Standardising of Financial Rules and Budget Formats across States

Standardising of Financial Rules and

Budget Formats across States

Office of the AG(A&E), Jharkhand, Ranchi

2

Task assigned by Headquarters

Study of Budget Manuals of Union & State Governments

Study of Budgets of GOI and States and related regulations, Government orders, rules etc.

Identify commonalities and variances in Budgets

Suggest best practices


3

Structure of Presentation

Characteristics of a Budget

Budget Preparation and Objectives

Methodology and Criteria

Constitutional Provision for Budget Preparation

Documentation of Budget Documents

Findings


4

Structure of Presentation

Breach of Constitutional Provision Incorrect exhibition of Revenue and

Capital Expenditure Receipts Budget Issues Other errors/ misclassification noticed in

Budget Documents Variation in practice relating to Flagship

Schemes Good Practices and Recommendations


5

Budget should aim to be Comprehensive,

Transparent,

Realistic,

Policy-oriented and

Allow for clear accountability in Budget execution.

Characteristics of a Budget


6

Budget, a policy instrument, articulates Legislature and Executive’s intent in terms of the goals, objectives, strategies of the Government.

Budget governs Fiscal Plan and Fiscal Operations of the Government.

Budget should be dovetailed with the overall macro economic framework.

Budget Preparation


7

Study of the Budget Documents focuses Study Variance/ Commonalities in

Documentation

Review with reference to Constitutional Provisions

Review with reference to accepted budgetary principles/ practices

Good practices for consideration and adoption in Centre/ States

Objective of Study


8


Collection of Budget Documents Budget Documents of Union and 13

States for financial year 2010-11 from different regions were selected for study

Confirmation from Pr. Accountant General/ Accountant General sought

Basic principles of classification, Budget Manuals, List of Major & Minor Heads of Accounts, Budget Circulars etc. referred to


9


Recent papers of International Organizations dealing with Public Finance

Budgeting practices of Flagship Schemes reviewed

Gaps in linking financing of such schemes and utilisation of such funds by the States

Constitutional Provisions


11


Article 112/202 of the Constitution Provision to place Annual Financial

Statement. Specific items to be classified as Charged expenditure for the Union/ State

Article 113/203 of the Constitution Procedure to place “Demand for Grants” in

Legislature with respect to estimate. Demands are placed only on the prior recommendation of the President/Governor


12


Article 114/204 of the Constitution Relates to introduction of Appropriation Bill

of Union/State. No money shall be withdrawn without Appropriation made by Law

Article 265 of the Constitution No Tax shall be levied or collected except by

authority of Law


13


Article 266(1) of the Constitution All revenues received/ loans raised on behalf of

the State Government are part of “The Consolidated Fund of the State”. No money out of the Fund shall be appropriated without law.

All other public money credited to Public Account.


14


Article 267(1)of the Constitution Parliament by law establish Contingency

Fund of India place at the disposal of the President pending authorisation by the Parliament under Article 115 and 116

Article 267(2)of the Constitution Legislature of State by law establish

“Contingency Fund of the State” which place at the disposal of the Governor for meeting unforeseen expenditure


15

Review of Documents placed

Budget Documents of 13 States has been reviewed

A tabular format has been devised to verify Budget Documents prepared as per

Constitutional requirements

Other Budget Documents prepared for tabling in the Legislature


16

Findings

Findings of the Study broadly categorized as:- Breach of Constitutional Provisions Incorrect exhibition of revenue and capital

provision under expenditure heads Receipt Budget- Issues Other errors/ misclassification noticed in

budget documents Variation in practices relating to Flagship

Schemes


17

Breach of Constitutional Provisions


18

Exhibition of Charged Expenditure

Under Articles 202(2), the expenditure Charged on the Consolidated Fund of the State should be shown separately in “Annual Finance Statement”.

In Andhra Pradesh, Madhya Pradesh, Haryana and Punjab, “Charged Expenditure” has not been shown separately in the Annual Financial Statement.


19

Incorrect provisioning of Charged Expenditure

Under Articles 202(3)(a), the emoluments and allowances of the Governor and expenditure relating to his office should be charged on the Consolidated Fund of the State.

In Karnataka, Madhya Pradesh and Meghalaya provisions has been made under Voted


20


Under Articles 202(3)(c), Debt Charges, Sinking Fund, redemption of Debt etc. should be charged on the Consolidated Fund of the State.

In Bihar provision of ` 160 crore, in the case of Sinking Fund, has been made under Voted


21


Under Articles 202(3)(d), expenditure in respect of salary and allowances of High Court Judges should be charged on the Consolidated Fund of the State.

In Karnataka some provision has been made under Voted

A tabular format shows details


22

Grants-in-Aid budgeted as Capital

Grants-in-Aid should be classified under Revenue Section

For transparency in accounts, Grants-in-Aid is to be bifurcated into Grants-in-Aid for Salary, Grants-in-Aid for Non-Salary and Grants for creation of capital assets

Study reveals that 10 States had budgeted ` 1378.77 crore in Capital Section


23

Minor Works/ repairs budgeted as Capital

Provision for minor works/ Maintenance & repairs should be under “Revenue heads”

11 States have made provision of ` 817.05 crore for minor works under Capital heads


24

Major Works budgeted as Revenue

Budget provision for major works is intended to create asset

It should be budgeted for under “Capital heads”

10 States had provided a total of ` 1228.32 crore budget for Major Works under “Revenue Section”

Classifying revenue as capital, vice- versa has implication on the revenue balance of the State

This will understate/overstate the revenue deficit


25

Receipt Budget Issues


26

Non Budget Transparency in Union Receipt

In six tier classification structure, 15 digit codification pattern is adopted

Union Government’s receipt classification is only upto Major head (in Annual Financial Statement)

Greater degree of transparency required


27

State Receipt Budget Issues

Wide variations of codification structure noticed in State Receipts Budget

Many States prepare their Receipts Budget upto 5-Tier

Additional Resource Mobilisation are not clearly depicted in Budget


28

Budgeting under minor head “800 Other Receipts”

Tendency of classifying revenue receipts under omnibus head observed

Classification under “800” of Tax Revenue (i) Sales Tax and (ii) State Tax other than

Sales Tax- it is nominal

Budgeting under “800” in case of Non-Tax Revenue is substantial


29

Statement of Revenue Foregone

Union Government prepares Statement of Revenue Foregone

Statement presents revenue impact of Tax incentives or subsidies

No State Government prepares such statement, currently

For clearer impact of exemptions, subsidies etc. on State Finances, State Government may consider preparing such a Statement


30

Expenditure Budget Issues


31

Presentation of Additional Statements

State Governments may consider preparing certain documents/ statements noticed in Union Budget:- Implementation of Budget Announcements Budget Provision by Heads of Accounts Reconciliation between Demands for Grants

and Annual Financial Statement Medium term expenditure trends Strength of establishment and provision


32

Provision under Omnibus expenditure head

Provision under “800 Other Expenditure” should be avoided as far as possible.

This is an essential requirement in facilitating transparency in Budget

States viz. Meghalaya, Assam and Bihar has provided substantial amounts under such residuary head.


33

Coding Pattern of expenditure heads

Standard 6 tier coding pattern has been prescribed

Major, Sub-Major and Minor have been standardized as per List of Major & Minor heads of Accounts

Wide variations has been noticed for Sub-head, Detailed and Object head

Many States have maintained 5 tier classification


34

Grant-in-Aid classified under other heads

Grants-in-Aid has been classified under Lump Sum

Other Charges

State Contribution

Central Contribution

7 States have classified ` 3665.33 crore Grants-in-Aid in such heads


35

Flagship Schemes


36

Flagship Scheme- Sarva Shikhsa Abhiyan

Assam, Andhra Pradesh, Karnataka, Madhya Pradesh, Meghalaya and Punjab have not operated prescribed minor head “111 Sarva Shikhsa Abhiyan”

Haryana and Madhya Pradesh classified the scheme as CPS and CSS respectively

Bihar, Jharkhand, Orissa and Punjab have shown the object head as State Share/ Lump sum provision instead of Grants-in Aid.


37

Flagship Scheme- National Rural Health Mission

Bihar and Himachal Pradesh have operated the scheme under the major head 4210 and 2211 respectively instead of major head 2210

Assam and Madhya Pradesh classified the scheme as CSS

Bihar, Himachal Pradesh, Jharkhand, Karnataka, Orissa and Punjab have shown the object head as State Share/ Lump sum provision


38

Flagship Scheme- MNREGA/ NREGA

Assam, Andhra Pradesh and Punjab have operated the scheme under the major head 2501/ 2515 respectively instead of major head 2505

Himachal Pradesh and Madhya Pradesh classified the scheme as CSS while Haryana has shown as CPS

Bihar and Jharkhand, have shown the object head as State Share

The name of the scheme in Karnataka is “Karnataka Rural Employment Guarantee Act”


39

Flagship Scheme- JNNURM

All State Governments have correctly operated the scheme under major head 2217/ 4217

Himachal Pradesh, Jharkhand and Punjab operated the scheme partially as SP and partially as CSS

Meghalaya has shown the object head as “Major Works”, while there is no Detailed and Object head in Kerala


40

Flagship Scheme- Indira Awas Yojana

Wide Variations of major heads have been operated for the scheme (2216/ 2501/ 2515/ 4515)

Himachal Pradesh and Madhya Pradesh operated the scheme as CSS while Haryana as CPS

Bihar, Jharkhand has shown the object head as “State Share”, while there is no Detailed and Object head in Kerala


41

Flagship Scheme- ARWSS

Haryana and Himachal Pradesh have operated the scheme under the major head 2215 and 4215 while other states have budgeted only in revenue section 2215

Himachal Pradesh has operated the scheme as Non Plan while Other States have shown SP/ CSS


42

Flagship Scheme- ICDS

Most States have classified the scheme under the major head 2235 and 4235

However, Karnataka has operated the scheme in major head 2211 and Meghalaya has operated major head 2236


43

Flagship Scheme- Backward Region Grant Fund

Most States have correctly classified the scheme under the major head 2505

Bihar and Kerala have classified the scheme under object head “Other Charges” instead of grants-in-aid

No such scheme found in the Budget of Assam


44

Flagship Scheme- Mid Day Meal

Assam, Andhra Pradesh, Himachal Pradesh, Madhya Pradesh, Meghalaya and Punjab have not operated prescribed minor head “112 National Programme of Nutritional Support to Primary Education”

Haryana and Orissa have classified the scheme under CPS

There is no such scheme found in Karnataka


45

Good Practices & Recommendations


46

Good Practices and Recommendations- General

Determine a clear macro-economic framework as part of the Budget Process

Haryana may consider preparing a separate document called “Annual Financial Statement” as required in Article 202(1) of the Constitution of India

States should consider preparing Performance Budget, Gender Budget and Outcome Budget as good practice


47

Good Practices and Recommendations- Correcting Constitutional Infringements

Madhya Pradesh, Andhra Pradesh, Haryana and Punjab should include a separate statement of expenditure charged upon the Consolidated Fund of State in the Annual Financial Statement

Karnataka, Madhya Pradesh, Bihar and Meghalaya should correct provisions shown as Voted in breach of Article 202(3)(a),(c) & (d)

Misclassification pertaining to revenue and capital heads should be reviewed to avoid overstatement/understatement of “Revenue Deficit”


48

Good Practices and Recommendations- Receipts Issues

Union Government needs to bring greater transparency in Receipt Budget by making projection below major head

States should review classification under “Other receipts” under Non-Tax section

Good practice of Union Government- of laying “Statement of Revenue Foregone” needs to be emulated by States


49

Good Practices and Recommendations-

Expenditure Budget

Good practice of Union Government may be adopted by States : Implementation of Budget Announcements Budget provision by heads of Accounts Reconciliation between Demands for Grants

and Annual Financial Statement Trends in receipts/ expenditure for last 10

years and Estimated strength of establishment and

provision thereof


50

Good Practices and Recommendations- Expenditure Budget

Review expenditure budget to minimise provisions under omnibus head “Other Expenditure” to bring more transparency

Budget classification below minor head needs alignment across States to ensure uniformity

Provision under Grants-in-Aid should be made under Revenue Account


51

Good Practices and Recommendations- Flagship Scheme

Clarity and Uniformity regarding nature of scheme viz. State Plan, Centrally Sponsored Scheme and Central Plan Scheme is required

Union Government should allot unique code for Flagship schemes for uniformity and linking Plan schemes

Share of funding between Centre and State should be indicated in Budget in case of CSS

Uniform classification needs to be operated to facilitate inter-state comparison


52


53

FLAGSHIP SCHEMES SELECTED FOR STUDY

1. Sarv Shikhsha Abhiyan (SSA)

2. Mid Day Meal Scheme (MDM)

3. National Rural Health Mission (NRHM)

4. Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)

5. Backward Region Grant Fund (BRGF)

6. Jawaharlal Nehru National Urban Renewal Mission (JNURAM)

7. Accelerated Rural Water Supply Schemes (ARWSS)

8. Indira Awas Yojana (IAY)

9. Integrated Child Development Schemes (ICDS)


54

States Selected for Review of Budget

1. Andhra Pradesh 8. Kerala

2. Assam 9. Madhya Pradesh

3. Bihar 10. Meghalaya

4. Haryana 11. Orissa

5. Himachal Pradesh 12. Punjab

6. Jharkhand 13. West Bengal

7. Karnataka


55

Codification Structure

Major Head XXXX Sub-major Head XX Minor Head XXX Sub-head XX Detailed Head XX Object Head XX


56



57

Grants-in-Aid budgeted as Capital


58

Minor Works/ repair budgeted as Capital


59

Major Works budgeted as Revenue


60

Codification pattern in respect Receipt Heads sub-ordinate to Minor heads


61

Variation of classification under the omnibus head ‘800 Other Receipts’


62

Provision under omnibus heads


63

Codification pattern in respect Expenditure Heads sub-ordinate to Minor heads


64

Grants in Aid classified under other head


65

THE CONSTITUTION OF INDIA(Part VI.—The States.—Arts. 200—202.)

Procedure in Financial Matters202. (1) The Governor shall in respect of every financial year cause to be laid before the House or Houses of the Legislature of the State a statement of the estimated receipts and expenditure of the State for that year, in this Part referred to as the "annual financial statement".(2) The estimates of expenditure embodied in the annual financial statement shall show separately—(a) the sums required to meet expenditure described by this Constitution as expenditure charged upon the Consolidated Fund of the State; and Bills reserved for consideration.(b) the sums required to meet other expenditure proposed to be made from the Consolidated Fund of the State; and shall distinguish expenditure on revenue account from other expenditure.(3) The following expenditure shall be expenditure charged on the Consolidated Fund of each State—(a) the emoluments and allowances of the Governor and other expenditure relating to his office;(b) the salaries and allowances of the Speaker and the Deputy Speaker of the Legislative Assembly and, in the case of a State having a Legislative Council, also of the Chairman and the Deputy Chairman of the Legislative Council;(c) debt charges for which the State is liable including interest, sinking fund charges and redemption charges, and other expenditure relating to the raising of loans and the service and redemption of debt;(d) expenditure in respect of the salaries and allowances of Judges of any High Court;(e) any sums required to satisfy any judgment, decree or award of any court or arbitral tribunal;(f) any other expenditure declared by this Constitution, or by the Legislature of the State by law, to be so charged.

Major Works

Rule-8, Delegation of Financial Power Rules,1978

Minor Works

Rule-8, Delegation of Financial Power Rules,1978