System (PPBS)
PPBS is primarily a system designed to help decision-makers allocate resources effectively. It consists of three components:

• Planning: Defining missions, goals, and objectives, identifying and evaluating alternatives, and making choices among these alternatives.
• Programming: Linking planning and budgeting by documenting decisions on required resources and expected outputs, scheduling activities over the planning period, and managing information and documentation systems.
• Budgeting: Translating long-range planning decisions into annual budget formats with more precise measures of inputs, costs, and outputs.

This approach emphasizes the interrelatedness of planning, programming, and budgeting as a system, meaning that budgeting cannot exist in isolation. Performance budgeting assesses the effectiveness of each program or activity in relation to its output, requiring the development of refined tools such as work measurement, performance standards, and unit costs.

Performance Budgeting
Performance budgeting views the annual budget as a work plan specifying the program targets to be achieved by the agency during the fiscal year. It emphasizes the purposes for which funds are provided and correlates the physical and financial aspects of each program and activity by establishing a relationship between inputs and outputs. The main objectives of performance budgeting are to:

• Correlate physical and financial aspects of each program and activity
• Improve budget formulation and decision-making at all levels of government management
• Facilitate better legislative review and understanding
• Enable effective performance auditing
• Measure progress towards long-term objectives as outlined in development plans
• Integrate budgets and development plans

Development of Performance Budgeting in India
In India, the introduction of performance budgeting was suggested in 1954 by the Estimates Committee of Parliament, based on its success in the USA. The Administrative Reforms Committee (ARC) later recommended the introduction of performance budgeting in all government departments and organizations overseeing development programs, starting with the 1969-70 budget. This recommendation was accepted by the Government of India, and performance budgeting has gradually been implemented in almost all departments. State governments also prepare performance budgets for development departments and submit them to the legislature.

Elements of Performance Budgeting

• Formulation of objectives: Clearly stating specific and concrete objectives for each program or activity helps in developing suitable plans.
• Program/activity classification: A functional classification of the budget is necessary, meaning that public expenditure is presented in terms of functions, programs, activities, and projects.
• Norms/Standards: Performance budgeting requires setting physical targets for each program and activity, enabling the calculation of corresponding financial estimates. Developing suitable work-measurement units, norms, and performance indicators helps measure the physical work to be done or services to be rendered.
• Accounting Structure: The budget classification, in terms of functions, programs, activities, and projects, should be reflected in the accounting structure.
• Decentralized Responsibility Structure: Detailed budget estimates should be prepared at various responsibility levels within broad guidelines, then coordinated upwards.
• Review of Performance: Comparing actual performance (both physical and financial) with the budgeted plan is an essential aspect of performance budgeting.

In conclusion, performance budgeting is a valuable management tool that can be successfully implemented in government by developing norms and standards for all levels of operations.

Zero Based Budgeting

Zero-Based Budgeting (ZBB) is a budgeting method that requires organizations to start from scratch when preparing their budgets, rather than relying on the previous year's expenditures. This means that all activities and priorities must be reevaluated and funding should be allocated based on justifications supported by evaluation techniques, such as cost-benefit analysis.
The main goal of ZBB is to eliminate unnecessary spending within organizations. To achieve this, ZBB employs four strategies:

• The first strategy is to remove any spending that does not serve a clear purpose within the organization. This ensures that all expenditures are aligned with the organization's goals and objectives.
• The second strategy is to identify and eliminate any duplicate spending. Over time, multiple departments within an organization may perform the same activities, leading to redundant expenses.
• The third strategy involves searching for better alternatives to achieve the organization's objectives more cost-effectively. For example, solar equipment might be a more efficient alternative to an electric gadget.
• The fourth strategy is to optimize spending by making it more productive and efficient. This can be achieved by applying performance budgeting techniques.
• The Government of India implemented the ZBB approach starting from the 1978-88 budget. Since then, the Budget Division of the Ministry of Finance has encouraged ministries and departments to adopt ZBB principles in their expenditure estimates through annual budget circulars.

Steps involved in ZBB

The methodology employed in ZBB involves:

(i) Identification of Decision Units

A decision unit is a distinct segment of an organisation for which budget is prepared. It can be a programme, scheme, project or an operation.

(ii) Formulation and Development of Decision Packages

• According ZBB, the budget of a decision unit has to be prepared in terms of decision packages, which contain the following:
• A description of the function or activity of the decision unit
• The goals and objectives of the various functions/ activities of the unit
• Benefits to be derived from financing the activity/programme
• Relevance of the activity/programme to the overall objectives of the organisation/department in the present context
• The consequences of its non-funding
• The projected/estimated cost of the package
• The yearly phasing of the proposed expenditure/project cost
• Alternative ways of performing the same activity or achieving the same objectives.

(iii) Evaluating and ranking decision packages in order of priority

ZBB requires that the manager-in-charge of the decision unit should rank the decision packages in order of priority. There are various methods followed in ranking decision packages, such as judgement approach, committee system, standardised formula, single criterion approach, etc. The available resources are allocated among the various decision packages, according to prioritisation established in terms of their ranking.

(iv) Preparation of Budget by Allocating Resources to Activities or Decision Packages by Utilising Hierarchical Funding Cut-Off Levels

• ZBB requires that the available fund should be allocated in accordance with the ranking of decision packages as finally settled by the top decision unit in the hierarchy of decision units. In a situation of resource crunch, i.e., if funds available are not adequate to cover all the decision packages, a cut-off level is determined and the decision-packages figuring above are financed and those falling below the cut-off level are not allocated funds.
• The cut-off level is moved upwards or downwards in the event of any revision in the availability of funds.

Problems in the implementation of ZBB

• A major factor contributing to the failure of ZBB has been too much paper work involved in the process. Also the reviews and analysis required to be carried out could not be handled within the normal cycle of budget process spread over a few months.
• The second problem in the implementation of ZBB is the non-availability of trained personnel fully aware of the concept, who can make an analysis of expenditure by applying cost-benefit analysis and other techniques.
• The third problem is redeployment of resources, like manpower, material, machinery and equipment, which become surplus, when a scheme or activity is found redundant and has therefore to be eliminated. Redeploying manpower is a very difficult and delicate issue.
• In brief, ZBB is a useful system for exercising control over expenditure. Its utility can hardly be overemphasised in a situation of resources crunch. Any progressive organisation would find it useful for ensuring effectiveness, efficiency and economy of expenditure.

Outcome-based Budgeting

• In USA, a recent trend in government budgeting is to link the money spent on each program to its return in terms of impact of each public policy. This type of budgeting links budget with performance measurement system.
• For example in Catawba country, North Carolina, local officials used this to enhance their government’s system of service delivery. The country in the past few years had experienced limited growth in revenues; yet during this time the call for human services continued to rise. County leadership responded by handling decision making authority to agency administrators challenging them to reduce costs while more effectively meeting citizen demands. Those who achieved 90 per cent of their goals would be able to apply their savings to unrestricted needs. Catawba county administrators embarked on a citizen-driven, outcome-based system of budgeting to ensure that resources were targeted to meet specific community goals. Over time, they not only saved money but also enhanced government responsiveness (Denhardt and Grubb, 2003)
• In Indian financial system, in its first-ever budgetary exercise aimed at gauging the quality of implementation,the Finance Minister recently presented an “Outcome Budget”in the Parliaments is a compilation of the intended and anticipated outcomes as identified by 44 ministries and their respective departments,sought to be achieved through allocations made in the budget for the current financial year(The Hindu,2005).

Budgetary Control

Effective financial management requires control systems to ensure that funds are spent appropriately on specified activities. In India, the financial management of the country is the responsibility of the legislature, executive, and machinery entrusted with accounts and audit, as well as Parliamentary Committees. Budgetary control is exercised to guarantee that the money approved by Parliament is used for its intended purpose and in the manner approved by Parliament. The Comptroller and Auditor General of India (C&AG), Controller General of Accounts, and Parliamentary Finance Committees exercise this budgetary control in India. These financial committees have been established to enable Parliament to exercise budgetary control effectively.

Auditing of Accounts
In October 1976, the Controller-General of Accounts (CGA) was established to manage matters related to the departmentalization of accounts of the Union Government. This organization, which operates as part of the Ministry of Finance, performs various key functions, including:

• Prescribing the format of accounts for the Union and State Governments
• Establishing accounting procedures
• Ensuring the maintenance of adequate accounting standards by Central Accounts Offices
• Consolidating the monthly and annual accounts of the Government of India; and
• Administering rules under Article 283 of the Constitution concerning the custody of the Consolidated Fund of India, the Contingency Fund, and the Public Account.

The CGA prepares a condensed version of the Appropriation Accounts and the Finance Accounts of the Union Government.

However, merely preparing accounts by the CGA is not sufficient. It is essential to verify the accuracy and completeness of the accounts and ensure that the expenditure incurred has been sanctioned by Parliament and has occurred in compliance with the rules approved by Parliament. Hence, the Comptroller and Auditor General of India (C&AG) audits the accounts prepared by the CGA. The audited accounts are then submitted to both Houses of Parliament, together with the C&AG report. The C&AG is responsible for auditing all expenditures of the Central and State Governments and submitting their audit reports to the President or Governor for presentation before the appropriate legislature. The C&AG's report serves as a 'certificate,' and their 'observations' summarize any objections and irregularities concerning voted and charged expenditures in the budget.

Article 149 of the Constitution outlines the duties and powers of the C&AG. Under Article 150, the C&AG must prescribe the format for maintaining the accounts of the union and the states. Additionally, Article 151 mandates the C&AG to submit reports regarding the accounts of the union and the states.

The C&AG performs various duties and exercises powers in relation to the accounts of the union and states as prescribed by Parliament. As a result, Parliament enacted the Comptroller and Auditor-General's (Duties, Powers, and Conditions of Service) Act, 1971, which was amended in 1976 to relieve the C&AG of their duty to prepare the accounts of the union. Other significant provisions relating to the C&AG's duties include:

• Auditing and reporting on all expenditures from the Consolidated Fund of India and each state to ensure compliance with the law,
• Auditing and reporting on all expenditures from the Contingency Fund and the Public Account of the union and the states, and
• Auditing and reporting on all trading, manufacturing, and profit and loss accounts maintained by any department of the union or a state.

The Constitution safeguards the independence and freedom of the Comptroller and Auditor-General and places them beyond political influences. Although appointed by the President, the C&AG may be removed based on an address from both Houses of Parliament on grounds of 'proven misbehavior' or 'incapacity.' Their salary and terms of service are statutory, i.e., as laid down by Parliament through legislation, and cannot be altered to their disadvantage during their term in office.

In conclusion, the audit department independently and fearlessly scrutinizes government expenditures and ensures that they are not incurred irregularly or wastefully. In this way, it assists the legislature in exercising financial control over the executive.

Public Debt Management

• Public debt management involves creating and implementing strategies to manage a government's debt, in order to raise necessary funds, achieve cost/risk objectives, and fulfill other goals such as maintaining a well-functioning market for government securities. In India, the Constitution outlines fiscal responsibilities for central and state governments through the union, state, and concurrent lists. As of March 2002, the combined liabilities of the central and state governments were estimated to be around 76% of India's GDP. The high level of public debt results in increased interest payments, which in turn necessitate higher market borrowings and put pressure on the fiscal deficit.
• The reorientation of India's debt management strategy began as part of the financial sector reforms initiated in the early 1990s. One of the first steps was to allow market-determined rates in the primary issuance market for government securities through auctions in 1992. Reserve requirements were also reduced; the Statutory Liquidity Ratio (SLR), which mandates banks to invest a certain percentage of their liabilities in government securities, was lowered from 38.5% in 1990 to 25% in 1997. Similarly, the Cash Reserve Ratio (CRR), that requires banks to maintain a certain proportion of their liabilities as cash with the Reserve Bank of India (RBI), was reduced from 25% in 1992 to 5% in June 2002.
• India's debt management strategy began to focus on addressing interest rate and refinancing risks associated with managing public debt, while also aligning with monetary policy objectives. This required authorities to develop the necessary institutional, infrastructure, legal, and regulatory frameworks for the government securities market.

Coordination with monetary and fiscal policies

• The Reserve bank of India acts as the government’s debt manager for marketable internal debt. Since the RBI is also responsible for monetary management, there is a need for coordination between the monetary and debt management policies, especially in view of the large market borrowing programme to be completed at market related rates.
• During the first stages of market development, especially for countries such as India with large net market borrowing (3 to 4 per cent of GDP in the recent period), having the central bank responsible for both debt management and monetary management, has the advantage of appropriate policy coordination. During the early period, however as the markets develop, the economy opens up for capital flows and the private sector starts contributing more to the economic activity, there is a need for independent monetary management and separation of the debt management function from the central bank. Amendments to the RBI Act have been proposed to remove the mandatory nature of public debt management by the RBI and allow the government to entrust the public debt management function to any agent.
• Risk Management Framework
  As regards management of external debt, the Indian government has adopted a cautious and step-by-step approach toward capital account convertibility. It has initially liberalised non-debt creating financial flows followed by liberalisation of long -term debt flows. There is partial liberalisation of external commercial borrowing, but only for the medium term and long-term maturities. There is a tight control on short-term external debt and a close watch on the size of the current account deficit. In fact, the Government of India (GOI) does not borrow from external commercial sources and there is no short-term external debt on the government account. There is a high share of concessional debt, amounting to nearly 80 per cent of sovereign external debt at the end of March2002.The maturity pattern of government debt is also concentrated toward the long end of the debt portfolio.
• As regards internal debt, there is a natural incentive to focus on long-term sustainability of interest rates. There has been a conscious attempt to avoid issuance of floating rate and short-term debt and foreign currency -denominated debt.

Cash Management

• In a landmark development in 1994, the GOI entered into an agreement with the RBI to phase out the system of automatic monetisation of budget deficits within three years. Accordingly, the system of financing the government through creation of adhoc treasury bills was abolished effective April 1 1997. Under a new arrangement, a scheme of Ways and Means Advances (WMAs) was introduced to help the GOI to address the temporary mismatches in its cash flows. According to this scheme, a limit was fixed for WMAs, so that when the government reaches 75 per cent of the limit, the RBI could enter the market on behalf of the government to raise funds. This arrangement means that the government has to fund its budget requirements at market related rates.
• The RBI also provides WMAs to the states. Once the limits are reached, the accounts go into overdraft, and they are limited not only in size to the WMA limit, but also not allowed to continue beyond 12 working days. Beyond this point, payments are stopped on behalf of the respective state government.

Legal Ceilings on government debt

The central government introduced the Fiscal Responsibility and Budget Management Bill (2000) in Parliament. The bill aims at ensuring inter- generational equity in fiscal management and long-term macroeconomic stability. This would be accomplished by achieving sufficient revenue surplus; eliminating fiscal deficit; removing impediments in the effective conduct of monetary policy and prudential debt management through limits on central government borrowings, debt and deficits and establishing greater transparency in fiscal operations. The specific target for debt management in this regard is to ensure that the total liabilities of the central government does not exceed 50 per cent of GDP. Simultaneously the central government will not borrow from the RBI in the form of subscription to primary issues by the RBI.

Developing the markets for government securities

Since the early 1990s, the RBI has been focusing on the development of the government securities market through development of primary and secondary markets. In 1996, the structure of Primary Dealers (PDs) was introduced to ensure development of underwriting and market making capabilities for government securities outside the RBI .The banks are allowed to undertake trade in government securities though member brokers of the National Stock exchange, the Bombay Stock Exchange and Over-the-Counter Exchange of India. After irregularities in the securities market that involved fraudulent links between the brokers and banks, banks were advised by the RBI not to trade more than 5 per cent of their transactions through a single broker.

Role of the Ministry of Finance, Finance Commission and Planning Commission in Financial   Management

The Finance Ministry has a significant role to play in the government’s financial management policies. The important  departments under the Finance Ministry  are the, the Department of Economic Affairs, the Department of Expenditure, and the Department of Revenue.

Department of Economic Affairs (DEA)

The Department of Economic Affairs is the nodal agency of the union government to formulate and monitor country's economic policies and programmes having a bearing 

on internal and external aspects of economic management. One of the principal responsibilities of this Department is the preparation of the Union Budget every year (excluding the Railway Budget, which is prepared by the railway Ministry).

The Department of Expenditure

The Expenditure Department has the following divisions viz., the establishment division, the plan finance I and II divisions, the finance commission division, the pay research unit, the staff inspection unit, the cost account branch, the National Institute of Financial Management, the central pension accounting office, the office of chief controller of accounts and the miscellaneous department branch.

Establishment Division

The Establishment Division plays a crucial role in the administration of various financial rules and regulations including service conditions of all central government employees.

Plan Finance I

Plan Finance-I Division handles matters relating to overall financial position and plan outlays of States. The Division is closely associated with Planning Commission in assessment of financial resources for five year plans and annual plans of states.

Plan Finance Division II

Plan Finance-II Division deals with matters relating to the Central Plan. These cover the estimates of resources for central plan including Internal and Extra Budgetary Resources, Plan outlays of different Ministries/Departments of the Central Government, appraisal of Plan projects/schemes before they are submitted to Public Investment Board (PIB)/Expenditure Finance Committee (EFC) etc.

Finance Commission Division

The Finance Commission Division of the Department of Expenditure is concerned with the implementation of the recommendations of the Finance Commission. It provides the status of the implementation of the accepted recommendations of Expenditure Finance Commission from time to time and any other data on state finances when required.

Pay Research Unit

The Pay Research Unit is mainly responsible for collection, compilation and analysis of data on actual expenditure incurred on pay and various types of allowances as well as data pertaining to the strength of the central government civilian employees and Employees of Union Territory Administration.

Staff Inspection Unit

The Staff Inspection Unit was set up with the object of effecting economies in manpower consistent with administrative efficiency and evolving performance standards and work norms in government offices and institutions wholly or substantially dependent on government grants. Its officers also serve as core member on the committees appointed to scrutinise manpower requirements of scientific and technical organisations.

Cost Accounts Branch

Cost Accounts Branch (CAB) is a specialised pricing office of the central government within the Ministry of Finance, Department of Expenditure. CAB renders professional assistance to different mnistries on the matters of determination of fair cost of production/selling prices of various industrial products, consumer products, services, 

etc. CAB also renders expert professional advice to different ministries/departments on matters of tariff fixation, advise on the specific reference emanating from the implementation of Central Excise Act, 1944, issues relating to introduction of Commercial, Financial, Cost and Management Accounting, conducting system studies, analytical studies, etc.

National Institute of Financial Management (NIFM)

NIFM is a center for excellence encouraging learning, teaching and research in the area of financial management

Central Pension Accounting Office

The Central Pension Accounting Office (CPAO) was set up as an administrative unit of the Ministry of Finance, Department of Expenditure under the Controller General of Accounts. This office is administering the ‘Scheme for Payment of Pension to Central Government Civil Pensioners by Authorised Banks’.

Controller General of Accounts (CGA)

The Controller General of Accounts is the apex accounting authority of the central government and exercises the powers of the President under Article 150 of the Constitution for prescribing the forms of accounts of the union and state governments on the advice of the Comptroller & Auditor General of India. The chief controller of accounts is in overall charge of the accounting organisation of the ministry.

Miscellaneous Departments Branch

The branch functions as an Associated Finance Unit to the Departments, viz., Prime Minister Office, Supreme Court of India, Ministry of Parliamentary Affairs and Secretariats of the Lok Sabha and the Rajya Sabha, Cabinet, President and Vice President. It deals with all financial matters including the annual budget of these Departments.

Department of Revenue

The Department of Revenue functions under the overall administrative direction and control of the Secretary (Revenue). It exercises control in respect of matters relating to all the Direct and Indirect Taxes through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Customs and Central Excise. Each Board is headed by a Chairman who is also ex-officio Special Secretary to the Government of India. Matters relating to the levy and collection of all the Direct Taxes are looked after by CBDT, whereas those relating to levy and collection of customs and central excise duties and service tax fall within the purview of Central Board of Customs and Central Excise.

Role of the Finance Commission

• Recognising the fact that the financial resources of the states may prove inadequate for undertaking welfare, maintenance and development activities, the framers of the Indian Constitution did make elaborate arrangements relating to flow of funds from the centre to the states. The disequilibrium between proliferating functional responsibilities of the states and their own resources is corrected by central transfers effected through the following three main channels.
  (i) Statutory transfers through the Finance Commission.
  (ii) Plan transfers through the Planning Commission.
  (iii) Discretionary transfers for centrally sponsored schemes, relief from natural calamities, and relief and rehabilitation of displaced persons.
• Transfers routed through the finance commission pertain to sharing of central taxes and grants-in-aid of revenues to the states.
• Finance Commission is a unique feature of the Indian Constitution. Its first task, is to evolve a scheme of transfer of financial resources from the centre to the states so as to ensure financial equilibrium at the two levels of government during the period of its award. Secondly, it is to design formulae to allocate resources so transferred among the states. The tasks of a Finance Commission are by no means easy, as it has to judge the conflicting claims, needs and resources of the centre and the states and to evolve a scheme of transfers which would balance the needs and resources of the two layers of the government.
• The procedure adopted by the Finance Commission to fulfill its duties is as follows: On the basis of the trends in the finances of the central and state governments, it prepares estimates of revenue and expenditure for the period of its award .It then decides the total amount of transfers from the centre to the states so as to maintain the desired equilibrium in the finances of the two tiers of the government. Thereafter, the total amount of transfers is broken down into devolution and grants-in-aid among the states. Transfer of resources from the center to the states is designed to correct vertical imbalances while the distribution of resources among the states aims at correcting horizontal imbalances.
• Twelve Finance Commissions have been constituted since the commencement of the Constitution.

Role of the Planning Commission

• The Planning Commission, established in 1950, played a significant role in the allocation of resources to state governments in India. This was made possible through the invocation of Article 282 by the Central Government, which allows the center or a state to provide grants for any public purpose. However, the grants under Article 282 have been a subject of controversy as they were initially intended for unforeseen emergencies such as droughts, famines, and other natural calamities. These grants were not envisioned as part of the normal financial relations between the center and the states.
• As a result of the Planning Commission's involvement in allocating resources to state governments, the role of the Finance Commission has been limited to overseeing non-plan expenditure of state budgets. This has led to concerns that the Planning Commission has gained excessive power in matters related to the allocation of resources, thereby restricting the Finance Commission's intended scope of responsibility in center-state financial relations.

Conclusion

In conclusion, the Indian financial management system is a comprehensive and intricate process that involves various stages, approaches, and organizations. The budgeting process is an essential aspect of financial management, ensuring efficient allocation of resources and adherence to national objectives. Performance budgeting, zero-based budgeting, and outcome-based budgeting are some of the approaches used to improve the effectiveness of the budgeting process. Budgetary control, exercised by organizations such as the Comptroller and Auditor General, ensures compliance with approved budgets and maintains the government's fiscal stability. Public debt management is another crucial aspect of financial management, requiring strategic planning and monitoring to ensure sustainable debt levels and reduce fiscal deficits. Overall, the Indian financial management system plays a significant role in the growth and sustenance of the country's economy.

Frequently Asked Questions (FAQs) of Financial Management

What is the purpose of a budget in financial management?

A budget serves as a financial plan that forecasts an organization's revenues and expenses for a specific period, typically one year. It outlines the government's activities and resource allocations, reflecting its priorities and objectives. A budget helps organizations plan, allocate resources, and manage their finances effectively, enabling them to make informed decisions about their activities and initiatives.

What are the main components of a budget?

A budget usually consists of three main components: an analysis of the revenues collected, expenses incurred, and changes in the national debt and other financial aspects during the fiscal year immediately preceding the budget presentation; a projection of the organization's expenditures for the upcoming year; and recommendations for any necessary changes in tax rates, exemptions, or increases to ensure that the planned expenditures are adequately funded.

What are the different approaches to budgeting?

Some approaches to budgeting include planning and programming budgeting, performance budgeting, zero-based budgeting, and outcome-based budgeting. Each of these approaches emphasizes different aspects of financial management, such as resource allocation, performance measurement, cost control, and the achievement of specific outcomes.

What is the role of the Comptroller and Auditor General (C&AG) in India's financial management system?

The C&AG is responsible for auditing all expenditures of the Central and State Governments and submitting their audit reports to the President or Governor for presentation before the appropriate legislature. The C&AG's report serves as a 'certificate,' and their 'observations' summarize any objections and irregularities concerning voted and charged expenditures in the budget. They ensure the accuracy and completeness of the accounts and verify that the expenditure incurred has been sanctioned by Parliament and has occurred in compliance with the rules approved by Parliament.

What is public debt management, and why is it important?

Public debt management involves creating and implementing strategies to manage a government's debt, in order to raise necessary funds, achieve cost/risk objectives, and fulfill other goals such as maintaining a well-functioning market for government securities. Effective public debt management is crucial for maintaining fiscal stability, controlling interest payments, and ensuring the long-term sustainability of a country's finances. In India, the high level of public debt puts pressure on the fiscal deficit and requires careful management to avoid negative impacts on the economy.