“ INTEGRATED F
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Information technology (IT) is "the study, design, development, implementation, support or management of infotech". Information technology is a general term that describes any technology that helps to produce, manipulate, store, communicate, and/or disseminate information. Information refers to data that has been organized and then communicated. Information technology is a broad term used to refer to any form of technology used to create, transfer, or store information in all of its various forms (text, images, sound, multimedia files). The term "IT" encompasses the methods and techniques used in information handling and retrieval by automatic means. The means include computers, telecommunications and office systems or any combination of these elements. Information technology, while stirring thoughts and visions of networks, the Internet, server rooms, racks of switches and routers, and advanced terms, the 'technology' doesn't necessarily refer only to computer related issues. Any medium that stores and processes information is also in the category of information technology. The back-story of information technology precedes the invention of the computer. The abacus, used by Asians, Egyptians, Romans, and the Greek can be termed a source of information technology. Calculators, the first mechanical one built by German polymath Wilhelm Schickard, or the slide rule, developed in 1622 by William Oughtred, also comes under the heading of information technology. Another example would be punch card machines, expanded upon by IBM in the early to mid 1900's, qualifies the term information technology.
1.1 Pre-History of Information Technology
G. Boole developed a mathematics of true values, logic Charles Babbage invented a computing machine based on mechanics, e.g. cogwheels Countess Ada Lovelace programmed Babbage’s invention; first programmer Looms were automated in the 18th century
As time progressed along with the advances of inventions and applied knowledge, computing took shape and became useful in a variety of ways
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other than calculations. Computer science became an academic specialty, creating computer science departments and classes. As these classes took shape, separate branches of computer science became distinct areas of study. Today, Information Technology departments use computers, data centers, servers, database management system, specialized software applications and more, managed by system and database administrators.
1.2 Advent and Development of Information Technology in India
Today India is known world over as a leader in Information Technology. This has not happened over a short period of time. A sustained effort by the Indian Government, corporate houses, and universities has made this possible. It all started with a small group of initiators within the government and entrepreneurs outside the government sensing the opportunities in Information Technology. After a certain passage of time the government came up with full support to change the environment for IT. Thus began a series of steps that transformed IT from being just a sector to an Industry. Transformation of Information Technology: From IT as a sector To IT as an Industry
Providing satisfactory services to Adding value to sustain the growth existing increases in demand Government controlled Government facilitated infrastructure and technology infrastructure and technology IT for specialists Fulfilling external demand IT for masses Creating internal demand
The most important thing that came out from this was the advent of information technology as an industry. In the beginning IT was treated at par with conventional manufacturing industry, but later on it started receiving the necessary support as a non conventional service industry. National Association of Software and Service Companies (NASSCOM) was established in 1988 as the business strategist of InfoTech for the
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Government of India. NASSCOM is dedicated to framing policies that focus on the interdependence of business opportunities and social environment. The main focus of NASSCOM for IT is to • • Add value to IT as an industry Take IT to the masses
Even before this time, during the erstwhile license raj, Tata Consultancy Services Ltd was established with Mr. F C Kohli at the helm. Mr. Kohli is many times referred to as the father of Indian Software Industry. Mr. Kohli was the first person to talk about Tandem, first to import an IBM 3090, first to maintain that mainframes are not dead, and to question the openness of open systems-even before most of the world addressed these concerns. The birth of software industry in India began in 1970 with the entry of Tata Consultancy Services Ltd (TCS) into the domain of outsourced application migration work. In the late 1960’s Tata’s created TCS as a central service center for TATA group companies. A few MIT trained Indian professionals were recruited and a large computer system was imported. With IBM having been thrown out of India, the concept of outsourcing application development work had become a necessity for Indian companies. Utilizing its excess computer capacity, TCS began doing outsourced application work for organizations such as Central Bank of India and Bombay Telephones. Within a few years TCS began sending young Indian engineers to a joint venture partner in the United States, Burroughs for training. The trainee engineers excelled at doing platform conversions and TCS started earning conversion assignments for its engineers in Germany and elsewhere. Following the success of TCS many new companies were set up in India. During the years 1968-1984, four type of companies interlinked in direct and indirect ways to facilitate body shopping (Indian engineers going overseas to do software programming onsite). There were established companies like TCS and Infosys Technologies which supplied programmers to large multinationals in IT primarily in the US. These multinationals also recruited programmers through local US companies established by Indians living in the United States. Such companies in turn recruited manpower through local search agents (small companies run by Indians living in the United States). These agents from several states in the United States would contact local agents in India from a multitude of small companies and operators. The responsibility of collecting resumes, forwarding them to U.S. placement agents preparing visa and contract finalization with the programmers was done by the agents in India. The programmers were paid low wages.
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Commissions were charged by different members of the supply chain. Sometimes there were subagents spread in different cities and towns in India. There was an interesting network among revolving players. Programmers who returned to India after a stint overseas would join a pool of software engineers who could be hired by the established companies in India. Often programmers sent onsite by large Indian companies would move laterally to another assignment in the United States through a local US agent to prolong their US experience. Later they would return to India and be in the market for local Indian agents to hire them. The Indian Diaspora had played a key role in the bodyshopping exports. Several reports also suggest several instances where Indian immigrants in the United States helped US buyers to locate Indian suppliers. Field interviews with US customers reported that the impetus for outsourcing to India came from employees of Indian origin. Bodyshopping was and continues to be an attractive strategy for new entrants into the industry, requiring nothing more than knowledge and established relations with few potential clients.
1.3 The Era of Outsourcing
While initial development of India’s software industry was based primarily on bodyshopping work onsite at US firms, in recent years the trend has been increasingly for Indian firms to conduct software development for U.S. clients “offshore” in India. This shift was the result of a maturing of India’s software industry and its international reputation over a decade and a half and the development of necessary infrastructure and communications technologies in India that has made offshore work possible. As the Indian software industry matured, increasing client confidence in Indian capabilities and quality standards enabled Indian firms to move their work offshore. With maturity has come a goal to move up the value chain. Many new companies were set up in the 1980’s by entrepreneurs with ambitions of creating world class software development centres. Firms which had started primarily as subcontractors for technical manpower gradually shifted to managing complete parts or phrases of projects and then to delivering complete solutions from India. During this phase most companies made significant efforts to assimilate good practices in project management and quality and to acquire internationally recognized quality standards certification. NASSCOM played an aggressive role in promoting the India brand abroad. In some ways, during this period, India was building a launching pad for the eventual take off of its software service industry.
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In this period the Indian government played a facilitating role in advancing the industry & enabling offshore work in India. Recognizing the growth potential of the software industry, the government in the 1980s took key policy actions to open up the sector. Further policy reforms enacted since 1990s have facilitated development of telecommunications and other infrastructure required for offshore work. In 1990 the government created software technology parks (STPs) in 39 locations across India to provide software companies with access to high speed data communications and single window clearance for regulatory compliance. While few of the larger firms have made use of STP’s they have provided opportunities for new firms to launch, and smaller firms to grow, with little investment. The Indian software industry is now in its third phase- that of take off. Today most leading companies are operating in the high end software services business and are also making efforts to enter the products segment. A new breed of companies, led by second generation software entrepreneurs, is setting up product-oriented companies. The industry has weathered ups and downs in the global market, maintaining a high rate of growth. The industry moved centre stage in the domestic media because of its visibility in the United States, high market capitalization, and wealth creation for its employees.
1.4 Role of NASSCOM
The National Association of Service and Software Companies (NASSCOM), India’s software industry association, was founded in 1988 and has been a vocal and potent force in lobbying for policy reforms, including rules limiting access to capital markets, issuance of stock options, easing rules on foreign currency transactions, and improving telecom infrastructure. NASSCOM played a significant role in establishing a brand image for India in the global software services markets by participating in global trade fairs and events and organizing learning events in India that feature prominent experts from major markets. Through its annual reports NASSCOM has become the most reliable source of data and information about the Indian software industry. NASSCOM activities were influenced by the dominant software players, who share a great commonality of interest in terms of policy recommendations and the Indian brand. NASSCOM’s membership grew from 38 members in 1988 to over 1000 firms in 2008. It was most effective in policy reforms and brand promotion abroad. NASSCOM was less effective in representing small and medium scale enterprises or domestic rather export firms.
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1.5 Impact of Information Technology Industry on Indian Economy
The success of the Indian software industry has had wide-ranging effects across the Indian economy. Policy changes to enhance exports are facilitating rapid development of a domestic IT market, offering efficiency gains through adoption of information technologies. In sharp contrast to even 15 years ago, Indian business, government, and consumers have ready access to the newest software products and imported hardware. The very high standards of management practiced in Indian IT firms and the tremendous employment opportunities offered by the industry have had significant effects on the confidence, aspirations and work ethic of young professionals in India. The leading software firms have pioneered a movement to modernize Indian management practices, adopting practices of creative organizations with less hierarchical structures and strong work ethics. In order to comply with international norms to participate in international capital markets, IT firms have set new standards in accounting and corporate governance. They have offered unprecedented high-paying employment opportunities for the young and educated labour force, particularly for women professionals.
1.6 Indian firms moving up the value chain
The leading firms have moved up the value chain in software services, developing organizational and managerial capabilities that enable them to offer more comprehensive services than merely low cost programming. One sign of maturity is that the industry increasingly procures fixed price contracts, rather than the time and materials contracts of the earlier years. With the greater risk of fixed price contracts comes flexibility in organizing work, greater management control and an opportunity to earn higher returns as efficiency improves. In order to build client value, companies have expanded their capacity to service a wider range of software development tasks, as well as to move into new services such as product design and information services outsourcing. Software development includes analysis and specification of requirements, software design, writing and testing of software, and delivery and installation. Indian companies are trying to move beyond only writing and testing, which require the least skill and account for only a small portion of the overall project costs, to higher skill levels that require deeper business knowledge of the industry for which software solutions are being developed.
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In their quest to climb the value chain, Indian software firms ensured product quality and reliability by adopting internationally recognized standardized work processes. An increasing number of firms have met international certification requirements for key quality standards. For many, this was an exercise in brand building but the processes put in place left their hallmark on the quality of software products and services.
1.7 Current Industry
The industry is estimated to aggregate revenues of USD 73.1 billion in FY2010, with the IT software and services industry accounting for USD 63.7 billion of revenues. During this period, direct employment is expected to reach nearly 2.3 million, an addition of 90,000 employees, while indirect job creation is estimated at 8.2 million. As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 6.1 per cent in FY2010. Its share of total Indian exports (merchandise plus services) increased from less than 4 per cent in FY1998 to almost 26 per cent in FY2010.On the exports front the industry is expected to gross USD 50.1 billion in FY2010, thus implying the that major part of this industry’s revenues come from overseas thereby indicating the scope of growth on the domestic front. As per NASSCOM’s strategic review 2010 the domestic market for the industry is expected to grow at almost 8.5% for the next year. This will be made possible through rise in IT spending by Indian corporations, increased IT spending by the central as well as state governments in various e-Governance initiatives and the increasing mass appeal for IT.
1.8 Path Ahead
The beginning of the new decade heralds the slow, but steady end of the worst recession in the past 60 years. Global GDP, after declining by 1.1 per cent in 2009, is expected to increase by 3.1 per cent in 2010, and 4.2 per cent in 2011, with developing economies growing thrice as fast as the developed economies. Improving economic conditions signifying return of consumer confidence and renewal of business growth, is expected to drive IT spending going forward. IT services is expected to grow by 2.4 per cent in 2010, and 4.2 per cent in 2011 as companies coming out of recession harness the need for information technology to create competitive advantage. Organizations now recognize IT’s contribution to economic performance extending beyond managing expenditures. They expect IT to
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play a role in reducing enterprise costs, not merely with cost cutting but by changing business processes, workforce practices and information use. Movement toward SaaS and cloud computing, shared services, and more selective outsourcing will take firmer shape as near-term priorities to address constrained IT budgets. Government IT spending continues to rise across the world, focusing on infrastructure, and security. Other areas of spending include BPM, data management, on demand ERP, virtualization, and efforts to increase and deliver enterprise managed services on IP networks. Business process outsourcing spending in 2010 is expected to be increasingly driven by F&A segment and procurement, followed by HR outsourcing. Providers will increase their focus on developing platform BPO solutions across verticals and services. However, realization of this potential will involve mitigation of several challenges that India faces currently. Costs are expected to rise with wage inflation and increased attrition. While India has ample supply of talent, it is largely trainable in nature, not employable. This leads to incremental training costs and increased downtime for the industry, which is challenging keeping in mind quality talent availability in competing countries. Currently, over 90 per cent of total revenues are generated from the seven Tier-I locations, which are nearing peak capacities in terms of infrastructure support. India has to quickly develop other delivery locations to achieve its 2020 vision. There are concerns around security – both physical and data related, in service delivery, which would need to be addressed. Currency fluctuations have also dented India’s competitiveness, and steps need to be taken to address India’s increased risk perception. A key impact of the recession has been the rise of protectionist sentiments in major markets for the industry. The impending discontinuation of fiscal incentives and frequent changes in fiscal regulations are making the business environment more challenging. Last but not the least, a number of new outsourcing destinations seeking to emulate India’s success have emerged, offering multiple fiscal and training incentives, making them cost competitive. Concerted action by all stakeholders is required to capture the opportunities and mitigate future risks. In doing so, stakeholders (industry, NASSCOM, and the government) will need to act together in an unprecedented manner. Efforts should be made to catalyze growth beyond today’s core markets, towards establishing India as a trusted global hub for professional services, developing a high caliber talent pool, building a pre-eminent innovation hub in India.
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India’s technology and business services industry has flourished in the last decade and a half. A bright future lies ahead and the industry has much to look forward to, with the potential to quadruple its revenues over the next decade. Several macro-economic and social trends will support the rise of the IT-BPO sector in the future, in core and emerging markets. The government needs to continue nurturing this industry with incentives and a simplified tax structure that will promote investments, and also will need to drive the domestic industry by spending on e-Governance projects.
1. TATA CONSULTANCY SERVICES
2.1 History, Present and Future
Tata Consultancy Services Ltd was established in the year 1968 as Tata Computer Center to provide computer services to other group companies. Mr. FC Kohli was the first general manager and Mr. JRD Tata was the first chairman. One of TCS' first assignments was to provide punched card services to a sister concern, Tata Steel (then TISCO). It later bagged the country's first software project, the Inter-Branch Reconciliation System (IBRS) for the Central Bank of India. It also provided bureau services to Unit Trust of India, thus becoming one of the first companies to offer BPO services. In the early 1970s, Tata Consultancy Services started exporting its services. In 1981, TCS set up India's first software research and development center, the Tata Research Development and Design Center (TRDDC). The first client-dedicated offshore development center was set up for Compaq (then Tandem) in 1985. In 1989, TCS delivered an electronic depository and trading system called SECOM for SIS SegaInterSettle, Switzerland. It was by far the most complex project undertaken by an Indian IT company. TCS followed this up with System X for the Canadian Depository System and also automated the Johannesburg Stock Exchange (JSE). TCS associated with a Swiss partner, TKS Teknosoft, which it later acquired. On 9th August 2004 TCS became a publicly listed company much later than its biggest rivals, Infosys, Wipro and Satyam. In 2008, the company went through an internal restructuring exercise that executives claim would bring about agility to the organization. With effect from January 2009, TCS acquired Citigroup Global Services, the in-house Indian BPO of Citigroup thus entering the BFSI segment in a big way. The unit functions as a TCS e-Serve Ltd which is the Banking BPO of TCS. Today TCS is considered as the largest private sector employer in India with core strength in excess of 160000 employees. As per a survey TCS has lowest attrition rates in Indian IT industry. Today TCS is the largest provider of information technology and business process outsourcing
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services in India. The company is listed on Bombay Stock Exchange and National Stock Exchange in India. TCS offers a consulting led, integrated portfolio of IT and IT enabled services. The areas of business of TCS include IT services, IT infrastructure services, enterprise solutions, consulting, business process outsourcing, business intelligence and performance management, engineering and industrial services, IT and business solutions for small and medium business enterprises. The industry verticals of TCS include banking and financial services, insurance, telecom, media and information services, government, healthcare and life sciences, energy and utilities, retail and FMCG, travel, transport and hospitality, Manufacturing, high tech and professional services. TCS has more than 50 direct and indirect subsidiaries. TCS is headquartered in Mumbai and operates in more than 50 countries through more than 170 offices. In the year 2009-2010 TCS earned consolidated revenue of Rs. 30,029 crore, an operating profit of Rs. 8018 crore, and a PAT of Rs. 7001 crore. It is by far the market leader in India’s software industry. As per the words of Mr. N Chandrasekaran, Chief Executive Officer and Managing Director TCS, Tata Consultancy Services plans to keep its focus on simple things like remaining close to its customers while helping them to enhance efficiency and enable their growth. TCS understands that it must remain frugal and efficient to prosper under changing dynamics of the market. With increasing verticals across Banking, Financial Services and Insurance (BFSI), Telecom, Manufacturing and Retail sectors TCS has all it takes for growth. The company is also looking at expanding overseas as well as developing talent. High profile contracts from the Indian government have ensured domestic growth for TCS. Thus Tata Consultancy Services looks all set to enjoy a long and fruitful life.
Global Top 10 by 2010.
To help customers achieve their business objectives, by providing innovative, best-in-class consulting, IT solutions and services. To make it a joy for all stakeholders to work with us.
Leading change. Integrity. Respect for the individual. Excellence. Learning and Sharing.
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2.5 Things that specifically happen at TCS Gandhinagar:
TCS Gandhinagar is a part STP (Software Technology Park) and part non STP. The domain within TCS Gandhinagar where I worked is non STP. The critical point worth mentioning here is that in an STP only export work can be done. Thus if TCS is developing same kind of solutions for a domestic client and a foreign client, the former will come under non STP whereas the latter will come under STP. The major kind of projects undertaken in Gandhinagar are primarily for various state Governments (industry solution unit), for new growth markets, telecom sector, infrastructure and legal sectors. The classification of various projects is done industry wise at TCS Gandhinagar. For instance the Government is considered as a separate industry. The internal finance department which takes care of internal financial management is situated at Ahmedabad. There is a sales team which is in charge of the bidding procedure at TCS-G. But the main Marketing Department is at Mumbai. Apart from this people work in either of the two areas. These areas are functional and technical. I worked in the functional area.
2. INDUSTRIAL ANALYSIS
It is extremely difficult to ascertain the exact future demand for IT services as the industries across the world are immense and their services requiring IT support galore. But the present status of the demand can be ascertained by knowing the exact number of clients of different companies. TCS has a client base of 1034 active clients, Infosys which is the next biggest software service provider has an active client base of 575, Wipro has a client base around 350, HCL technologies has a client base of around 300. These 4 are the top IT services providers of the country. They offer software services and consulting services. However Wipro and HCL also offer hardware which neither TCS nor Infosys offer. But as per the international norms hardware as well as software is a part of Information Technology. Apart from these 4, several other companies such as Mahindra Satyam, Patni Computer Systems, i-flex Solutions, L/T Infotech etc are also some of the big names of the Indian Information Technology industry. The technology in the IT industry is a fast changing one as it acts as a way of unique positioning by different companies. One more thing worth mentioning is that starting an IT firm is not at all difficult from the technology point of view. Any person with a bit of computer knowledge can start an IT firm and can then scale the way up. This has been precisely the reason for so many garage startups of IT firms all over the world. Even from investment point of view starting an IT firm is not at
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all difficult, as all one requires is a room and some computers. But once started, the scale up does require lots of investments. These investments arise due to marketing, adapting to the latest technology, surviving in a highly competitive industry etc. It is because of this reasons that only a handful of companies have become a force to reckon with.
3.1 External Environment - Pestle Analysis
IT Industry In India The Indian information technology sector has been instrumental in driving the nation's economy onto the rapid growth curve. According to the Nasscom-Deloitte study, the IT/ITES industry's contribution to the country's GDP has increased to a share of 5.2 per cent in 2007, as against 1.2 per cent in 1998. Further, the IT and BPO industries are poised to clock revenues worth US$ 64 billion by the end of fiscal year 2008, registering a growth of 33 per cent with exports expected to cross US$ 40 billion and the domestic market estimated to clock over US$ 23 billion, according to a study. Simultaneously, the Indian IT services market is estimated to remain the fastest growing in the Asia Pacific region with a CAGR of 18.6 per cent, as per a study by Springboard Research. India's IT growth in the world is primarily dominated by IT software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Service-oriented architecture and Web services. A report by the Electronics and Software Export Promotion Council (ESC) estimates software exports to register a 33 per cent growth in the current financial year with export figures during FY 2008 expected to reach US$ 45 billion. The country's IT exports have, in fact, come quite far, starting from a few million dollars in the early 1990s. The Government expects the exports turnover to touch US$ 80 billion by 2011, growing at an annual rate of 30 per cent per annum. Political: • Political stability: Indian political structure is considered Stable enough expect the fact that there is a fear of hung Parliament (no clear majority). (+ve) • U.S. government has declared that U.S companies that Political outsource IT work to other locations other than U.S. will not get tax benefit. (-ve) • Government owned companies and PSUs have decided to Give more IT projects to Indian IT companies. (+ve) • Terrorist attack or war. (-ve)
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Economical: • Global IT spending (demand). (-ve) • Domestic IT Spending (Demand): Domestic Market grow by 20% & reach approx USD 20 billion in 2008-09 Nasscom (+ve). • Currency Fluctuation (-ve) • Real Estate Prices: Decline in real estate prices has resulted reducing the rental expenditure (+ve). • Attrition: Due to recession, the layoffs and job-cuts have resulted in low attrition rate (+ve). • Economic attractiveness: Due to cost advantage and other factors (+ve) Social: • Language Spoken: English is widely spoken language in India. English medium is the most accepted medium of education.(+ve) • Education: Large number of technical institutes and universities over the countries provide IT education. (+ve) • Working age population. (+ve) Technological: • Telephony (+ve) • India has the world lowest call rates • Expected to have total subscribers base of about 500 million by 2010. • India has the second largest telephone network after china. • Enterprise telephone services, 3G, Wi-max, VPN, poised to grow. • Internet Backbone: Due to IT revolution in 90’s india is well connected with undersea optical cables. (+ve) New IT Technologies: Technologies like SOA, web 2.0, High definition content, grid computing, and innovation in low cost technologies is presenting new challenges & opportunities for Indian IT industry.(+ve)
3.2 Porter’s Five Forces
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Today's business environment is extremely competitive and in economics parlance where perfect competition exists, the profits of the firms operating in that industry will become zero. However, this is not possible because, firstly no company is a price taker (i.e. no company will operate where profits are zero). Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to be one of the foremost gurus' of management, developed the famous five-force model, which influences an industry.
In the case of both
software outsourcing and BPO, for TCS there are few important suppliers, because TCS’s inputs are standard commodities and there is little opportunity for differentiation on the input side. The four forces that are most problematic are the bargaining power of customers, the threat of new entrants, the threat of substitutes, and the
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competitive rivalry with existing players. We examine each of these four forces in their turn for both software services outsourcing and BPO. In the early days of the software exporting business, the software vendor market was dominated by a few large global suppliers such as IBM. Indian firms were viewed as too small to matter for obtaining significant business. In addition, they competed actively with each other at the lowend. The result was that TCS and its Indian peers chose components of the business that were relatively low value-added and relatively simple to do. TCS also faced a client market that was dominated by the large banks and insurance companies. While it actively sought alliances with larger vendors as a competitive strategy, its most successful strategy was to directly approach clients and accept the lower rates that its competitive position necessitated. Looking ahead, TCS must continue to work to reduce the bargaining power of customers by trying to move the purchase decision away from price. This means that TCS must deliver more than undifferentiated programming by moving up the value chain. Such a movement is difficult in software services because the customers have deep domain expertise and almost invariably wish to retain the tasks grouped under strategic consulting. Moreover, customers understand that if they outsource the strategic consulting, then their bargaining power will be reduced. TCS must develop sufficient expertise so as to make outsourcing these tasks a compelling value proposition. Of course, it is exactly in these realms that the multinational outsourcing firms such as IBM, Accenture, and EDS are the most ferocious competitors. Forging alliances is often viewed as a good strategy to offset clients’ bargaining power. However, building alliances with firms working in clients’ locations should be discounted as this would further focus TCS in applications’ development. On the other hand, the acquisition of a medium-sized American firm with strong client relationships and domain skills could provide an attractive opportunity. Although costs per employee would rise, the rise would be small since labor requirements are lower for higher value-added work. Meanwhile, the threat of new entrants is declining rapidly as the larger firms have rapidly increased their size, market share, and credibility with customers. However, although firms strive to reduce their direct
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competition through product differentiation, in each market segment there continue to be numerous players. A key concern for TCS is competition from existing players as it has generated competition for existing business and created significant pricing pressures. Globally, firms such as EDS have positioned themselves as capable of undertaking large, “turnkey” projects in order to differentiate themselves from competitors such as IBM and Accenture that focus on higher value-added work such as consulting. This suggests an organically-driven growth strategy for TCS: that TCS continue to do the same kinds of work that it currently does, but try to capture a greater portion of the value-addition by undertaking larger projects. Though it has already demonstrated a capability in remote project management, it would be required to further increase this capability. However, there are some risks to this strategy. TCS’ large size suggests that it may have already maximized economies to scale in applications development. Adding scope, however, offers the potential for large gains since it necessarily involves higher value-added activities. In the early days, this was difficult, partly due to the technical difficulty in deintegrating the value-chain beyond the modularization of applications programming. Over the past few years, however, engineering services, systems design, and systems integration work have increasingly been outsourced (within the U.S.), suggesting that, if the skills are at hand, such work could be done in India. Most of the American providers of such services offer domain and software skills. TCS already has the software skills to move into these areas. But domain skills are a challenge. This reflects a general lack of domain expertise outside the financial services sector in India. Put differently, India does not have global-class, nontechnical knowledge in various other industries. As a result it is difficult to offer the full panoply of services a firm would want when it considers outsourcing a software development activity. This may be being rectified as the liberalization of the Indian economy since 1991 has led to the development of a host of new industry capabilities, such as in insurance. These facts indicate that it will be difficult for TCS as an organization based and staffed primarily in India to change its revenue mix through organic growth. Acquiring Indian firms doing higher value-added business is a possibility, but there are few such firms in the Indian business environment. Essentially, the constraint that TCS faces is environmental rather than firm specific. In most sectors, Indian business conditions are
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sufficiently dissimilar to overseas client conditions that local domain expertise is of low relevance. The threat of substitutes in software services does exist as technology tools to speed coding etc. However, at this time the threat of substitutes seems rather remote.
3.3 SWOT Analysis of Industry
STRENGTHS: • Leadership in sophisticated solutions that enable clients to optimize the efficiency of their business. • Proven “Global delivery model” • Commitment to superior quality and process execution • Strong Brand and Long-Standing Client Relationships • Ability to scale Innovation and leadership. WEAKNESSES: • Excessive dependence on US for revenues, 67% of revenues from USA. • Weak player in domestic market. Only 1% of revenues from Indialow as compared to peers. • Low R & D spending as compared to global IT companies – only 1.3% of total revenues. • Low expertise in high end services like Consultancy and KPO. OPPORTUNITIES: •Domestic market set to grow by 20%. •Expanding into new geographies – Europe, Middle East etc. •TCS is cash rich (Around US $ 1 Billion). •Acquiring companies to increase expertise in Consultancy, KPO and package implementation capabilities •Opening offices and development centers in cost advantage countries such as those in Latin America and Eastern Europe. THREATS: •Global economic slowdown may continue for several years – hence low IT spending globally. •US Govt. against outsourcing. •Shrinking margins due to rising wage inflation, Rupee-dollar movement affects revenue and hence margins.
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•Increased competition from foreign firms like Accenture, IBM etc. •Increased competition from low-wage countries like China, Indonesia etc.
3.4 SWOT Analysis of TCS
Strength: • It's highly professionally managed IT consulting and services company under the belt of TATA. • Company has performed consistent year on year with weak economy conditions of world. • Company has capabilities to deliver new as well as legacy application. It is in space of services as well as products and high value chain consulting. • It has fragmented IT services and SDLC cycle into minute grains such as S/w testing and grown that business to more than 250million USD. This is the testimonial of efficient management. • It is the only company initiating Earned value based profit center for evaluating their performance. HLL is the first company to do so. • IT is the only company that has survived and surprised investors with its fixed cost Project delivery model and still making phenomenal profit despite overloading the project with 10 t o15 % in terms of resources. • Part of the Tata group, which helps it gets more international business. Cases in point: the $1.2-billion Nielsen deal, Ferrari, and now JaguarLand Rover (bought over by the Tata group) Weakness: •Lack of scale compared to global competitors like IBM, HP (which bought EDS), and Accenture. •Needs to establish a track record when it comes to large deals Consulting accounts for less than 4 per cent of global revenues; IBM, Accenture score on this count. •Needs to strengthen other service lines besides application, development and maintenance (ADM) that accounts for nearly 48 per cent of its revenues. •Man power strength is more than 10,000 employees and thus, it is challenging to get personalized career development. •Bad real estate
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•Limited Product Line Opportunities: • • • • • • • • • Change in consumer lifestyles Acquisitions Available Governmental support Available technological innovations Growth of the industry of operations Decrease in taxation Entering niche markets Merger or takeover Strategic alliances & joint ventures
Threats: • • • • • • Financial slowdown, slowing US economy. Labour challenges, globally. Competition from foreign markets Innovative products/services of competitors Changing technology New competitors entering the market
3.5 Public Policy for Information Technology Industry
With the end of the “License Raj”, the Government of India has made significant and commendable efforts towards the development of IT industry in India. Successive Governments, even of different coalitions have continued with IT supporting policies. There is a separate Ministry of Communications and Information Technology under which there is a Department of Information Technology totally devoted for development of IT sector. The very vision of DIT is “e-Development of India as the engine for transition into a developed nation and an empowered society.” The mission of DIT is “e-Development of India through multi pronged strategy of e-Infrastructure creation to facilitate and promote e-governance, promotion of Electronics & Information Technology, Information Technology Enabled Services (IT-ITeS) Industry, providing support for creation of Innovation / Research & Development (R&D), building Knowledge network and securing India's cyber space.” The major functions of DIT are
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• • • •
Policy matters relating to Information Technology, Electronics and Internet. Initiatives for development of Hardware / Software industry including knowledge based enterprises, measures for promoting Information Technology exports and competitiveness of the industry. Promotion of Information Technology and Information Technology enabled services and Internet. Assistance to other departments in the promotion of E-Governance, E-Infrastructure, E-Medicine, E-Commerce, etc. Promotion of Information Technology education and Information Technology-based education. Matters relating to Cyber Laws, administration of the Information Technology Act. 2000 (21 of 2000) and other Information Technology related laws. Interaction in Information Technology related matters with International agencies and bodies Promotion of Standardization, Testing and Quality in Information Technology and standardization of procedure for Information Technology application and Tasks.
After the economic reforms of 1991-92, liberalization of external trade, elimination of duties on imports of information technology products, relaxation of controls on both inward and outward investments and foreign exchange and the fiscal measures taken by the Government of India and the individual State Governments specifically for IT and ITES have been major contributory factors for the sector to flourish in India and for the country to be able to acquire a dominant position in offshore services in the world. The major fiscal incentives provided by the Government of India have been for the Export Oriented Units (EOU), Software Technology Parks (STP), and Special Economic Zones (SEZ).
3.6 Software Technology Parks (STPs)
For the promotion of Software exports from the country, the Software Technology Parks of India was set up 1991 as an Autonomous Society under the Department of Information Technology. The services rendered by STPI for the Software exporting community have been statutory services, data communications servers, incubation facilities, training and value added services. STPI has played a key developmental role in the promotion of software exports with a special focus on SMEs and start up
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units. The STP Scheme has been extremely successful in fostering the growth of the software industry. The exports made by STP Units have grown many folds over the years. Today the exports made by STPI registered units are INR 215571 Crores about 90% of total software exports from the Country. Under Software Technology Parks scheme apart from exemptions available for capital goods (with a few exemptions) there are also exemptions from service tax, excise duty, and rebate for payment of Central Sales Tax. But the most important incentive available is 100 percent exemption from Income Tax of export profits, which has been extended till 31st March 2011. The strength of the scheme lies in the fact that, it is a virtual scheme, which allows, software companies to set up operations in the most convenient and cheapest locations and plan their investment and growth solely driven by business needs. STP Scheme is a pan India Scheme, which has centers spread across India; over 8000 units are registered under STP Scheme.
3.7 Special Economic Zones (SEZ) Scheme
In 2005, the Ministry of Commerce, Government of India has enacted the Special Economic Zone (SEZ) Act, with an objective of providing an internationally competitive and hassle free environment for exports. A SEZ is defined as a "specifically demarked duty-free enclave and shall deemed to be foreign territory (out of Customs jurisdiction) for the purpose of trade operations and duties and tariffs". The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006. It provides drastic simplification of procedures and a single window clearance policy on matters relating to central and state governments. The scheme is ideal for bigger Industries and has a significant impact on future Exports and employment. The SEZ Scheme offers similar benefits to SEZ units as compared to those under STPI in respect of indirect taxes, with some minor differences in operational details. There is a however a significant difference, in respect of income tax holiday. In SEZ Scheme the exemption from income tax is tapered down over 15 years from the date of commencement of manufacture. There is 100% exemption of export profits from income tax for the first five years, 50% for the next five years and 50% for the five years subject to transfer of profits to special reserves. The SEZ policy aims at creating competitive, convenient and integrated Zones offering World class infrastructure, utilities and services for globally
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oriented businesses. The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. The main act governing IT industry is Information Technology Act 2000.
3.8 Current Structure of the IT Industry
As mentioned earlier in this report there are hundreds of IT forms in India and abroad. TCS being the largest Indian company the discussion of industry structure will be restricted to India. Although there are hundreds of IT firms, the major market is captured by the big 5 or 6 companies. Smaller firms have had a positioning problem. So far they have kept projecting themselves as smaller versions of large firms like TCS, Infosys, Wipro etc. This has worked against their efforts to scale up.
The diagram above shows the relative market share of major companies in the IT industry. As seen TCS as a company has the largest market share. Although the share of others appears to be huge, on dividing this segment into hundreds of companies one will understand that the relative share of each company in this segment will be small. Companies like Infosys and Wipro are giving a good battle to TCS. Cognizant has also emerged as a tough competitor in recent times. Till the year 2007 IT industry was booming. Every one, right from companies, clients, employees, shareholders, students was gaining. But with the advent of global financial meltdown, the growth in revenues of these industries went down drastically. So the past couple of years were turbulent for the industry on a whole as budgets on IT worldwide were reduced. However from around May 2009, the situation has improved and now the industry looks set to enjoy another bout of growth for a long time to come. However the focus of corporate clientele has changed. Clients are becoming increasingly unwilling to offer high prices for software support as in the past. As per an article published on June 23, 2010 in The Economic Times, the Indian tech firms will be facing decrease in margins over the next 2-3 years. The article stated explicitly that despite of growth in revenues, the profit margins will be under pressure. However as per the article this was not at all a cause for worry. Apart from this the article also stated that the corporate clients are increasingly shifting from heavy implementation projects to a SaaS (Software as a Service) model. Thus though the future offers lots of opportunities, they won’t come without
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challenges for this industry. Having said that this industry’s one phase has reached maturity and now another phase is all set to start from the introductory stage. One more challenge for each firm will be to take care of the high attrition rate that has plagued the entire industry. Each firm will have to review its HR strategy in the light of new developments.
1. INTEGRATED SYSTEM
Integrated Financial Management System (IFMS) is an information system that tracks financial events and summarizes financial information. In its basic form, an IFMS is little more than an accounting system configured to operate according to the needs and specifications of the environment in which it is installed. Generally, the term “IFMS” refers to the use of information and communications technology in financial operations to support management and budget decisions, fiduciary responsibilities, and the preparation of financial reports and statements. In the government realm, IFMS refers more specifically to the computerization of public financial management (PFM) processes, from budget preparation and execution to accounting and reporting, with the help of an integrated system for financial management of line ministries, spending agencies and other public sector operations. The principal element that “integrates” an IFMS is a common, single, reliable platform database (or a series of interconnected databases) to and from which all data expressed in financial terms flow. Integration is the key to any successful IFMS. In a nutshell, integration implies that the system has the following basic features: Standard data classification for recording financial events; Internal controls over data entry, transaction processing, and reporting; and common processes for similar transactions and a system design that eliminates unnecessary duplication of data entry. Apart from this IFMS is also said to be a computer software application, (which can be off the shelf package or bespoke software). – –
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4.2 What is Public Financial Management?
Having used the term Public Financial Management for quite some time, it becomes necessary to explain the exact nature of it so as to get a better understanding of IFMS. Public finance is a field of economics concerned with paying for collective or governmental activities, and with the administration and design of those activities. The field is often divided into questions of what the government or collective organizations should do or are doing, and questions of how to pay for those activities. Management of such activities is Public Financial Management. Resource generation, Resource Allocation and Expenditure Management (resource utilization) are the essential components of a public financial management. Public Financial Management (PFM) basically deals with all aspects of resource mobilization and expenditure management in government. Just as managing finances is a critical function of management in any organization, similarly public financial management is an essential part of the governance process. Public financial management includes resource mobilization, prioritization of programmes, the budgetary process, efficient management of resources and exercising controls. Rising aspirations of people are placing more demands on financial resources. At the same time, the emphasis of the citizenry is on value for money, thus making public financial management increasingly vital. Six critical goals of Public Financial Management • • • • Fiscal Management: – Aggregate fiscal position and risk are monitored and managed. Budget Realism: – The budget is realistic and implemented as intended in a predictable manner. Comprehensive, Policy-based Budget: – The budget captures relevant fiscal transactions, and is prepared with due regard to government policy. Information: – Adequate fiscal, revenue and expenditure records and information are produced, maintained and disseminated to meet decision-making, control, management and reporting purposes. Control: – Arrangements are in place for the exercise of control and stewardship in the use of public funds. Accountability and Transparency: – Arrangements for external transparency and scrutiny of public finances are operating.
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Level 1 – Fiscal management • Flows – revenues, debt, transfers, capital and recurrent expenditure Balances – internal & external debt, assets Risk – contingent liabilities
Proper use of public resources • In accordance with constitutional, legal & regulatory requirements Avoidance of corrupt practices
Level 2 – Resource allocation • • Optimal resource allocation In accordance with government policies Level 3 – Value for Money •
Transparency Information for stakeholders in a format that facilitates understanding and analysis Accountability
Management of public resources in Those responsible for the use of public order to achieve efficiency, economy resources made accountable for their and effectiveness in expenditure actions and stewardship
4.3 Integration Between Public Finanical Management And Inegrated Financial Management System
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4.4 How IFMS can help to realize PFM Goals?
With an Integrated Financial Management System in place, the Government will have an enhanced ability to manage cash, debt and liabilities and fiscal risk. This enhanced ability will be realized through up to date and predictive disaggregated information on monitory flows and balances and proper information on current and predicted contingent liabilities. The government will be in a better position to allocate resources as it will have all the historic information on expenditures and their impact at its beck and call. The budgets will be prepared using a tool that realistically models relationships, is based on reliable information on starting points, and enables alternative scenarios to be modelled. Apart from these advantages, utilizing IFMS will help the Government reduce financial transaction costs, enable it to compare costs between units/activities and performance targets leading to greater efficiency. It would be appropriate to mention here that there are certain things that an IFMS cannot do. For instance IFMS will not be able to resolve unrealistic budgets, weak fiscal management, inefficient use of resources, corruption etc. IFMS is primarily a tool to upgrade systems that are sound but have their limitations. Certain critical factors needed for success of IFMS: • • • • • • Management commitment and involvement Financial management users must drive the process Broad support and involvement by all concerned agencies Suitable institutional structures Human resources with appropriate skills Strong project management team with skills and experience
4.5 Request for Proposal
As a part of my project, I was required to go through various requests for proposals or RFP’s. This is necessary for anyone working in the functional side at Tata Consultancy Services. Before embarking upon the details found in these RFPs, I will like to introduce the concept of request for proposal. A request for proposal (referred to as RFP) is an early stage in a procurement process, issuing an invitation for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service.
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The RFP process brings structure to the procurement decision and allows the risks and benefits to be identified clearly upfront. The RFP may dictate to varying degrees the exact structure and format of the supplier's response. The creativity and innovation that suppliers choose to build into their proposals may be used to judge supplier proposals against each other. Effective RFPs typically reflect the strategy and short/long-term business objectives, providing detailed insight upon which suppliers will be able to offer a matching perspective. Key Objectives to be met through generating Request for Proposals to (IT service providers): • • • • • • Obtain correct information to enable sound business decisions. Decide correctly on strategic procurement. Leverage the company's purchasing power to obtain a favorable deal. Enable a broader and creative range of solutions to be considered. Informs suppliers (vendors) that your company is looking to procure and encourages them to make their best effort. Requires the company to specify what it proposes to purchase. If the requirements analysis has been prepared properly, it can be incorporated quite easily into the Request document. Alerts suppliers that the selection process is competitive. Allows for wide distribution and response. Ensures that requirements. suppliers respond factually to the identified
Key Benefits of generating Request for Proposals to (IT service providers):
• • • •
By following a structured evaluation and selection procedure an organization can demonstrate impartiality - a crucial factor in public sector procurements.
An RFP typically involves more than a request for the price. Other requested information may include basic corporate information and history, financial information (can the company deliver without risk of bankruptcy), technical capability, product information such as stock availability (in case of IT manpower availability) and estimated completion period, and customer references that can be checked to determine a company's suitability. RFPs often include specifications of the item, project or service for which a proposal is requested. The more detailed the specifications, the better the
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chances that the proposal provided will be accurate. Generally RFPs are sent to an approved supplier or vendor list. The bidders return a proposal (in case of IT companies a response) by a set date and time. Late proposals may or may not be considered, depending on the terms of the initial RFP. The proposals are used to evaluate the suitability as a supplier, vendor, or institutional partner. Discussions may be held on the proposals (often to clarify technical capabilities or to note errors in a proposal). In some instances, all or only selected bidders may be invited to participate in subsequent bids, or may be asked to submit their best technical and financial proposal, commonly referred to as a Best and Final Offer (BAFO). Thus an RFP becomes a very important instrument for getting new projects in an IT industry. The RFP’s that I was required to read as a part of my project included information about the client (or the purchaser), the requirements the purchaser wanted in the system (both functional and technical), scope of the project, current system of doing things and the improvements in the existing system. It is only after reading an RFP that one can fully understand the requirements to be met through the new system. A part of my project also included designing a response for New Pension Scheme system which is being developed by TCS as a part of Integrated Financial Management System. This system might be used by the Government of Gujarat or any other state Governments as the processes in all the state governments will be the same. In the later part of this report I have mentioned in detail about NPS.
4.6 IFMS developed for Government of Gujarat: Some inputs of the client
Department of Finance, Government of Gujarat, as part of its ongoing reforms in the e-Governance sector, has taken initiative to achieve optimum utilization of Information Technology in its functional areas. It proposes to evolve a Comprehensive Integrated Financial Management System by integrating various internal and external departments and applications under its purview. The scope of this project is to implement an Integrated Financial Management System for Finance Department for Government of Gujarat that will provide a long-term solution for carrying out Budgetary, treasury and pension functions of Government of Gujarat and provide consolidated and consistent information about the expenditures and revenues across all the treasuries. Areas covered under Gujarat IFMS:
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i. Number of Users : 20000 Users ii. Number of locations : 251 Offices • 25 Admin Depts., • 1 Director Accounts and Treasury, • 1 Director Pension and Provident Fund, • 1 Examiner Local Fund, • 25 District Treasury Offices, • 2 Pay & Accounts Offices, • 1 Pension Payment Office, • 21 District Local Fund Office and • 174 Sub-Treasury Offices iii. Size of Data Generated : • # of bills – 1100000 • # of challans – 250000 • # of cheques – 1050000 • # of Pensioners – 375000 • # of Employees (Pay Fixation) – 516000 • Size of Database over the period of 1 yr – 300 GB (6 months) Requirement Analysis i. Time Spent on Gathering requirements : Overall 20% ii. Levels of Interactions done : Finance Department Officials, Respective HODs and their staff, Identified representative for each module, End users for identified locations iii. Methodology adopted: Existing legacy system study, Gap Analysis, Suggestion on Process Re-engineering/ Proposition of Opportunity for improvements. Finally preparation of Requirement Specifications covering Functional and NonFunctional requirements with proposed system’s prototypes However as per my project supervisor Mr. Manish Thaker, the major functions of all the state governments are more or less the same. Thus the study of the processes of Gujarat Government can be used later for IFIMS projects for other state governments as well.
1. BASIC CONCEPTS OF INTEGRATED FINANCIAL MANAGEMENT SYSTEM
5.1 Government Securities:
A Government security is a tradable security issued by the Central Government or the State Governments, acknowledging the Government’s debt obligation. Such securities can be short term (usually called Treasury Bills, with original maturities of less than 1 year) or long term (usually called Government bonds or dated securities with original maturity of one
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year or more). In India, the Central Government issues both Treasury Bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free instruments. Government of India also issue savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (Oil bonds, FCI bonds, fertilizer bonds, power bonds, etc.) but they are usually not fully tradable and are not eligible for meeting the SLR requirement.
The reason for studying about the Government Securities by me was that TCS is developing a system for Gujarat Government which as a state government raises loans from the markets as well as invests in borrowings of the central government. In order to understand and effectively design a computer system which will meet the stated needs of the state governments, it becomes necessary to go through extensive literature published by various government agencies. State Governments invest regularly in Central Government securities primarily because of safety which is a must in any public fund management. State Governments invest in various types of securities, primary among which are Treasury Bills (T-Bills).
5.2 What are T-Bills?
Treasury Bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, viz., 91 day, 182 day and 364 day. Treasury Bills are zero coupon securities and pay no coupon. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury Bill of Rs.100/- (face value) may be issued at a discount of say, Rs.1.80, that is Rs.98.20 and redeemed at the face value of Rs.100/-. The return to the investors is, therefore, the difference between the maturity value or face value (i.e., Rs.100) and the issue price. Treasury Bills are issued through auctions conducted by the Reserve Bank of India usually every Wednesday and payments for the Treasury Bills purchased have to be made on the following Friday. The Treasury Bills of 182 days and 364 days' tenure are issued on alternate Wednesdays, that is, Treasury Bills of 364 day tenure are issued on the Wednesday preceding the reporting Friday while Treasury Bills of 182 days tenure are issued on the Wednesday prior to a non-reporting Friday. Currently, the notified amount
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for issuance of 91 day and 182 day Treasury Bills is Rs.500 crore each whereas the notified amount for issuance of 364 day Bill is higher at Rs.1000 crore. Government, at its discretion, can also decide to issue additional amounts of the Treasury Bills by giving prior notice. An annual calendar of T-Bill issuances for the following financial year is released by the Reserve Bank of India in the last week of March. The Reserve Bank of India also announces the issue details of Treasury bills by way of press release every week. States also invest in long term or dated government securities. The states also issue such securities for their own funding needs.
5.3 What are Dated Government securities?
Dated Government securities are longer term securities and carry a fixed or floating coupon (interest rate) paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years. The Public Debt Office (PDO) of the RBI acts as the registry / depository of Government securities and deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon securities. The nomenclature of a typical dated fixed coupon Government security has the following features - coupon, name of the issuer, maturity and face value. For example, 7.49% Government of Gujarat 2017 would have the following features: Date of Issue: April 16, 2007 Date of Maturity: April 16, 2017 Coupon: 7.49% paid on face value Coupon Payment Dates: Half-yearly (October16 and April 16) every year Minimum Amount of issue/ sale: Rs.10, 000 Dated Securities of both Government of India and State Governments are issued by RBI through auctions which are announced by the RBI a week in advance through Press Releases and paid advertisements in major dailies (for dated securities). The investors are thus given adequate time to plan for the purchase of government securities through such auctions. Dated securities may be of the following types: Fixed Rate Bonds: These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds are issued as fixed rate bonds. For example – 8.24%GS2018 was issued on April 22, 2008 for
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a tenor of 10 years maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment being the half of the annual coupon 8.24%) of the face value on October 22 and April 22 of each year. Floating Rate Bonds: These are securities which do not have a fixed coupon rate and the coupon is re-set at pre-announced intervals based on a specified methodology. The coupon is re-set at predetermined intervals (say, every six months or one year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the Government of India, the base rate is the weighted average cutoff yields of the last three 364 day Treasury Bill auction preceding the coupon re-set date. Floating Rate Bonds were first issued in September 1995 in India. For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, maturing on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50% being the weighted average rate of implicit yield on 364 day Treasury Bills during the preceding six auctions. Further, in the bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis points (0.34%) was decided. Hence the coupon for the first six months was fixed at 6.84%. At the next reset date after six months, assuming that the average cutoff yield in the preceding six auctions of 364 day Treasury Bill is 6.60%, coupon applicable for the next half year would be 6.94%. Zero Coupon Bonds: Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to face value. Capital Indexed Bonds: These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. Over the past 5 years, these kinds of bonds have not been issued. But now with inputs from leading economists and financial experts, steps are being taken to revive the issuance of the Inflation Indexed Bonds wherein payment of both the coupon and principal payments on the bonds will be linked to an Inflation Index (Wholesale Price Index). Bonds with Call/ Put Options: Bonds can also be issued with features of optionality wherein the issuer can have the option to buyback (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. A bond (viz., 6.72%GS2012) with call / put option was issued in India in the year 2002 which will mature in 2012. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance
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on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007. The dated securities issued by the state governments are known as State Development Loans. The features of SDL’s are same as central government issued dated securities. Investments in SDL’s are also qualified for SLR and are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF). These government securities (central as well as state) are issued through auctions conducted by the RBI. Auctions are conducted on the electronic platform called the Public Debt Office – Negotiated Dealing System (PDO-NDS). Commercial banks, scheduled urban cooperative banks, Primary Dealers, insurance companies and provident funds, who maintain funds account (current account) and securities accounts (SGL account) with RBI, are members of this electronic platform. All members of PDO-NDS can place their bids in the auction through this electronic platform. All non-NDS members including non-scheduled urban co-operative banks can participate in the primary auction through scheduled commercial banks or Primary Dealers. For this purpose, the urban co-operative banks need to open a securities account with a bank / Primary Dealer – such an account is called a Gilt Account. A Gilt Account is a dematerialized account maintained by a scheduled commercial bank or Primary Dealer for its constituent (e.g., a non-scheduled urban co-operative bank).
5.4 Different Types of Auctions Used To Issue Securities:
1. Yield Based Auction: A yield based auction is generally
conducted when a new Government security is issued. Investors bid in yield terms up to two decimal places (for example, 7.85 per cent, 7.87 per cent, etc.). Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cutoff yield is taken as the coupon rate for the security. Successful bidders are those who have bid at or below the cutoff yield. Bids which are higher than the cut-off yield are rejected.
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An example of a yield based auction of a new Government Security is given below: Yield based auction of a new security • Maturity Date: September 8, 2018 • Coupon: It is determined in the auction (8.22% as shown in the illustration below) • Auction date: September 5, 2008 • Auction settlement date: September 8, 2008* • Notified Amount: Rs.1000 crore * September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle. Illustration of fixing of coupon: Details of bids received in the increasing order of bid yields Bid No. 1 2 3 4 5 6 7 8 Amount Bid Yield Of bid crore) 300 200 250 150 100 100 150 100 Cumulative (Rs. Amount Crore) 300 500 750 900 1000 1100 1250 1350 Price (Rs. coupon 8.22% 100.19 100.14 100.13 100.09 100.00 100.00 99.93 99.87 with as
8.19% 8.20% 8.20% 8.21% 8.22% 8.22% 8.23% 8.24%
The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would get allotment pro-rata so that the notified amount is not exceeded. In the above case each would get Rs. 50 crore. Bid numbers 7 and 8 are rejected as the yields are higher than the cut-off yield.
2. Price Based Auction: A price based auction is conducted
when the Government (either central or state) reissues securities already issued earlier. Bidders quote in terms of
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price per Rs.100 of face value of the security (e.g., Rs.101.02, Rs.100.95, Rs.99.80, etc., per Rs.100/-). Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected. An example of a price based auction of a new Government Security is given below: Price based auction of an existing security 8.24% GS 2018 • • • • • Maturity Date: April 22, 2018 Coupon: 8.24% Auction date: September 5, 2008 Auction settlement date: September 8, 2008* Notified Amount: Rs.1000 crore * September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle.
.Details of bids received in the decreasing order of bid price Price of Bid 100.31 100.26 100.25 100.21 100.20 100.20 100.16 100.15 Amount Of bid crore) 300 200 250 150 100 100 150 100 (Rs. Implicit Yield 8.1912% 8.1987% 8.2002% 8.2062% 8.2077% 8.2077% 8.2136% 8.2151% Cumulative Amount 300 500 750 900 1000 1100 1250 1350
1 2 3 4 5 6 7 8
The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would get allotment in proportion so that the notified amount is not exceeded. In the above case each would get Rs. 50 crore. Bid
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numbers 7 and 8 are rejected as the price quoted is less than the cutoff price.
Note: Depending upon the method of allocation to successful bidders, auction could be classified as Uniform Price based and Multiple Price based. In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid. In the example under (ii) above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., Rs.100.20. On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1 at Rs.100.31, bidder 2 at Rs.100.26 and so on. An investor may bid in an auction under either of the following categories: Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price / yield quoted is within the cut-off price / yield. Competitive bids are made by well informed investors such as banks, financial institutions, primary dealers, mutual funds, and insurance companies. The minimum bid amount is Rs.10,000 and in multiples of Rs.10,000 thereafter. Multiple bidding is also allowed, i.e., an investor may put in several bids at various price/ yield levels. Non-Competitive Bidding: With a view to providing retail investors an opportunity to participate in the auction process, the scheme of noncompetitive bidding in dated securities was introduced in January 2002. Non-competitive bidding is open to individuals, HUFs, RRBs, co-operative banks, firms, companies, corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible investors apply for a certain amount of securities in an auction without mentioning a specific price / yield. Such bidders are allotted securities at the weighted average price / yield of the auction. The amount reserved for non competitive bidding is 5% of the notified amount. The participants in non-competitive bidding are, however, required to hold a gilt account with a bank or PD. Regional Rural Banks and co-operative banks which hold SGL and Current Account with the RBI can, also, participate under the scheme of non-competitive bidding without holding a gilt account.
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In every auction of dated securities, a maximum of 5 per cent of the notified amount is reserved for non-competitive bids. In the case of auction for Treasury Bills, the amount accepted for non-competitive bids is over and above the notified amount and there is no limit placed. However, non-competitive bidding in Treasury Bills is available only to State Governments and other select entities and is not available to the cooperative banks.
5.5 How and in what form can government securities be held?
The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and central depository for the Government securities. Government Securities are to be held by investors in dematerialized (demat) form. The investors can maintain their securities in Demat form in either of the two ways: SGL Account: Reserve Bank of India offers Subsidiary General Ledger Account (SGL) facility to select entities who can maintain their securities in SGL accounts maintained with the Public Debt Offices, of the Reserve Bank of India. Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is restricted, an investor has the option of opening a Gilt Account with a bank or a Primary Dealer which is eligible to open a Constituents' Subsidiary General Ledger Account (CSGL) with the RBI. Under this arrangement, the bank or the Primary Dealer would maintain the holdings of its constituents in a CSGL account (which is also known as SGL II account) with the RBI as a custodian on behalf of the Gilt Account holders. The servicing of securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and maintenance of the securities. Receipt of maturity proceeds and periodic interest is also faster as the proceeds are credited to the current account of the custodian bank / PD with the RBI and the custodian (CSGL account holder) immediately passes on the credit to the Gilt Account Holders (GAH). Investors also have the option of holding Government securities in a dematerialized account with a depository (NSDL / CDSL, etc.). This facilitates trading of Government securities on the stock exchanges. These government securities can also be traded. There is an active secondary market for trading of the government securities. State Governments as such do not participate in such a trading but the
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securities issued by the state government are traded in these secondary market. The Reserve Bank of India has specified certain Do’s and Don’ts for dealing in government securities. Here is a list: Do’s • Segregate dealing and back-up functions. Officials deciding about purchase and sale transactions should be separate from those responsible for settlement and accounting. Monitor all transactions to see that delivery takes place on settlement day. The funds account and investment account should be reconciled on the same day before close of business. Keep a proper record of the SGL forms received/issued to facilitate counter-checking by their internal control systems/RBI inspectors/other auditors. Use CSGL/ Gilt Accounts for holding the securities and maintain such accounts in the same bank with whom the cash account is maintained.
The Don’ts issued by the central bank are not applicable to the state government and hence are not mentioned in this report. But on seeing the list of Do’s one can easily appreciate the need for a system which can easily manage the investment portfolio of state governments. Such a system has been designed by Tata Consultancy Services.
It becomes important to understand the manner in which the transactions in government securities get settled both in primary market as well as secondary market. Primary Market Once the allotment process in the primary auction is finalized, the successful participants are advised of the consideration amounts that they need to pay to the Government on settlement day. The settlement cycle for dated security auction is T+1, whereas for that of Treasury bill auction is T+2. On the settlement date, the fund accounts of the participants are debited by their respective consideration amounts and their securities accounts (SGL accounts) are credited with the amount of securities that they were allotted. In case of retail participants/ individuals who do not maintain accounts with the RBI, they can tender a cheque, the proceeds
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of which will be collected through clearing process after which securities are issued to them.
Secondary Market The transactions relating to government securities are settled through the member’s securities / current accounts maintained with the RBI, with delivery of securities and payment of funds being done on a net basis. The Clearing Corporation of India (CCIL) guarantees settlement of trades on the settlement date by becoming a central counter-party to every trade through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller. All outright secondary market transactions in Government Securities are settled on T+1 basis. However, in case of repo transactions in government securities, the market participants will have the choice of settling the first leg on T+0 basis or T+1 basis as per their requirement.
5.6 What is the relationship between Yield and Price of a bond?
If interest rates or market yields rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words the yield of a bond is inversely related to its price. The relationship between yield to maturity and coupon rate may be stated as follows: • When the market price of the bond is less than the face value, i.e., the bond sells at a discount, YTM > current yield > coupon yield. • When the market price of the bond is more than its face value, i.e., the bond sells at a premium, coupon yield > current yield > YTM. • When the market price of the bond is equal to its face value, i.e., the bond sells at par, YTM = current yield = coupon yield.
How is the yield of a bond calculated? An investor who purchases a bond can expect to receive a return from one or more of the following sources: • The coupon interest payments made by the issuer;
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• Any capital gain (or capital loss) when the bond matures or it is sold; and • Income from reinvestment of the coupon interest payments or intereston -interest. The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefly described below:
i) Coupon Yield The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield refers to nominal interest payable on a fixed income security like Government security. This is the fixed return the Government (i.e., the issuer) commits to pay to the investor. Coupon yield thus does not reflect the impact of interest rate movement and inflation on the nominal interest that government pays. Coupon Interest / Face Value Illustration: Coupon: 8.24% Face Value: Rs.100 Market Value: Rs.103.00 Coupon yield = 8.24/100 = 8.24% ii) Current Yield The current yield is simply the coupon payment as a percentage of the bond’s purchase price; in other words, it is the return a holder of the bond gets against its purchase price which may be more or less than the face value or the par value. The current yield does not take into account the reinvestment of the interest income received periodically. Current yield = (Annual coupon rate / purchase price)*100 Illustration: The current yield for a 10 year 8.24% coupon bond selling for Rs.103.00 per Rs.100 par value is calculated below: Annual coupon interest = 8.24% x Rs.100 = Rs.8.24 Current yield = (8.24/Rs.103)*100 = 8.00% The current yield considers only the coupon interest and ignores other sources of return that will affect an investor’s return.
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iii) Yield to Maturity Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its maturity. The price of a bond is simply the sum of the present values of all its remaining cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is the YTM. Thus YTM is the discount rate which equates the present value of the cash flows from a bond to its current market price. In other words, it is the internal rate of return on the bond. The calculation of YTM involves a trial-and-error procedure. A calculator or software can be used to obtain a bond’s yieldto-maturity easily.
There is day count conventions used in calculating bond yields. These day count conventions refer to the method as to how the numbers of days are counted for calculation of prices and yields of bonds. As the use of different day count conventions can result in different prices/ yields, it is appropriate that all the participants in the market follow a uniform day count convention. For example, the conventions followed in Indian market are given below. Bond market: The day count convention followed is 30/360 which means that irrespective of the actual number of days in a month, the number of days is taken as 30 per month and the number of days in a year is taken as 360. Money market: The day count convention followed is actual/365 which means that the actual number of days in a month is taken for months whereas the number of days in a year is taken as 365 days. Hence, in the case of Treasury bills which are essentially money market instruments, 365 day convention is followed. An example as to how the yield of a Treasury Bill is calculated It is calculated as per the following formula Yield = (100 – P)/P * (365/D) * 100 Wherein; P – Purchase price D – Days to maturity Day Count: For Treasury Bills, D = [actual number of days to maturity/365] Illustration Assuming that the price of a 91 day Treasury bill at issue is Rs.98.20, the yield on the same would be
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Y = (100-98.20)*365*100/98.20*91 = 7.3521% What is duration of a Bond? Duration of a bond is a measure of the time taken to recover the initial investment in present value terms. In simplest form, duration refers to the payback period of a bond to break even, i.e., the time taken for a bond to repay its own purchase price. Duration is expressed in number of years.
Fundamentally the government securities (both state and central) are considered risk free. However there are certain risks which are associated with G-Secs. Market risk: Market risk arises out of adverse movement of prices of the securities that are held by an investor due to change in interest rates. This will result in booking losses on marking to market or realizing a loss if the securities are sold at the adverse prices. Small investors, to some extent, can mitigate market risk by holding the bonds till maturity so that they can realize the yield at which the securities were actually bought. This is also the reason for state governments not indulging in any kind of secondary market transactions of the central government. Reinvestment risk: Cash flows on a Government security includes fixed coupon every half year and repayment of principal at maturity. These cash flows need to be reinvested whenever they are paid. Hence there is a risk that the investor may not be able to reinvest these proceeds at profitable rates due to changes in interest rate scenario. The state governments need to be extremely careful in mitigating this risk as they are investing public funds in the central government securities. Liquidity risk: Liquidity risk refers to the inability of an investor to liquidate (sell) his holdings due to non availability of buyers for the security, i.e., no trading activity in that particular security. Usually, when a liquid bond of fixed maturity is bought, its tenor gets reduced due to time decay. For example, a 10 year security will become 8 year security after 2 years due to which it may become illiquid. Due to illiquidity, the investor may need to sell at adverse prices in case of urgent funds requirement. However, in such cases, eligible investors can participate in market repo and borrow the money against the collateral of the securities. This is typical of a state government. Whenever (as mentioned in cash management system) a state government is short of funds, the first step taken by RBI is to discount the T-Bills held by the state government. This is an example of market repo.
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5.7 Liquidity Management Assistance to the States
Though the receipts and the expenditure of the states are matched in the annual State Budget, there could be temporary mismatches in the cash receipts and expenditure during the course of the year. Central Government and RBI have instituted mechanisms that enable States to tide over such short term liquidly problems. These are as follows:
I. WMA Facility to State Governments
The Ways and Means Advances (W&MA) provided by RBI to the States are governed by Section 17(5) of the RBI Act, 1934. This Section authorizes the RBI to extend WMA to the State Governments which are repayable not later than three months from the date of making the advances. These advances are meant to be temporary to provide a cushion to the States to carry on their essential activities despite mismatches on fiscal transactions and to avoid disruptions to the normal and necessary financial operations of the State. At present all the State Governments except Jammu and Kashmir and Sikkim have signed such agreements with RBI. The scheme is revised from time to time. Currently it is based on the recommendations of the Bezbaruah Committee. The RBI provides accommodation to the State Governments through two facilities. These are: (i) Normal WMA facility and (ii) Special WMA facility which is secured against Government of India securities held by the State Governments with RBI. These facilities have been in existence since 1937 and 1953 respectively. • Normal Ways and Means Advances Normal WMA limits were earlier related to the minimum balance held by each State. The present system of WMA is based upon the recommendations of the Bezbaruah Committee under the Chairmanship of Shri M.P. Bezbaruah. Bezbaruah Committee had recommended substantial enhancement of limits of WMA. Based on the recommendations of the Committee normal WMA was enhanced to Rs. 9875 crore from the earlier limit of Rs. 8935 crore from 1 March, 2006 for 26 States. The total normal WMA limit was further enhanced to Rs.9925 crore with effect from April 1, 2007 for 26 States and one UT (Pondicherry) and continues to be the same from April 1, 2008 and April 1, 2009. • Special Ways and Means Advances The State Governments are sanctioned Special Ways and Means Advances based on their holdings in Government of India (GOI) dated securities/ Treasury Bills since 1953 when a uniform limit of Rupees two crore was allocated to each State. The limits were raised from time to time. Special WMA Scheme continues to be linked to the investments made by State
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Governments in the Government of India securities, i.e., dated securities and Treasury Bills as per recommendations of Bezbaruah Committee. A lower and uniform margin of five per cent has been applied on the market value of the securities for determining the operating limit of Special WMA. The States are required to avail of Special WMA limits first before seeking accommodation under the normal WMA limits. • Overdrafts of State Governments States' overdrafts (OD) with Reserve Bank of India represent their drawls exceeding the authorized limits of WMA, both normal and special. The OD regulation scheme was first introduced in 1972. Since then, the scheme has regularly been revisited. The salient features of revised OD scheme are as follows: (a) The number of days that a State can be in overdraft at present is 14 consecutive working days. (b) The norms of restricting overdraft to 100 per cent of the normal WMA limit will continue. If the overdraft exceeds this limit for five consecutive working days for the first time in a financial year, the Reserve Bank will advise the State to bring down the overdraft level within the 100 per cent of WMA limit. If, however, such irregularity occurs on a second or subsequent occasion in the financial year, the Reserve Bank will stop payments notwithstanding the above provision, which permits the State an overdraft up to 14 days. (c) No State Government will be allowed to be in overdraft for more than 36 working days in a quarter. If this is not adhered to, payments will be stopped. This regulation was made applicable from April 1, 2003. (d) The rate of interest on overdraft will be: (i) Overdraft up to 100 per cent of normal WMA limit- two per cent above the Repo rate, and (ii) Overdraft exceeding 100 per cent of the normal WMA limit-five per cent above the Repo Rate.
II. Central Government’s Intervention in State’s Liquidity Mismatch
In addition to Ways and Means Scheme of Reserve Bank of India as detailed above, Ministry of Finance, Government of India also assists the States to overcome mismatch in their receipts and expenditure. This is done by way of (a) advance payments of State's entitlements of NCA, share in Central Taxes, Revenue Deficit Grants and Small Saving Loans. (b) Advances under Ways and Means Scheme of Central Government.
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(a) Advance release of States’ Entitlements of Plan and NonPlan Assistance The Government of India, when requested by the States, considers the advance release of monthly entitlements of the States consisting of normal central assistance, share in central taxes, revenue deficit grants, small saving loans. (b) Ways and Means Scheme of Central Government Ways and Means Advances are provided by the Government of India to supplement the effort of the State Governments to meet temporary cash imbalance. It is provided for temporary mismatch in revenue and expenditure. Annual Budget provision for ways and means advance is made in the Demand Head of Plan Finance-I, Division in the Department of Expenditure. It carries a rate of interest as determined by Government of India from time to time. At present the ways and means advances given to the States by Government of India attract a rate of interest of 8.5%. This advance is to be repaid within the year and cannot be spilled over to next financial year. Amount of ways and means advance to be given to a State and repayments is decided by the Ministry of Finance. These are the concepts necessary to understand debt management and cash management. To understand the financial concepts of any Government, one must understand a concept called as budget.
5.8 What is a Budget?
References to budget can be found in Kautilya’s Arthashastra. It states that the Chancellor should first estimate revenue from each place and sphere of activity under different heads of accounts and then arrive at a grand total. The actual revenue is to be estimated by adding receipts into the treasury for current year and delayed payments received which were due in earlier year/s. From this deduct the expenditure on king, standard rations, other exemptions granted by King and authorized postponement of payments into treasury. The outstanding revenues were estimated from work under construction for which revenue will accrue on completion, unpaid fines, unrecoverable dues, uncollectible sums, advances to be repaid by officers etc. The origins of the modern Budget can be traced to the Norman period, where two departments dealt with finance- the Treasury and the Exchequer. The Treasury received and paid out money on behalf of the monarch. The Exchequer, had a ‘lower office’ which received money, and an ‘upper office’, concerned with regulating the Kings accounts. The term ‘budget’ has been derived from the old French word ‘bougette’, which means a leather bag or wallet. The first use of the term ‘budget’
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may date back to 1733 financial statement by Walpole as Prime Minister and Chancellor of the Exchequer. A cartoon of him opening a patent medicine seller’s wares was published at the time, as a satirical comment with the caption ‘The Budget Opened’. (‘Budge’ is an old word for a bag or small case). Initially, “budget” referred solely to the Chancellor’s annual speech on the nation’s finances. Now, the term is used for an annual financial statement of income and expenditure of a government.
5.8.1 Indian Budget process
The budget is prepared by the Finance Minister with the assistance of number of advisors and bureaucrats. The Finance Minister seeks the view of the industry captains and economists prior to preparation. Various accounting and finance related organisations send in their opinions and suggestions .The budgeting exercise in India remains mainly the domain of bureaucrats to participate and influence the outcomes. Normally, the budget-making process starts in the third quarter of the financial year. The budget has four stages viz., (1) estimates of expenditures and revenues, (2) first estimate of deficit, (3) narrowing of deficit and (4) presentation and approval of budget. Stage 1: Estimates of expenditures and revenues Part A: Estimates of Expenditure The process begins with various ministries providing initial estimates of plan and non-plan expenditures. The ministries discuss the plan expenditures with the Planning Commission. The Planning commission allocates resources for continuing plan programmes and decides on the new programmes that can be undertaken on the basis of a tentative estimate or resources available, that is provided to it by the finance ministry. The financial advisors of the ministries prepare the non-plan expenditures. The expenditure secretary consolidates them and after intensive discussion with financial advisors, budget estimates are set for the ensuing fiscal year. The majority of the non-plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers) and wage payments to employees. Part B: Estimates of Revenue Apart from estimating the expenditure, an assessment of expected revenues likely to flow into the government treasury has to done as a
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concurrent exercise. Revenue receipts are of two types – capital and current receipts. Capital receipts include repayment of loans given by the government, receipts from divestment of public-sector equity and borrowings – both domestic and external. Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the central government. The amounts to be received by way of tax revenues is estimated on the basis of existing rates of taxation and taking into consideration the likely growth and inflation rate over the ensuing fiscal year. On the capital receipts side, targeted amounts to be realized through divestment of public sector equity and amounts to be realized by way of repayments of loans is made. All the estimates are provided to the revenue secretary. STAGE 2: First estimates of deficit After the estimates of revenue and expenditure are made, they are matched together. This provides the first estimate of expected shortfall in revenue to meet projected expenditure. The government then, in consultation with the chief economic advisor, decides on the optimum level of borrowings to meet this deficit. The figure of external borrowings is known as much of the external borrowing by the government consists of bilateral and multilateral assistance which is known by the time budget exercises are undertaken. The level of domestic borrowing depends partly on the desired level of fiscal deficit that the government targets for itself. A part of the revenue gap is left unfilled to be met through the issue of ad hoc treasury bills. STAGE 3: Narrowing of the deficit After the targets for the fiscal deficits and the overall budget deficit is decided, any remaining shortfall is filled through a revision in tax rates if feasible , keeping in mind the fiscal incentive structure the government wishes to put in place to stimulate the growth in different sectors. Following the initial plans, if any changes need to be made adjustments are made to the expenditure; usually the plan expenditure has to be modified. The non plan expenditure comprises of interest payments, subsidies and administrative expenditure. Due to the political sensitivities involved in reducing subsidies, non-plan expenditure of the government is inflexible about changing it and it is the plan expenditures which get the axe after pre-emption have already been made for non-plan expenditure. STAGE 4: The Budget
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The presentation of the Budget for the ensuing fiscal year (beginning April 1) is usually done on the last working day of February. The Indian constitution has made the Parliament supreme in financial matters. The Union government, under Article 112 of the constitution, is required to lay an annual financial statement of estimated receipts and expenditure before both Houses of Parliament. It can levy taxes or disburse funds only on approval in both houses of Parliament. However, the proposal for taxation or expenditure has to be initiated within the Council of Ministers– specifically by the Minister of Finance. The Finance Minister presents before the Parliament, a financial statement detailing the estimated receipts and expenditures of the central government for the forthcoming fiscal year and a review of the current fiscal year. Under Article 114 of the Constitution, the government can withdraw money from the Consolidated Fund of India only on approval from Parliament and so it has to get the Appropriation Bills approved by Parliament. This authorizes the executive to spend money. Article 265 of the Constitution prohibits the government from collecting any taxes without the authority of law. Therefore, the government comes up with the Finance Bill. The Bill may levy new taxes, modify the existing tax structure or continue the existing tax structure beyond the period approved by Parliament earlier. The bills are forwarded to the Rajya Sabha for comment. The Lok Sabha, however, is not obligated to accept the comments and the Rajya Sabha cannot delay passage of these bills. The bills become law when signed by the President. The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures. The proposals in the budget come into force on April 1. Between the presentation and effective date there is a gap of 1 month during which the Lok Sabha can review and modify the government’s budget proposals. This does not happen most of the time and the Parliamentary scrutiny of proposals and the passage of the budget gets completed in May, well after the commencement of the new fiscal year. Since the proposed budget has to be effective from April 1, the government usually seeks an interim approval to meet emergent expenditures that have to be incurred pending the approval of the budget. This is called the vote-on-account and the sanctions given by the passage of the vote-on-account get automatically overridden once the Budget is approved by Parliament.
5.8.2 State Budget
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Each state government has its own budget, prepared by the state’s minister of finance in consultation with appropriate officials of the central government. Primary control over state finances rests with the state legislature. However, State finances are which latter reviews the state government accounts annually and reports the findings to the state governor for submission to the state’s legislature. Because of its greater revenue sources, the central government shares its revenue received from personal income taxes and certain excise taxes with the states. It also collects other minor taxes, the total proceeds of which are transferred to the states. The division of the shared taxes is determined by financial commissions established by the president, usually at five-year intervals. The central government also provides the states with grants to meet their commitments. Budget documents 1. Key to Budget This document provides an understanding of the budget documents 2. Budget Highlights This statement gives the key features of the budget 3. Annual Financial Statement Annual Financial statement is the main document. This statement shows the receipts and payments of the government under the three parts in which government accounts are kept. 4. Budget at a Glance Budget at a Glance provides an overview of government finances. It’s more like a balance-sheet of the Union or state. It gives a broad break up of tax revenues, other receipts, and expenditure-plan and no-plan allocation of outlays by ministries. Progresses towards implementation of Budget proposals announced in previous years are listed in the Implementation Budget. 5. Expenditure Budget Expenditure Budget Volume I and II explain the provisions made. While Volume I explains the provisions ministry-wise, Volume II analyses expenditure trend over the years with regard to Plan and non-Plan expenditure. 6. Receipts Budget Receipts Budget gives details of revenue receipts and capital receipts and explains the estimates so as to make them intelligible to an ordinary citizen. It also include trend of receipts over the years and details of external assistance
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These documents are common to both the central as well as state governments. Conclusion: The budget documents are fascinating. These documents are not just numbers. Scrutinizing them, one can understand the intention of the government, its priorities, its policies, and its allocation of financial resources, among different regions, sectors, industries which create a sea change in the lives of the people affected by it. Budget numbers express an enormous volume of information. One trained in budget analysis can discover the government’s expressed as well as hidden priorities. They may be interested in rural development by-creating employment opportunities, or providing elementary education to children, drinking water facilities to the villages, or health services in remote areas or whether their focus is on urban development with creation of industries , satellite towns , improvement in facilities or it wants to provide optimum resources to both.
Basic Concepts of the State Budget: As per article 202 of the constitution of India, the governor of a state shall 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 a financial year. This estimated statement of receipt and expenditure for a financial year named in the constitution as the “Annual Financial Statement” is commonly known as “Budget”. Maintenance of State Government Account: State Government (as well as central government) accounts are maintained in 3 parts 1. Consolidated fund of the state 2. Contingency fund of the state 3. Public Accounts of the state
Fund: All receipts are to be credited and all expenditure are to be met from this fund with the approval of the legislature. The consolidated fund of the state is formed out of all revenues received by the state, all loans raised by treasury bills, loans from market borrowings and negotiated loans, ways and means advanced and all money received towards recovery of loan advanced by state government from time to time. Similarly the expenditure from the consolidated fund can be met for
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charges/services as are voted by the legislatures or charged appropriations as included in the annual financial statement.
2. Contingency Fund: It is a notional fund where money is not actually
kept for expenditure. It is an arrangement to meet emergent expenditure for which there is no approval of the legislature. Expenditure is met from contingency fund with approval of governor in anticipation of approval of the legislature. This fund is in the nature of an imprest for meeting unforeseen and emergent expenses. The fund is placed at the disposal of the Governor, who can authorize expenditure from the fund subject to post-facto sanction of appropriation by the legislature. The transaction under the fund is guided by the rule framed for this purpose. The advance made from the fund to meet the urgent and emergent expenditure is required to be recouped by necessary supplementary provision within the financial year. In exceptional cases where advance is given at the last part of the financial year, when there is no chance to recoup the same by necessary provision through supplementary, the same can be recouped in the next financial year.
3. Public Accounts: Expenditure from Public Account does not require
the approval of the legislature but the net receipt in the public account is taken into account for balancing the Budget. The Public Accounts as defined in Article 266(2) of the Constitution of India comprises all public money received by or on behalf of the Govt, which are not credited to the consolidated fund of the state. The public accounts comprises of the followings: ➢ Unfunded Debt (Shares of small savings and provident fund) ➢ Deposit and Advances ➢ Reserve Funds ➢ Remittances and Suspense The unfunded debt (Provident Fund) and Deposit and Advances record transactions in respect of which Government acts only as a banker by receiving amounts which is paid afterwards and make advances other than loans, which are repayable. The suspense and remittances are only adjusting heads and all entries in these accounts are eventually cleared by corresponding Credit/Debit to the final head of accounts.
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Composition of the Consolidation Fund
Revenue Expenditure Expenditure on salary, pension, interest payment, subsidy, old age pension, electricity, water charges, motor vehicle, contingent expenditure and maintenance of capital assets like roads, buildings, irrigation works etc, is termed as revenue expenditure. The revenue expenditure is in fact an establishment related and maintenance of house keeping related expenditure.
Capital Expenditure The expenditure on construction of buildings, roads, irrigation projects, power house, flood control work, water supply etc which result in creation of permanent assets is termed as capital expenditure. (but maintenances of capital assets is in Non Plan expenditure) Here it becomes important to note down that the term non plan expenditure is just a nomenclature and the expenditure is actually a planned one.
Revenue Receipt: By state Government- own Tax and Non- Tax revenue From central government- share in central taxes and grants-in-aid Revenue Receipt of the state government consists of the following: (a) State’s own tax revenue • • • • • Sales Tax Motor Vehicle Tax Electricity Duties Stamp and Registration fees Land revenue
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• State excise duty • Professional Tax • Entry Tax • Entertainment Tax • Luxury Tax (b) State’s own non tax revenue • Interest payment on loans and advances given by the state government to various corporations, cooperatives, government servants etc Dividends on investments by the State Government Irrigation water rate Water tariff on urban water supply Fees and fines collected in schools and colleges User charges in medicals Mining Royalty Forest Royalty
• • • • • • •
Revenue Receipt from Central Government: (c) Share in central taxes: State’s share as per the recommendation of the Finance Commission from income tax, basic excise duty, additional excise duty, railway passenger fare etc Now instead of share from this few central taxes, State’s share has been recommended at x% on all central taxes excluding surcharge on income tax under the award of Eleventh Finance Commission. (d) Grants in aid from the Centre: • Non Plan revenue deficit grant, Centre’s share under Calamity Relief Fund, up-gradation and special problem grant as recommended by the Finance Commission Grant portion of the central assistance for state plan (70% loan + 30% grant) Grant under Centrally Sponsored Plan Schemes (State share varying from 50% to 10% and central’s share from 50% to 90%) Grant under Central Plan Schemes
• • •
(e) State’s own Revenue and State’s total Revenue:
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State’s own tax and own Non Tax are called State’s own revenue whereas State’s total revenue consists of State’s own revenue, share in Central taxes and grants from the Centre.
Capital Receipts • • Recovery of loans and advances given to various corporations, cooperatives and Government servants Loan portion of the central assistance, small saving loan, market borrowing, loan from NABARD, LIC, GIC, HUDCO etc, and loan from General Provident Fund Account (GPF) of the employees Misc. Capital Receipts such as proceeds of disinvestment, and sale of capital assets etc.
Source of Loan for the State Government 1. Internal Source (Internal Borrowing) • Market Borrowing • Loan from GPF account • Loan from NABARD, LIC, GIC, HUDCO, NCDC etc • Small Savings Loan 2. Loan from Government of India • Loan portion of the State Plan Assistance (30% grant, 70% loan) • Loan Portion of additional central assistance under Externally Aided Project (30% grant, 70% loan) • Loan portion of other central assistance given for specific programme • Small Savings loan though treated as internal borrowing is loan from GoI and this is being paid to GoI
I. Normal State Plan Assistance: Determined by the Planning
Commission on yearly basis (70% loan + 30% grant). II. Additional Central Assistance under EAP: The World Bank Loan and Grant from DFID or other agencies are passed on State Government to GoI as additional Central Assistance under EAP. (70% loan + 30% grant). III. Voted Expenditure and Charged Expenditure: Voted Expenditure requires the approval of the voting of the legislature, Charged Expenditure does not require the voting
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of the legislature but is placed before the legislature alongwith the voted amount. For instance the expenditure of Speaker, Deputy Speaker, Governor, and office establishment, judges of high court, administrative tribunal, Gujarat Public Service Commission, regulatory commission and decrial dues arising out of court judgment are treated as charged expenditure. Also the payment of interest, repayment of principal are also booked as charged expenditure.
IV.Revenue Expenditure and Capital Expenditure: Revenue
Expenditure is an establishment related and maintenance expenditure- salary, pension, interest, subsidy, maintenance of capital assets while Capital Expenditure is an expenditure which results in creation of assets such as road, bridges, dams, power house etc.
5.8.3 Types of Plans:
1. State Plan: When a new programme is taken up by the state government it is normally taken under State Plan. After Completion of the project or at the end of the Plan period the programme if felt necessary to be continued is transferred to non-plan. 2. Non-Plan: When a road is constructed, the expenditure is booked under planned but thereafter the expenditure on the maintenance of the road is taken under the non-plan. 3. Central Plan: 100% funding by the Central Government. 4. Centrally Sponsored Plan: Expenditure is shared by Central Government and State government in an agreed ratio varying from 50% to 90%.
5.8.4 Different types of Deficits:
1. Revenue Deficit: The gap between Revenue Receipt and Revenue Expenditure is called Revenue Deficit. 2. Fiscal Deficit: The excess of expenditure (both Revenue and Capital) over the Revenue Receipt and Recovery of Loans taken together represents the Fiscal Deficit. It also represents net borrowing during a year. Fiscal Deficit = Revenue Receipt + Recovery of Loans – Total Expenditure (including Capital Expenditure but excluding repayment of Loans and Advances)
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3. Primary Deficit: The primary deficit represents the Fiscal Deficit less the Interest Payment. It represents the net borrowing to meet the expenditure excluding the interest payment. 4. Budgetary Deficit: Budgetary Deficit represents the net borrowing from RBI at the end of the year. The Budgetary Deficit indicates that the total expenditure has exceeded by that amount from all Revenue Receipt, all Recovery of Loans and Advances, all Loans and the net balance in the Public Account etc. It is a borrowing from RBI in advance which is recouped in the next year. The deficits are measured as a percentage of GSDP (Gross State Domestic Product)i.e. dividing the deficit amount by GSDP multiplied by 100.
5.8.5 Types of Sub- Budget:
Expenditure Budget Vol 1: Expenditure Budget Vol 1 deals with revenue and capital disbursements of various Ministries/Departments and gives the estimates in respect of each under ‘Plan’ and ‘Non Plan’. This also gives analysis of various types of expenditure and broad reasons for the variation in estimates. Under the present accounting and budgetary procedures, certain classes of receipts, like payments made by one department to another and receipts of capital projects or schemes are taken in reduction of the expenditure of the receiving department. The estimates of expenditure included in the Demands for Grants are for the gross amounts while the estimates for expenditure included in the Annual Financial Statement (Budget) are for the net expenditure as will be reflected in the accounts, that is, after taking into account the recoveries. The document Expenditure Budget makes certain other refinements like netting expenditure of related receipts so that inflation of receipts and expenditure figures are avoided and there can be a better appreciation of the magnitudes of various expenditure. Contributions to International Bodies are shown in a separate annex. A statement each showing (i) the estimated strength of establishment of various Government Departments and provision made therefore and (ii) Plan grants and loans released by Ministries/ Departments directly to State and District level autonomous bodies. Expenditure Budget Vol 2: The provisions made for a scheme or a programme may spread over a number of major heads in the Revenue and Capital sections in a Demand for Grants. In the Expenditure Budget Vol 2, the estimates made for scheme/programme are brought together and shown on a net basis at one place, by major heads. To understand the
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objectives underlying the expenditure proposed for various schemes and programmes in the Demand for Grants, suitable explanatory notes are included in this volume in which, wherever necessary, brief reasons for variations between the Budget estimates and revised estimates from the current year and requirements for the Budget year are also given. Receipts Budget: Estimates of receipts included in the Annual Financial Statement (Budget) are further analyzed in the document ‘Receipts Budget’. The document provides details of tax and non-tax revenue receipts and capital receipts and explains the estimates. The document also provides the arrears of tax revenues and non-tax revenues, as mandated under the Fiscal Responsibility and Budget Management Rules 2004. Trend of receipts and expenditure along with deficit indicators, statement of revenues foregone, statement of liabilities, statement of contingent liabilities, statements of assets and details of external assistance are also included in Receipts Budget. Detailed Demands for Grants: The Demands for Grants are followed by the Detailed Demands for Grants laid on the table of the Legislative Assembly some time after the presentation of the Budget, but before the discussion on Demands for Grants show further details of the provisions included in the Demands for Grants as also of actual expenditure during the previous year. A break up of the estimates relating to each programme/organization, wherever the amount involved is not less than Rs. 10 lakhs, is given under a number of object heads which indicate the categories and nature of expenditure incurred on that programme, like salaries, wages, travel expenses, material and equipment, grants-in-aid etc. At the end of these Detailed Demands are shown the details of recoveries taken in reduction of expenditure in the accounts. Plan Outlay: Plan expenditure forms a sizeable proportion of the total expenditure of the State Governments. The Demands for Grants of the various ministries show the Plan expenditure under each head separately from the Non-Plan expenditure. The Expenditure Budget Vol 1 also gives the total Plan provisions for each of the Ministries arranged under the various heads of development and highlights the budget provisions for the more important Plan programmes and schemes. A description of important schemes included in the Plan along with the objectives, targets and achievements is given in the Performance Budget of the respective Ministry. Variations in the estimates of Plan expenditure are also explained in this document. Performance Budget: Physical and financial aspects of major programmes and schemes are included in the Performance Budgets
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presented to Legislative Assembly separately by the Ministries/Departments. Performance Budgets are prepared and circulated to Members of Legislative Assembly by all Ministries/Departments dealing with developmental activities. The Performance Budget presents the budget of the Ministry/Department in terms of functions, programmes and activities. It also includes a statement on the programmes and performance of the various public sector undertakings under the Ministry/Department indicating, among other things, the capacity installed and utilized, physical targets and achievements, results of operation, return on capital etc. Performance Budget serves the management as a tool of administrative and financial control in the implementation of development programmes.
5.9 Maintenance of Govt finances:
5.9.1 Broad outlines of the process for preparation of State Govt Accounts
The broad outlines are indicated below:a) All receipts in India on behalf of each state Govt & on behalf of each Union Territory shall be paid into its treasury or the bank, and initial accounts of such receipts shall be maintained at the treasury. b) Receipts realized in the public works, Forest and any other departments which may be authorized in this behalf shall be paid into a treasury or bank in the lump and accounted for at the treasure merely as receipts on behalf of such departments. The detailed accounts of such receipts shall be kept by the departmental officers concerned. c) Payments in India on behalf of the State Governments shall ordinarily be made either at its treasury or the bank, but some departmental officers may be authorized to withdraw sums in lump from treasury or the bank for making payments. In the former case, the initial accounts of payments shall be kept at the treasury, and in the latter case, such accounts shall be maintained by the departmental officer concerned. The accounts referred to in the clause do not relate to the accounts maintained by Govt servant in respect of expenditure incurred from permanent advances (i.e. cash imprests) • Officers of the Civil Departments who pay their receipts into the Consolidated Fund or the Public Account or withdraw money for expenditure there-from or from the Contingency Fund in the lump will submit detailed accounts of their transactions to their respective
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Accountant General. Some specified Departmental officers may be required to render to the Accountant General compiled accounts of their transactions classified under prescribed heads of accounts. d) At the beginning of each month, each Accountant General will receive from the treasuries under his Jurisdiction monthly accounts supported by the requisites schedules, vouchers, in respect of the transactions which took place in the treasury during the previous month. Each State or Central treasury, which renders accounts to a state account general, will submit a double set of accounts, one for transactions of the State Govt & the other for transactions of the Central Govt. e) From the accounts furnished by treasuries & Civil Departmental Officers, referred to in clauses (b) and (c) above, Departmental Classified Abstracts will be compiled by the Civil Account Officers showing the monthly receipts and payments pertaining to each department for the whole account circle, classified under the relevant major, minor, sub and detailed heads. Separate classified abstracts will be maintained for each department, each group of small departments or each major heads of account not relating to any particular department or departments according to local convenience. The transactions adjustable against a department or against a major head not relating to any particular department which are intimated to the Civil Accounts Officer by another Accounts Officers as well as all book adjustments against a departmental or other major head which are initiated in the Accounts office itself will also be incorporated in the relevant departmental Classified Abstracts, so that the latter may include monthly all transactions of whatever nature connected with the receipts and payments pertaining to each department or major head of account. From these classified abstracts, separate Departmental Consolidated Abstract showing the progressive totals month by month under major, minor, sub, and detailed heads of revenue receipts and service payments will be compiled. Separate Consolidated Abstracts will be maintained for each of account or for a group of departments or major heads of accounts as may be found convenient. The Departmental Classified Abstracts and the Departmental Consolidated Abstracts for the Central transactions will be compiled separately from those for departments of the State Govt. f) The transactions pertaining to Debt, Deposit and Remittance heads appearing in the Treasury Cash Accounts and List of Payments and in the Departmental and other Abstracts will be collected for the whole circle of account under each head of account from month to month in a Detail Book. From the figures in the Detail Book, the Consolidated Abstract of Debt, Deposit, Remittance, Suspense transactions will be prepared
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showing the progressive totals month by month under each major head in the “Public Debt”, “Loan and Advances”, sectors of the Consolidated Fund and those in the Public Account. This abstract will also show the progressive totals under such minor, sub and detail heads as may be found necessary. Separate Detail Book and Consolidated Abstracts will be maintained for Central and State transactions. g) The final stage of compilation will be the preparation of the Abstract of major head totals showing the receipts and disbursements by major heads during and to end of the month from the Departmental Consolidated Abstracts and the Consolidated Abstract of Debt and Remittance transactions. From the consolidated Abstracts for State and Centre respectively will also be compiled the monthly and the annual accounts of the State Govt and of Union Territory Govt with legislature and material for the annual accounts of the Central Govt and of Union Territory Administrations. The cash balance of the State Govt in the books of the Accountants General at the close of each month will then be reconciled with the balances shown in the Cash Accounts rendered by Treasury Officers and with the statements of closing balance received from the Central Accounts Section of the Reserve Bank. Reconciliation of figures under the head “8675-- Deposits with Reserve Bank” in respect of transaction of the Central Govt/ Union Territory Govt and Administrations arising in their books will be effected by the Accounts General. h) A copy of the monthly account of each State Govt , will be submitted to it by the Account General concerned. A copy of the monthly account of transactions finally adjusted in their books in respect of Union Territory Administrations, relevant portion relating to a Union Territory Govt, and of Central Govt Civil pensions will be rendered by the Account General to the Controller General of Accounts, vide Rule 14(f) above. i) Each Accountant General will work out the progressive figures during the year of the Central and State accounts with which he is concerned. On closing the accounts for March (Supplementary), a progressive account of the transactions and accounts relating to annual receipts and disbursement of State Govt/ Union Territory Govt. A progressive account of the Union Territory Administrations and relevant transactions of Union Territory Govt for which budget provision is made in the composite Grants of the central Govt and transactions under the Public Account will be sent by the Accounts General to the controller General of Accounts, vide Rule (j) above.
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Annual Accounts ( including Appropriation Accounts) in respect of State Govt, and Union Territory Govt with Legislature are prepared by the concerned Accountant General and submitted to the Comptroller and Auditor General of India for approval and transmission to the Governor of the State, Administrator of the Union Territory Govt concerned, along with his report thereon in terms of Article 151 (2) of the Constitution/Section 49 of Union Territories Act, 1963 and section 11 of the Comptroller and Auditor General's (Duties, Power and Conditions of Service) Act, 1971 for being laid before the Legislature.
5.10 Banking Arrangements of State Government
Each State Govt has made a separate agreement with the Reserve Bank of India by virtue of which the general banking business of the Govt (in which business is included, the receipt, collection, payment & remittance of moneys on behalf of that Govt) is carried on and transacted by Reserve Bank, in accordance with and subject to the provision of the agreement and of the Reserve Bank of India Act, 1934, and in accordance with and subject to such orders as may from time to time be given to the Reserve Bank by the State Govt. The operation of each State shall, however, be confined to the offices and branches of the Reserve Bank of India and the bank which have been designated as falling within the area of that particular State. The receipt and payment of moneys on behalf of a state outside its jurisdiction shall ordinarily be arranged through the Accountant General of the State in which the transaction takes place. (The govt of Jammu & Kashmir and Sikkim have not so far entered into agreement with the Reserve Bank of India for the conduct of their general banking business by the Reserve Bank). Each office or branch of the Reserve Bank, or the State Bank of India acting as agent of the Reserve Bank, shall keep separate account of cash transactions undertaken by it on behalf of the State Govt within whose area it is situated. All transactions which cannot be debited or credited directly to the account of the Central Govt with the Bank and transactions of other State Govt shall also be taken to the account of the Govt of the State in which they occur. Statement of these transactions together with all supporting vouchers, challans, paid cheques etc. shall be forwarded by each office and branch of the bank daily to he local Treasury officer or to the Accountant General as the case may be. The transactions shall also be reported to Central Account Section, Reserve Bank Of India, Nagpur.
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(Note: With effect from 1st February, 1978 transactions on account of discharge value of, and periodical interest on securities of State Govt, as well as receipts on account of subscriptions against market loans floated by State Govt are taken by the officers of the Reserve Bank of India directly against the cash balance of the State Govt concerned with the Central accounts section of the Reserve Bank of India, Nagpur.) Complete accounts of the Central Govt and each of the State Govt with the Bank shall be maintained by the Central Accounts Section o the Reserve Bank at Nagpur which shall also act as a general clearing house for the adjustment of (i) all transactions between different State Govt and (ii) such transactions between the Central and State Govt as may be specified by the Central Govt. All adjustments to be made between the accounts of different State Govt as well as all payments which one of these Govt has to make to another shall be advised by the Accountant General authorized in this behalf to the Central Account Section of the Reserve Bank which will pass the necessary entries in the accounts of the Govt concerned, maintained in its books. Similarly, such adjustments in the case of specified transactions between the Central Govt and the State Govt will be advised to the Central Accounts Section of the Reserve Bank by the Accountant General authorize in this behalf for making monetary settlement in the accounts of the Govt concerned maintained in the books o the Bank. Details of transfers affected in its books against the balance of the State Govt or of the Central Govt a the case may be, on account of adjustment advised by Accounts Officers authorized for the purpose, shall be communicated by the Central Accounts Section of the Bank to the originating as well as to the effected Accounts Officers or Account Officer of the concerned ministry/Department of the Central Govt at the close of each day. At the close of the accounts of each month, a statement of closing balance of each State Govt in the books of the Bank after taking into accounts all the cash transactions in all the offices, branches and agencies of the bank and the adjusting transactions in its own books shall be forwarded by the Central Accounts Section to the Accounts Officer concerned.
5.10.1 State Transactions in Central Treasuries
Cash balance held in the treasuries of the Central Govt from part of the Consolidated Fund, Contingency Fund and the Public Account of India. Such treasuries exist in those Union Territories whose accounts have not been separated from audit and continue to the compiled by the
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Comptroller and Auditor General of India. Transactions on behalf of State Govt arising in these treasuries shall be classified in the treasury accounts under the head “8658 – Suspense Accounts – Suspense Accounts (Civil) – Accounts with Accountant General and settled in cash by exchange of cheques/demand drafts as the case may be. (NOTE: At present the settlement of the transactions by the exchange of cheques/demand drafts is resorted to in cases where the transactions taking place in Union Territory accredited to an Accountant General are adjustable against the cash balances of a State, whose accounts are maintained by another Accountant General. These transactions initially taken in the Central Section of accounts under the head '8685 Suspense Accounts- Cash Settlement Suspense Account'.)
5.10.2 Transactions of the other Governments, including Central Government in State Treasuries
Cash balances held in Central treasury form part o the Consolidated Fund, the Contingency Fund and the Public Account of the State to which the treasury belongs. The treasury Rules of each State Govt issued under article 283 of the Constitution, however, provide that moneys may be received and payments made on behalf of other State Govt, by a State Treasury. Similarly, moneys may be received and payments made by such treasuries on behalf of the Central Govt in the case of certain specified transactions. All such receipts and payments on behalf of other State Govt and Central Govt shall be taken in the first instance against the cash balance of the state concerned. On receipt on intimation of such transactions through the monthly treasury account or otherwise the Accountant General shall take the following action: (a) In case of transactions pertaining to the other State Govt, the Accountant General shall make the requisite adjustments through the Central Accounts Section of the Reserve Bank against the balances of the other State Govt concerned NOTE (i): This procedure shall also be applicable to moneys received in the office of the Accountant General on behalf of another State and book entries made in the office of the Accountant General affecting the accounts of another State Govt. NOTE (ii): As the general banking business of the State Govt of Jammu & Kashmir is at present, not conducted by the Reserve Bank of India, the settlement of transactions between the State Govt and other State the
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Centre / is affected in cash or by demand drafts in accordance with the instructions contained in separate order. (b) In the case of such transactions of the Central Govt, including Railways / Postal / defence Departments at State treasuries (both banking and nonbanking), these shall be accounted for by the treasuries in the State Section of Treasury Account under the head 'PAO Suspense – Transactions adjustable by PAO ministry / Department of ….......' below the Major head '8658 – Suspense Accounts' for necessary cash settlement by the State Accountant General with the Pay and Accounts Office.
5.11 Functional Details of Different Offices:
5.11.1 Department of Finance: Some of the main functions of the
Finance Department of every state are as follows: i. Monitoring receipts and expenditure of the state ii. Allocating and monitoring of budget iii. Accessing availability of funds for various schemes and monitoring the status of government investment in equities, loans, debentures etc iv. Union Pensions v. State Pensions and Pension rules vi. Commutation of Pensions vii.Compassionate Funds viii.Small Savings Scheme ix. Treasuries x. Appropriation Bill xi. Re-Appropriation xii.Finance Commission xiii.Loans and Advances to local bodies xiv.Matters connected with or arising out of the appropriation accounts and audit report and Public Accounts Committee Moreover, Department of Finance is the administrative department controlling Directorates like the Directorate of Pension and Provident Fund, Directorate of Accounts and Treasuries etc.
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5.11.2 Directorate of Pension and Provident Fund: The
Directorate of Pension and Provident Fund deals with the scrutiny and authorization of pension cases of government employees/officers. Pension case papers are handled by about ten branches and each case has to move to various branches. It is a state-level office and has no subordinate offices at the district or taluka level. And considering the nature of functions of this office, it deals with government employees/officers and pensioners as well as government offices, which means it does not have direct interaction with citizens.
5.11.3 Directorate of Accounts and Treasuries: The Directorate
of Accounts and Treasuries administers the functioning of Treasuries, including sub-treasuries, joint director offices. Some of its main functions are listed below: i. Monitoring of treasury operations ii. Monitoring of pension cases disposed off at the treasury and the office of divisional joint director iii. Internal audit, store and cash verification of other government departments iv. Monitoring of CAG and AG audit v. Conducting special audit as per the order of Finance Department vi. Monitoring of monthly accounts sent by Treasuries to AG vii.Issuing instructions to Treasuries and Sub-Treasuries to execute bans on payment as per the order of Finance Department viii.Giving opinion on various financial matters referred by other Departments ix. Reconciliation of departmental expenditure at AG level Treasuries & Sub Treasuries Information: Treasuries are the nodal offices for all financial transactions of the Government in the district. They manage both payment and receipts of the Government. The Sub-Treasuries work as an extension of the Treasuries at the Tehsil level. The Drawing and Disbursing Officers who are authorized to draw money can present their claims in the Treasury.
5.11.4 Accountant General (AG): The office of the Accountant
General is part of the Indian Audit & Accounts Department under the Comptroller & Auditor General of India (CAG). The main function of this office is the compilation and consolidation of Civil Accounts of the respective State Government. It compiles and submits monthly Civil
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Accounts to the State Government. Annual Finance and Appropriation Accounts are prepared and presented to the Governor of the respective state for lying on the table of State Legislative Assembly (Vidhan Sabha). This office also issues Drawing and Disbursing Authorities to the respective Drawing and Disbursing Officers and conducts periodical inspection of treasuries.
6. DETAILS OF DIFFERENT MODULES WHICH ARE PART OF INTEGRATED FINANCIAL MANAGEMENT SYSTEM
6.1 Annual Development Plan Module:
1. General Administration Department (Planning) will generate a file to the finance department asking for the amount of resources decided for the next financial year. 2. The finance department will reply to this and 3. Based on that GAD (Planning) will decide sector wise- sub sector wise deployments (outlays) and generate a new file. 4. This file will be transmitted in order of regular hierarchy for approval. 5. Once the necessary approval is obtained, GAD(PLNG) will issue a letter along with reports of sector-sub sector wise outlays to secretaries of different departments asking scheme wise outlays and some other information provided by planning commission New Delhi. 6. As the various departments will receive letter/report from GAD (planning) specifying sector wise/sub sector wise outlays, respective planning branch will create a file for each of the sub sector concerned to the department, and generates scheme wise outlays and attaches the write-up.
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7. Then the consolidated file is forwarded in the regular hierarchy of the respective department. 8. The planning branch of the department will write a letter along-with various reports (sub-sector wise) to the GAD (Planning) as a part of formal procedure. 9. Thus the GAD (Planning) will receive such reports from various departments. 10. Now GAD will prepare a separate file for each sub sector and if a sub sector is shared between more than one department than consolidated outlays will be prepared. 11. Again the file will be forwarded in the regular hierarchy and necessary approval will be sought. 12. GAD will issue sector/sub sector wise outlays to all departments and invites for discussion. The process of Annual Development Plan will flow as follows: 1. The entire process described above will be for before discussion phase. 2. As soon as the process is completed a discussion will be held between Chief Minister, Chief Secretary, Principal Secretary Planning, and the secretaries of all the departments. 3. In such a discussion a final size of the plan will be decided. 4. Now the entire process is repeated but the main difference now will be that this process will be on an after discussion basis and will carry the final amount of the plan. 5. After finalization of plan, book for the Annual Development Plan is prepared and sent for the approval of planning commission and legislative assembly. This entire process is proposed to be made online by employing Tata Consultancy Services as a service provider. The government as well as TCS feels that by adopting an online system, several benefits such as reduction in paperwork, automatic data consolidation and validation will accrue. I was fortunate to get an official document from TCS of Government of Gujarat related to a Tribal Development Plan as a part of ADP. On reading that document I came to know about how the government actually undertakes planning in different departments. That particular document was concerned with implementing Tribal Sub Plans of Tribal Development Department. On reading the document I could appreciate the intricacies involved in planning the various schemes and making budgetary allocations for the same.
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A briefing as to what the document stated: On the basis of recommendations of a committee, it was decided by the Government to earmark 17.57% of the outlay of the state’s annual development plan every year for Tribal sub plan. As this decision was taken in the middle of the year, additional budgetary allocations had to be made subject to full utilization of already allocated outlay and under preparedness to absorb more funds during the current year. It will be the responsibility of the Tribal Development Department to finalize the sectoral, sub-sectoral outlays and schematic outlines and outlays. After deciding the intersectoral, sub-sectoral and schematic outlays under tribal sub plan, the tribal development department shall communicate the breakup of outlays to be provided for tribal sub-plan to all concerned administrative department. Name of the document: Tribal Development Department, Resolution No. TAP/1092/1928/CHH, Government of Gujarat
6.2 E-budget Module:
Some features of e-budget: e-budget is a tool which will enable the relevant officers of the state government to electronically process Receipt, Expenditure (Plan or Non Plan) and Revised Estimates. As and when various Heads of Departments will give their estimates, this ebudget module will enable their consolidation. Proposals are generated by various government departments to get grants. These proposals can be tracked online because of e-budget module. The calculations involved in preparation of budgets are astronomical; this module will enable accurate and dynamic calculations. Certain guidelines are needed to be followed while preparing a budget, by adopting an online approach these guidelines will always be followed taking the chances of any need for correction later to almost zero. Also the module will enable ease of electronic exchange of data with the external entities like Treasury, Accountant General Office etc. Issues to be tackled by e-budget: • • • • • Monitoring and Tracking of Budgetary proposals Linkage with ADP Aggregation of budget proposals Online Budget Publication Printing with Errata/addendums Incorrect & Incomplete Budget Proposals
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Data Exchange with AG & Treasury Trend Analysis and Decision Making
The objectives of e-budget are 1. Monitoring and Controlling: As budget is an important exercise of the state, lots of monitoring and controlling activities are required. These activities include online tracking of budgetary proposals, comparative study of proposed estimates against previous year’s detail, incorporation of budgetary guidelines, validation of planned budget against annual development plan etc. These activities are performed with ease because of this module. 2. Performance: The performance of various budgetary activities has been improved by adoption of IT. These improvements have occurred in consolidation and aggregation of proposals which has been automated; in the AG accounts, which are now incorporated electronically; in the publication of budgets online, which is now done without any errors; in availability of budgetary details for State, Department, and HoD on one click. 3. Accuracy: Because of e-budget module there is now robust validation engine for checking critical business rules at various levels like budget head structure, also the Proposal’s cycle time has reduced by correctness and completeness in it. The various stakeholders of e-budget are the Finance Department, the Assembly, the Planning department, the Accountant General’s Office, the Administrative Department.
Functions of an e-Budget: a) b) c) d) e) f) g) h) i) j) k) l) Budget Publication and MIS Management of Contingency Fund Budget Head Structure Configuration Budget Guidelines Expenditure Estimates Re-appropriation and Surrender of fund Supplementary Demand Expenditure estimates Receipt estimates Revised estimates Direct Upload Receipt Budget Direct Upload Exp Budget
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The e-Budget module will interact with the following external entities: • • • • Accountant General Office’s System Grant Annual Development Plan Treasury
6.3 Debt Management Module:
Debt Management features of the State Government will include Debt Management Related Functions: • • • • Loan Receipt Loan Repayment/ Interest Payment Debt Consolidation Template Generation (Time Promissory Notes, Memo etc)
Cash Management Related Functions: • • • Daily Position Monitoring T-Bill Investment/Rediscounting/Maturity Integration with Debt Management
Process Flow of Debt Management: Typically a state government’s debt will be from 4 sources: i. Government of India Loan ii. Institute Loan (Institutes will include the likes of NABARD, HUDCO etc) iii. NSSF Loan iv. Market Loan (i) Government of India Loan: The Central Government gives loans to the State Governments for various development related projects. Often several foreign agencies also give loans to the State Governments routed through the Central Government. Management of these loans becomes an integral and important function of the state treasury and AG. Often there are certain complications involved in such loans, such as different components of loans, grants etc. The grant component is not to be repaid, whereas the loan component has to be repaid.
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The process involved while receiving GoI loan: The central government will issue a sanction order to the respective state government and RBI Central Accounts Section (Nagpur). As the state account finances are maintained at RBI CAS, it will credit the state Government account as per the amount mentioned in the sanctioned letter. As and when the repayments arise the treasury will make the necessary arrangements and the state AG will issue an advice to the RBI CAS as well as to the state government (Finance Department). All these debits and credits are reflected in the Daily Position Statement which is an interaction tool between RBI CAS and AG office. Integration of Daily Position Statement (from RBI CAS) with the system will be an integral part of the system. System being proposed by TCS: In order to have an ease of debt management TCS has designed a system which will take care of capturing loan details in totality. This will be the most important function of the system as it will be only on the basis of this function that it will be able to perform its other functions such as generating repayment schedules as per the terms and conditions of the loan, verifying payables as per AG’s advice sent to RBI CAS and State Government’s finance department, capture any kind of discrepancy between different records, reconcile as and when necessary etc. The system will be an important source of MIS reports. These MIS reports will include: a. Details of loans outstanding month wise/year wise/ministry wise b. Payable details (Principal + Interest) month wise/year wise/ministry wise c. Details of loan at particular interest rate or between particular band of interest rates (interest rate profile of loans under this category) d. Maturity profile of different loans e. Tracking of the loans received against budgetary estimates f. Graphical analysis of the loans outstanding, repaid, received (Ministry wise, scheme wise, year wise) Characteristics of Government of India Loan: GoI loan will be typically for a period of 10 to 25 years. Interest will be as per the respective agreement. At times there will also be a
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moratorium period, wherein no repayments towards the principal are to be made. The repayment schedules will be individual loan specific, and will normally consist of 10 installments a year consisting of interest and principal. (i) Institute Loan: Institutes such as National Bank for Agriculture and Rural Development (NABARD), Housing and Urban Development Corporation Ltd (HUDCO) etc often give loans to state governments. These loans are different from traditionally given loans. These institutes along with giving loans & taking interest are also concerned with the knowledge of how these loans are utilized. Also the manner of disbursement of these loans is different. Initially while the Budget is prepared, the decisions as to what amount of loans have to be taken; the purposes for which these loans have to be taken etc are made. Various Government Departments make provisions in their Budgets for the amount of institute loans and the purpose of these loans. On the basis of these budgets, the department will send a proposal to the institute for obtaining the necessary sanctions. Once the institute issues the necessary sanctions, it will issue a sanction letter to the concerned department. The funds are not disbursed at the time of sanction but during the course of project execution whenever any expenditure is incurred by the department, a notification will be sent to the institute for reimbursement of the same. The department will send a letter to the finance department for verification. This letter will be signed by the Chief Engineer of the beneficiary department, Secretary of the Beneficiary Department, Additional Secretary of the Finance Department and Joint Secretary- Institutional Finance of Finance Department. It will be at the Finance Department that the verification of budget availability and actual expenditure incurred till date will be done. Based on the request received for reimbursement of expenditure as loan, institutions will scrutinize the request received against the loan sanctioned, progress of projects and other supporting documents. Thereafter the institute will initiate the process of issuing cheque and will intimate the finance department about the date of collection of cheque. The finance department in turn will prepare Time Promissory Notes (TPN). This TPN is nothing else but an undertaking about repayment of loan and regular payment of interest as per the prescribed rate and schedule. Against such a TPN issue to the relevant institute, cheques are collected physically by the officials of Finance Department. These cheques
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are deposited in a bank along-with a challan. This challan will be acknowledged by the bank on a specified date in the future and is kept as a record of the amount deposited. As per the repayment schedule, whenever an amount is due, FD will undertake internal processing regarding the amount to be paid and thereafter will issue a formal order mentioning the project wise amount to be repaid. The DMO of FD will forward the details to the Cash section. In the cash section the DDO will prepare a bill in proper format and submit it to the Treasury office for issuing cheque. Once the cheque is prepared in the Treasury, the cash section of FD will collect the cheque and submit it to the DMO cell of FD. A responsible official of DMO will submit the cheque to the institute and get the necessary acknowledgement. Between the amount released and repayment made reconciliation will be made in every 6 months. Also reconciliation is done with the Accountant General’s office for the head wise amounts booked in the budget. The system being proposed by TCS will perform several functions such as capturing loan details, generating TPN for each loan, generating repayment schedules as per loan terms and conditions. The system will also process payables and forward details to cash section so that the cheque can be issued from there. Once the cheque is received by DMO, the status of payables will be updated as paid along-with relevant cheque details. The system will enable integration with the treasury office and also will have an interface with AG office.
The MIS generated by the institute loan will have: ○ Status of loans institution wise/project wise/tranche wise ○ Details of loans outstanding month wise/year wise/institution wise ○ Payable details (Principal + Interest) month wise/year wise/institution wise ○ Details of loan at particular interest rate or between particular band of interest rates (interest rate profile of loans under this category) ○ Tracking of the loans received against budgetary estimates ○ Graphical analysis of the loans outstanding, repaid, received (Institution wise, project wise, tranche wise)
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Characteristics of Institutional Loan: The institutional loan is for duration of 7 years, with annual interest rate of 6.5%. There is a moratorium period of 2 years. The payment schedule is different for principal component and interest component. While the principal is to be repaid in 5 equal instalments after the moratorium period is over, the interest has to be paid every quarter on the amount of loan outstanding as on that date.
National Small Savings Fund ( NSSF) Loan: People from all over India invest in Kisan Vikas Patra, Post Office Monthly Income Account, 15 Years Public Provident Fund Account, Post Office Time Deposit Account, 5-Years Post Office Recurring Deposit Account, Post Office Savings Account, National Savings Certificate(VIII Issue), Deposit Scheme For Retiring Govt. Employees-1989, Deposit Scheme For Retiring Employees of Public Sector Companies 1991, all these form part of NSSF. The rate of interest on an average on these schemes works out to be around 8%. These schemes are essentially under the umbrella of the Central Government. Now Central Government provides these loans to the state governments in accordance with the amount invested by that state’s inhabitants. For e.g. if a total of Rs. 1000 crores have been invested by the people of Gujarat in the NSSF schemes then the Government of Gujarat will receive these 1000 crores at an interest rate of 9.5% from the Central Government. The process of receiving, management and repayment of NSSF loan is again different then other processes mentioned in relation with other loans. Initially the Finance Department of the State Government as well as RBI CAS (Nagpur) will receive a sanction (notification) of net amount released during the year. RBI CAS will credit the amount in the account of the State Government and the same will be reflected in the Daily Position Sheet which is sent to the AG as well as to the FD of the State. On the due date of repayment the amount will be debited from the state government’s account by RBI CAS and is again reflected in the Daily Position Sheet. The system being proposed by TCS will have to track each and every loan by verifying the payables against the payments made by RBI CAS (as will be reflected in daily position sheet). The system will have to reconcile with AG for the payment accounted.
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The system will have to generate repayment schedule as per the terms and conditions of the loan. The MIS generated by NSSF system will include: ○ Details of loan received, repaid and outstanding (Year wise, month wise) ○ Payable details (Principal + Interest) month wise/year wise ○ Tracking of the loans received against budgetary estimates ○ Trend analysis of loans received, repaid & outstanding (Graphical reports) ○ Details of loan at particular interest rate or between particular band of interest rates (interest rate profile of market loans) (i) Market Loans: State Governments often take loans from open markets to finance their capital expenditure requirements. Now the states by themselves do not have any powers to raise such money directly. They have to provide a notification to the RBI for raising this money on behalf of the state government. RBI does so by conducting the auction process described in this report itself. The process of obtaining market loan starts with the state government issuing notification regarding floating of Government stock along with various details of tenure, starting date, amount, repayment schedule to the RBI. Thereafter notices will be issued to the market participants (interested bidders) who in turn will submit their bids to the RBI. The RBI after concluding with the auction will send all the details such as amount of bids received, amount of bids accepted, interest rate decided etc to the state governments. Thereafter on a regular basis the state’s debt management office will track the loans as per the terms and conditions of the loans. These terms and conditions first appear on the RBI CAS statement. The system being developed by TCS will be able to provide a variety of information to the concerned official of the client staff. Such information will include market loan receipt details (month wise along with month wise payment details, loan tenure, interest rate etc), market loan repayment liability details (along with the payment date, loan amount, breakup of interest and principal component, description of the loan etc), market loans
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outstanding details (year wise, weighted average interest rate of that particular year etc), market loans outstanding details (month wise), market loans repaid (along with date of receipt, date of repayment, amount of interest paid, amount of principal paid, loans repaid for which interest rate etc). Also the system will be able to reconcile the amount paid with the amount payable and interface with external entities like AG.
Such market loans have some characteristics for tenure, rate of interest etc. The tenure of a typical market loan is of 10 years. It may differ in some cases though. The interest rate as already mentioned is determined through the auction process. Repayment of the principal will be done at maturity (at par) while interest is paid twice a year (every 6 months).
6.4 Cash Management Module:
Management of its cash is an important function for any entity, be it a business organization, NGO, or a Government. In case of a state government the main banker is RBI which undertakes transactions of the state through its agency banks. All the receipt and payment transactions of the state are executed by these agency banks (all public sector banks as well as some private banks). The net amount of the state governments account is settled by these banks with RBI. The banks through their link offices will send the daily records of transactions to RBI Public Accounts Department (PAD). (Gujarat’s RBI PAD is situated at Ashram Road, Ahmedabad). RBI PAD in turn will send these daily statements to RBI CAS Nagour. RBI CAS will work out the overall balance position of the state and generate a Daily Position Statement (DPS). DPS will consist of transactions reported by RBI PAD, intergovernmental transactions recorded directly at RBI CAS and all other transactions affecting the cash position of the state. This DPS is forwarded to the state government and AG office on a daily basis. Daily Position Statement will consist of the following kind of information:
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• • •
All the debits and credits of agency banks (these include all the receipts of Government and all payments of Government executed by agency banks), the Treasury offices also generate daily totals of debits and credits and these are reconcile with the bank records. All the intergovernmental advices such as Loan/Grant received from the central government, liaison office transactions, interstate settlements Investments in T-Bills, rediscounting of T-Bills, maturity proceeds of the investments etc Ways and Means advances and their repayments Overdraft advances and their repayments etc
Now based on the daily position of the state, the state will be either in deficit or surplus. If the state is in surplus then the excess funds of the state will be invested by the RBI. If the state is in deficit then primarily the T-Bills will be discounted, if however there are no T-Bills then RBI will give Ways and Means Advances (WMA). Once the approved limit of WMA is over, then special WMA (at a higher rate of interest) is given, if even special WMA gets exhausted then the state has to take the overdraft facility (at an even higher rate of interest). These various advances are to be repaid as soon as the state comes in a surplus position.
6.5 Guarantee Management Module:
A Guarantee in finance is promise by one party (the guarantor) to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise is also known as a guarantor. The situation in which a guarantee is most typically required is when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law jurisdictions, a contract of guarantee is only enforceable if recorded in writing and signed by the surety and the principal. Guarantee Issue State Governments give guarantees for repayment of capital, loans, fixed deposits etc, raised and dividend/interest payable by State
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Corporation/Statutory bodies, Municipal Corporations, Municipalities, Nagar Panchayats, Cooperative Banks/Societies, Joint Stock companies etc. The guarantee can be for loan, bond or tripartite agreement. In case of default by the borrowing organization, State Government has to honour the amount defaulted within the limit of amount guaranteed. The amount paid by State Government to the lender has to be recovered from the parent department of the defaulted organization. Such Guarantees are an example of non fund based financing and the state governments providing them earn income on them. The fees charged by the state governments will be in the range of 0.25% to 2% of the amount Guaranteed. However for guarantees provided to social organisations, no such fees will be charged. The respective department which has taken this facility will deposit the guarantee fee every year in the month of April. This fee will be calculated on the outstanding amount of guarantee. For instance if the state government has given a guarantee of repayment of Rs. 100 crore loan by XYZ Department, but later on because of subsequent payments made by XYZ Department the loan amount has fallen to Rs 70 crores, then the fee calculated will be on Rs 70 crores and not on Rs 100 crores. All the state governments have created Guarantee Redemption Fund (GRF); all the fees received towards guarantee are credited to GRF. In case of default by any department, initially the amount available in GRF is to be utilized. The surplus funds available in GRF are parked in Government Securities and the interest earned on such securities is credited to GRF. Process involved in Guarantee issue: The organization in need of guarantee will intimate its parent department. Such intimation will include all the details like amount of funds needed, the project for which these funds will be utilized, the tenure for which these funds are needed etc. The respective department will conduct a feasibility study and in turn intimate the finance department. The finance department will conduct a necessary check on the credit history of the organization, the risk profile of the organization. If the FD finds everything in order then it will issue a sanction order for guarantee. Such an order will include the amount of guarantee, tenure, the fees chargeable for the guarantee etc. The FD would have given guarantees to different organizations and by calculating the risk profiles of different organisations, will calculate an overall weighted average risk of guarantees given. On receipt of the sanctioned order the relevant department will pay the guarantee fees in the treasury and intimate the finance department. Based in the sanctioned order the department will issue an order or resolution mentioning the amount of
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guarantee, tenure of the guarantee, name of the beneficiary organization, name of the lender etc. Such a resolution is given to both, the borrower as well as the lender. Based on such a letter an agreement is signed between the lender and the borrower and the funds are released by the lender. Subsequently the concerned department keeps on informing the finance department about the progress of the project, manner of fund utilization etc.
Let’s take an example to understand the process in a better manner:
Energy and Petrochemicals Finance Department State Bank of Treasury Guarantee Issue GIPCL (GoG) Department (GoG) India
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In the diagram the organization requiring guarantee is GIPCL, the parent department of GIPCL is Energy and Petrochemicals Department, the arrows point out the process flows of guarantee issue. As seen from the diagram GIPCL will generate a request to its parent department which in turn will forward it to the Finance Department. The finance department in turn will issue a sanction order after proper scrutiny and forward the same to the Energy and Petrochemicals Department (EPD). The guarantee fee is paid by the EPD to the Treasury which will reconcile the amount with the FD. The resolution generated by EPD will be transferred to GIPCL as well as to SBI.
Guarantee Vacation The borrowing organization will start repaying the loan to the lender as per the terms and conditions of the loan. Simultaneously the organization will also inform its parent department about the repayments made, based on which the department will issue necessary orders to the FD for vacating the guarantee. FD in turn will issue order for vacating the guarantee as per the order of the department and will send notifications to the department and the organization. In case of a default the creditor will inform the parent department of the default case. This parent department will in turn inform to the FD which as a guarantor will make the payment to the lender. FD will recover the amount from the concerned parent department in due course of time.
The same example which we took up for understanding Guarantee issue, we take up to understand Guarantee Vacation.
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Energy and Petrochemicals FinanceSB Vacation GIPC Department Guarantee Department (GoG) L I
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GIPCL will start paying SBI as per the terms and conditions of the loan and inform EPD. EPD in turn will issue an order to the FD to vacate the guarantee as per the amount repaid. FD will vacate the guarantee as per the order and issue notifications to GIPCL and EPD. In case of a default by GIPCL, SBI will send a notice to EPD which in turn will inform FD.
The system being developed by TCS will enable more effective management of State Government Guarantees. The client staff will be able to see on any date the outstanding amount of guarantees department wise. This can enable effective follow-ups of the FD with the respective departments and the exact contingent liability of the State can be known. Also the system will allow the client staff to check the exact records of guarantees vacated, along with the dates on which the respective guarantees were vacated. The system will also provide the purposes whose guarantees have been vacated to enable informed decision making in the future. Also the system will perform functions which will assist in effective administration. The system will capture the sanction details as given by FD in both the FD as well as the parent department, will capture details of the guarantee availed (parent department order), will capture all the details of fees and penalties received against the guarantees given, will track the accumulations in Guarantee Redemption Fund, will be able to conduct the process for the payments to be made to the lender in case of default, will be able to track the recovery of amount from the parent department.
Guarantee Management MIS: • • • • • • • • • Department-Wise Summary of Outstanding Guarantees Outstanding Guarantees Over The years (Loan/Bond/Tripartite Agreement) Guarantee Vacated by the State Government Guarantee Fee Received Department-Wise Guarantee Risk Amount Institution-Wise Government Guarantee Given/Vacated & outstanding (with Graphical analysis) Type of organization wise (Statutory corporations, Joint Stock companies, Municipalities/Nagar Panchayat) reports Risk Classification Report Registers for GRF Investment sales/purchase
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6.6 Online Bill Processing by DDO Office Module:
The staff of the DDO office will prepare various online bills and send them to the DDO for verification. The DDO will check and verify the online bills and send the same for processing to the Treasury (after applying digital signature). The inward clerk at the treasury will generate tokens against online bills received and send them to the auditor for approval. The auditor at the Treasury will check the bills and either approve or reject them. If the auditor approves the bills, he sends them to the check writer to generate the respective cheques online. In case any of the bills are rejected then those will be sent to the outward counter with reasons of rejection to be sent back to the DDO office. For the approved bills, the cheques will be generated online and sent to the custodian of the treasury, the custodian in turn will forward it to the outward counter. From the outward counter the generated cheques will be sent to the DDO office (This entire process is online). Simultaneously in the treasury, vouchers will be prepared and detail posting of the cheques issued will be done which will get reflected in the books of accounts (Again the entire process of voucher generation, posting etc will be done online).
Some examples of the kinds of Bills generated in various Government departments:
• • • • • • • • • • • • • • • •
Medical Bill (GTR-29) T A Bill (GTR-35) Abstract Bill For Contingent Charges (GTR-45) Refund Of Revenue (GTR-61) Grant In Aid Bill (GTR-62) Grant In Aid Panchayat (GTR-62A) Grant In Aid Local Bodies (GTR-62B) Grant In Aid Others (GTR-62C) Scholarship/Stipend (GTR-63) Bill For Withdrawal Of Final/Dav/Other Gpf (Other Than Class-Iv) (GTR-75) Bill For Withdrawal Of Final/Dav/Other Gpf (Class-Iv) (GTR-76) Group Insu Scheme (GTR-77) Group Insu Scheme (Insu & Saving Fund) On Ones Demise (GTR-78) Group Insu Scheme (Saving Fund) On Ones Retirement & Resi (GTR79) Refund Of Deposit (GTR-81) Refund Of Lapsed Deposit (GTR-83)
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• • •
Advance Bill (GTR-85) Court Fee Refund (CFR) Detailed Bill For Contingent Charges (GTR-44)
6.7 Earnest Money Deposit (EMD) Module- Receipt to Refund:
In most of the purchase contracts EMD is involved. It is as a protection means to the seller in case the buyer defaults. By definition EMD is a portion of the down payment that accompanies a purchase agreement. When the purchase agreement is signed by the seller and returned to the buyer, the deposit is generally held in a trust account. In most of government contracts EMD is involved. For instance, if certain amount is to be deposited as a part of tender of a government contract, then such an amount will be considered as EMD by the government. On successful bidding by any one or more parties the amount has to be refunded. Any state government will receive crores of rupees as EMD every year in respect of its various projects. Thus its management becomes very important. As a part of IFMS, TCS is developing a system exclusively for EMD management. Accordingly, first EMD challan posting will be done as a proof of receipt of such an amount. Thereafter the system itself will enable the cash account to be updated with the latest EMD receipt. Now if in future this money becomes a right of the government, then the money will simply be transferred to the relevant account by an accounting entry. But if the money has to be refunded then actual cash will be reduced. Thus a separate module within the system itself is needed to enable ease of recording such a refund case.(At times even if the contract is accepted, then also EMD has to be refunded against a security deposit) Once it becomes clear that a particular amount is to be refunded, then the system will enable an inward refund bill generation. Once such a bill is generated, it will go for cardex verification (The power to generate a refund bill is with the DDO. Cardex is DDO identification number. Such a bill generation is similar to any other kind of bill generation (As needed for grant allocation)). Once cardex verifies the bill, it will be sent for an audit to check whether it is authentic and against a real EMD. Here there will be EMD credit verification of the party to whom the refund is to be made. Once the audit work is performed, the bill is finally sent for cheque preparation. The cheque is prepared and sent for printing. It would be worth mentioning here that the cheque won’t be actually printed, but only a print like soft copy of the cheque will be generated. Thereafter the cheque will be sent to the custodian and from there to the outer counter.
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There will be different outer counters for different cheques with each counter having a minimum and maximum limit of amount of cheques to be disbursed. Now a payment advice will be generated as a proof of the payment being made. Such a payment advice is necessary to enable effective posting in the books. Thereafter voucher generation and distribution will take place. On the basis of these vouchers, posting is done in the books. Ultimately a list consisting of various payments (made during a particular time frame) will be generated.
6.8 Cyber Treasury Portal Module: (Online integration with Banks)
The cyber treasury portal is a portal for electronic payments of various kinds of taxes/duties which are payable to the state government. This facility is for the common tax payers which will include individual tax payers, proprietary firms, small partnership firms etc. This facility is available 24*7*365 and the amount paid using this portal will be instantly credited to the state government account. This portal as developed by TCS will be concerned with certain activities such as a. Registration of users on Cyber Treasury Portal (i.e. personal and other details, users will be the tax payers) b. User Profile Management (features such as recognizing login ID, password, facility to change details as and when required) c. Challan Preparation on Cyber Treasury Portal (to be filled up by users in the required format) d. Challan Payment on Bank’s Portal (external interface) e. Cyber Receipt Generation and Acknowledgement f. Reconciliation of data g. Digitally signed E-scroll upload by Bank Admin h. E-scroll Verification and Approval by Treasury Admin i. Detail Posting of approved Challans in IFMS The various activities will have to be performed in an orderly and sequential manner. The first step in the process will be user registration. As soon as the home page of the treasury module will be opened there will be an option for new users to register themselves. For the sake of understanding let’s take an
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example of Mr. Patel who is an accountant in a firm and has to make a payment of value added tax on behalf of his firm. Mr. Patel will have to register himself on the treasury portal by filling in the requisite details. These details include: Personal Details: Includes name, address, contact number, e-mail ID name of the firm etc. Security Details: Includes password, security question etc Identification Details: The user will have to submit a proof of identification. This will be done by uploading a soft copy of driving license, PAN card, passport or any other legal document. Mr. Patel will also have to mention the treasury and the sub treasury where the challan is to be deposited by clicking on the link given. Mr. Patel will have the option to register for different purposes challans. Once Mr. Patel is registered a screen showing various kinds of information pertaining to him will be displayed. Once the registration process is complete, the system will integrate the new registration in the legacy system. This is necessary for future references. Once the registration process is over, Mr. Patel can login to the system whenever the tax payment has to be made. This can be done by using the login ID and password. When Mr. Patel will login to the system, he will have to click on the relevant challan for making e-payment (the names of only those challans for which Mr. Patel has registered will be displayed). In our case the relevant challan is for VAT. Once Mr. Patel clicks on VAT challan, he will have to fill in the challan and confirm it. Once confirmed the challan will have to be submitted for making e-payment. As soon as Mr. Patel submits the filled challan, he will be guided on to the respective Banks’ portal. (This is an example of external interface with banks. This bank will be from among a group of authorized banks, and Mr. Patel will have to select one from this group.(the bank will be the one where Mr. Patel has an account) The finance department (GoG) will have a tie-up with these banks). Once on the bank portal, Mr. Patel will use his net banking credentials and login. All the information which Mr. Patel has filled in the challan will be shown on the bank’s portal and Mr. Patel has to select the account from which he wants to make the payment. Once the account has been selected, a screen will be displayed where Mr. Patel will be able to look at all the
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details of the challan and the account selected. Mr. Patel will confirm these details and once confirmed a unique Challan Identification Number (CIN) will be generated on the banks end to uniquely identify different challan payments. This CIN will be displayed on the screen of Mr. Patel after a few moments, and Mr. Patel will have to confirm the payment by clicking on the confirm button and the amount will be debited from his account. All the accounting work for all such transactions will be done by Treasury Office Gandhinagar. As such sending an email to the user is not mandatory in such cases, some banks may do so as an additional service to their customers. After the relevant amount has been debited, the banks will generate a unique cyber receipt with a unique reference number as a proof of the transaction. This cyber receipt will be displayed on the screen of Mr. Patel and he can either take a print out of the same or save a copy for future reference. All this features will be system enabled. Once the transaction is completed Mr. Patel will be directed back to the treasury portal where CIN and bank reference number will be displayed. The system will also enable Mr. Patel to see the details of the payments made if he so wishes. With this the interaction with Mr. Patel gets over. Next will be the reconciliation between the banks and the treasury. Before the end of the working day, banks will send the reconciliation report for all the online transactions carried out during the day with a naming convention Reconciliation_Report_<BankName>_<ddmmyyyy> This report will be uploaded by the administrator of the treasury to update the status of all the transactions of challan e-payment. Automatically the system will show a list of all the transactions that have been matched, unmatched. The banks will also upload e-scroll soft copy on the cyber treasury portal, and it is on the basis of this e-scroll that the final accounting records will be updated. The treasury administration will also have to verify the e-scroll by approving the list of challans. Once these challans are approved they will be transferred on to the IFMS.
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External Interface with RBI, AG, Banks: As part of IFMS, any kind of external interface is very critical. An external interface with such entities as Reserve Bank, Accountant General and Banks becomes all the more important given its day to day requirements. An AG is an auditor of the state government just as an auditor is there for a company.This module of IFMS will enable the auditor to generate reports for all kinds of government transactions such as receipts, expenditure, loans (given and taken), guarantees etc. These reports are generated on the basis of information to the AG via the system itself. As part of its external interface regular inputs are sent to the AG of the state by the system. Now as mentioned in the cash management section in this report, various banks operate as agents of RBI and executive various kinds of transactions of the state governments. These banks send a daily scroll (as a record of all the transactions) to the state treasury. These scrolls will be for receipt as well as expenditure of the state (These scrolls are to be captured by the system itself). The junior clerk at the district treasury office will upload both expenditure as well as receipt scrolls on the system, will upload cheques (for payments) and challans (for receipts), automatically all these records will get reflected in the list of payments (expenditure) and in the cash account (receipts), thus updating the books. The banks will be sending records (scrolls) of state’s position to the treasury on a daily basis. This position is known as Reserve Bank Deposit (RBD) of the state. It is so known as banks are ultimately the agents of RBI and these are balances of the state with the banks. RBD can be in negative or positive. If RBD for a particular bank is in negative then it indicates that the state has made payments in excess of its receipts for that day from that particular bank. The case will be exact opposite when RBD is in positive. Now there will be several such banks and daily there might be either positive or negative RBD. On any day, by taking all the previous records (till the particular day) the net position of the state will be worked out. If the state is just meeting its minimum balance requirement then no steps will be taken, if the state is in excess, the amount will be invested in 14 Day intermediate T-Bills, and if the state is falling short of the minimum balance requirement then the WMA mechanism will come into picture. The RBD position as mentioned in the bank updates and as captured in the treasury will be reconciled and if any discrepancy arises then it will be reported to the respective bank and a discrepancy report will be generated. Now the agency banks will also be
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sending a daily report to the RBI of the state governments’ position. These reports will be sent to the state treasury (as RBI scroll) and again a reconciliation of the details captured at treasury and at RBI will be done (On the system itself). If any discrepancy arises then it will be clarified by necessary inputs from the banks, RBI and treasury.
6.9 Grant Release Module:
The grants under State Government are distributed From To Departm ent Finance Department Controlling Officer (CO) * * * * * * Controlling Officer (CO) Drawing Disbursement (DDO) and Officer
Note: Areas marked by * indicate grant distribution. The system will have the facility to generate reports for grant distribution for all the above mentioned cases. Apart from this the system will be able to generate reports for all the grants received by various CO’s as well as various DDO’s as on a particular date. (These will come under transaction screens) Benefits of this module as envisioned: • • • • • Effective and efficient distribution of grant at all levels up to DDOs Makes grant distribution process more transparent as detail about grant distribution at all levels will be available to FD Validates grant distribution with approved budget detail automatically which adds up control in the overall process Real-time MIS of grant distribution across state Facility of Audit Trail
For different reports generated by the system, there will be different screens and the details of these screens being almost the same; they do not warrant a separate explanation.
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Apart from this, the system will generate reports (under the heading report screens) detailing total grants given by Finance Department to other departments • that will be mapping CO and head, DDO and head (under a particular head what amount of grant has been released) • detailing total grants released from department to CO • detailing total grants released from CO to DDO • detailing total grants released from department to department (for example from agricultural department to education department) • detailing total grants released from department to DDO • detailing total grants released from CO to CO • grants not distributed by CO This will help in cross verifying within the system itself, the amount of grants received and disbursed by various entities. Detailed External Interfaces: The system will be having detailed interfaces with RBI, Banks and AG. Interface with RBI: The main feature of this interface will be to capture RBD figures as received from RBI and compare it with RBD figures received from Banks (via various treasuries and sub-treasuries) on a daily basis. The system will provide features of entering receipt/payment details bank wise and branch wise and help in calculating RBD. This would also be captured in respective Treasury Office/Sub Treasury Office. Also the figures received from RBI will be uploaded centrally in DAT through this system itself and the reconciliation process takes place at DAT on the system itself. The discrepancy reports will be generated (whether any discrepancy is found or not) through the system. In case any settlement process with the banks is needed, then it will be done by RBI and the details will be uploaded on the system (on DAT platform). Interface with AG: AG office is primarily concerned with the audit of various transactions to ensure that public funds are being utilized properly. In order to facilitate the AG office, several documents are sent from the treasuries. Now under the present system, data entry is being done at the AG office of all these documents. The system being developed by TCS will avoid such duplication. The interface with AG will be primarily concerned with generation of text file of treasury data between two given dates, (The audit work will be carried out on the basis of this data). This text file will then be integrated into the system present at the AG office and thus will avoid re-posting of voucher data. Thereafter the system at the AG office will take over.
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Interface with Banks: The bank interface of IFMS is primarily concerned with uploading of e-scrolls received from various banks into the IFMS. Upon such an upload, the data from these scrolls would be imported into IFMS and thus will eliminate data entry of individual challans at the treasury.
6.10 Pension Processing Module:
The basic process flow of this module will start with pension office sending a request case to Directorate of Pension and Provident Fund (DPPF). Here at DPPF the case will be reviewed and checked for details such as • Pensioner and Family Details • Pensioner Service Details • Pensioner Pay Details • Pensioner Recovery Details On the basis of above details the pension details of the pensioner will be calculated. The system will enable the pension file (details) to be forwarded as per the government system. The process flow for obtaining the services certificate will also be the same. All the kinds of transactions such as receipt of pension request, preparation of pension case, saving of such cases, forwarding through various levels of hierarchy, calculation of pension will be done within the system itself and shown on the computer screen. All the kinds of reports such as pension inward report, pension payment order, commuted value of pension order, and branch wise status of pension cases will be generated by the system itself. Thus the system as developed by TCS will be able to incorporate the existing process of the government and replace the existing manual system by an online system.
6.11 Expenditure and Receipt Accounting Module:
This module is primarily concerned with taking into consideration the receipts and expenditure of the state government. It is similar to the books of accounts maintained in corporate bodies. This module holds extreme importance as the documents maintained here are extremely important for decision making on part of the Government. The process flow is different for expenditure accounting and receipt accounting. For expenditure accounting the cheque advice reports will be the first inputs. These reports will be obtained from respective treasuries and sub-treasuries itself. On the basis of these reports, vouchers will be
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distributed as per major heads to the in-charge personnel within the system itself. Thereafter detail posting on the basis of these vouchers will be done and all kinds of reports such as payment subsidiary register, RBD report, major head-wise payment jotting etc will be generated in the system itself. These reports will be open to access for future references as well as will be printer friendly. Similarly for receipt accounting the major and first input will be the bank scrolls and challans. On the basis of this input detail posting of challans will be done and the books updated. The posting will be done as per treasury and sub-treasury. Here again various kinds of reports such as receipt subsidiary register, date wise receipt summary, cash account etc will be generated. Again all this reports will also be open to future access and printer friendly.
6.12 Stamp Processing Module:
Sale of stamp papers is an important source of revenue for the government. Stamp management is an important function of the Treasuries. There is a process involved behind those stamps we collect from retail vendors. First the vendor (these are government approved vendors) will give a hand written challan at the counter. With the submission of this challan at the counter, the system will come into the picture. Initially there will be stock verification of the desired stamps. Once it is confirmed that there is adequate stock with the treasury, an online challan preparation will be done. Subsequently an enfacement number will be generated for the challan. Such a number will be unique. This number will be written on the challan and given back to the vendor. The vendor will take the challan and pay money along-with the challan in the bank. The bank will be sending such acknowledged challans back to the treasury. The bank will also be sending a detailed scroll of various challans received (the scroll will have the numbers of various challans) to the stamp officer at the treasury. At the treasury challan verification will be done on the system itself. Once it is confirmed that everything is in order, the challan will be approved for stamp sale. Now the stamps will be transferred from double lock register to single lock register. Simultaneously it will be verified that the minimum required stock is there. Subsequently stamps will be issued to the vendor who in turn will sell to the common man. If the minimum requirement is not met then fresh order* for stamps be given to the stamp issuing authority. Either way the inventory will be updated. All this features will be system enabled. The challans will be sent to book branch, discount reports
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will be prepared (discounts are given to vendors as a remuneration), the consolidated discount bill will be sent to the book branch. * For issuing fresh orders to the stamp issuing authority, indent will be prepared and sent to the appropriate authority via the system itself. Indent preparation is a necessary step for issuing fresh orders of stamps. The system provides with various models to prepare, edit, consolidate indent.
6.13 Personal Deposit (PD) Account Module:
Organisations like educational institutes, boards, corporations, nigams, societies request for such account. Note: It is mainly the government departments that open a PD or PDPLA account with the Treasury. • • The depositors will request the finance department for opening of PD account Finance Department issues the sanction letter to the treasury office in case account opening is agreed. This order consist of details like FD order number, date, institute name, head structure, name of operator, opening balance, if any, account should be interest bearing or non interest bearing Treasury office prepares the Sanctioned order based on the FD generated letter and start process on opening an account The relevant information mentioned in FD order, date on which account created, controlling officer’s (account operating authority) signatures is maintained Existing system generates the PD account number which will be given to organization The newly generated account details will be mentioned in the PD ledger
The money in such an account can be deposited either through bank or finance department. 1. Through Bank: The depositor will fill in a challan and deposit the amount in the bank. The bank will be sending a scroll and deposited challans to the treasury office. Here the processing will be done by the relevant staff member. The PD account will be credited with the relevant amount.
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2. Through FD: The FD can credit the relevant PD account directly in case grant-in-aid is to be provided to the account holding institution. The payment process will start with the issuance of cheque book to the depositor. Whenever any payment is to be made from this account, the depositor will issue a cheque which on being deposited in the bank will ensure payment from the bank. The bank in turn will send the cheque to the treasury along-with the scrolls. These cheques and scroll is sent to the deposit branch by the treasury for detailed cheque posting. This payment made from the PDPLA account will have to be refunded by the treasury. The account holder will submit bills for refund and the treasury will dispatch a cheque against the same. The person in charge of all this processes will generally be the DDO of the relevant department. Through the system being developed by TCS all the processes from cheque book issue, PDPLA account creation, posting of receipt challans, posting of payment vouchers will be done on the system itself. The system will also be able to generate various kinds of reports such as incorporation of bank intimation for new account, head wise account summary, date wise accounts summary, ledger cum passbook. The system will also be able to generate reports related to inoperative accounts (accounts which have had no activity since a particular date), no transactions accounts. Also reports showing date wise minimum balance and month wise minimum balance will be generated (this holds importance as the interest calculation is done on the minimum balance of the month).
6.14 House Module:
Any government servant can apply for the long term advance. This long term advance can be house building advance (HBA) or Motor Car Advance (MCA). The applicant needs to feel in the form given/prescribed by the respective bank. Applicant will fill in the relevant data in the prescribed form and forwards the same to DDO. DDO then verifies the data and signs on that form & forwards them to the respective bank.
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For the recoveries, at the time of preparation of pay bill, DDO’s need to prepare schedule statements for the GPF, loan recoveries etc. These loan recoveries need to be updated under the particular account head. The schedules along with the pay bill are submitted to the Treasury office. Through the system designed by TCS the above mentioned process will be totally system enabled. Note: In describing the modules, I might have used at several instances the word ‘Treasury’ for explaining something. The reader should know that this has been done just to avoid ambiguousness in writing. There is not one but 25 district treasury offices and 174 sub-treasury offices.
6.15 New Pension Scheme
The Government of India (GOI), vide notification dated 22nd December 2003 issued by Ministry of Finance, Department of Economic Affairs has introduced a new Defined Contribution Pension Scheme known as the New Pension System (NPS) replacing the existing system of Defined Benefit Pension System. The New Pension System came into operation with effect from 1st January 2004 and is applicable to all new employees to Central Government service, except to Armed Forces, joining Government service on or after 1st January 2004. The employees of Central Autonomous organizations, State Governments/Union Territories (UTs) and the Autonomous organizations of the respective State Government/UT are also eligible to join the NPS. The employees who join the NPS will be known as ‘Subscribers’ in the NPS. The GOI established Pension Fund Regulatory and Development Authority (PFRDA) on 10th October 2003 to develop and regulate the Pension Funds under the NPS. PFRDA has appointed National Securities Depository Limited (NSDL) as the Central Record Keeping Agency (CRA) to maintain the records of contribution and its deployment in various pension fund schemes for the employees. For the purpose of accessing the CRA system, Nodal offices and Subscribers need to get registered afresh in the CRA system. Upon registration, the entities will be allotted unique Registration Numbers, User ids and passwords, which can be used by the nodal offices and subscribers for accessing the NPSCAN/CRA system. The Subscribers, upon registration, will be allotted a PRAN by CRA which shall be used by nodal offices while uploading subscriber contribution information to the CRA system.
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6.15.1 The NPS architecture is summarized as shown below:
1. The new pension scheme (NPS) announced by the Government of India initially targeted new entrants to central government service (excluding Armed Forces). After a few months, it was made available to all other citizens of India. Each member of the new pension scheme will be allotted a unique personal retirement account (PRA) number. This pension system will initially be based on two types of sub accounts created by individual members: a) A Tier I non withdraw able and tax deferred pensions account (for all individuals), and b) A Tier II withdraw able savings account with no tax advantages (for all individuals subject to minimum deposits per year in the Tier I account). The number of such sub accounts may be altered as the system evolves and depending on the needs and performance of the NPS.
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2. A member will accrete savings towards his retirement into his PRA through his working life. This PRA will stay with the member regardless of where he stays or Works – including spells of unemployment, self employment, changes in jobs or location. He will be able to use a nationwide network of competing pension service providers (POPs) to access this system for opening a PRA, accreting new Contributions, receiving account or system information and for obtaining retirement benefits. 3. A member will have complete control on how his contributions and savings in his PRA are managed. He will be able to select a professional Pension Fund Manager (PFM) from a pool of competing pension fund managers. Each PFM in this system will offer a choice of three simple and standard pension schemes with different risk and return profiles. If he desires, the member will be free to allocate his savings across multiple PFMs and schemes. If a member is unable to select a PFM, his savings will be directed to a 'Default' scheme. He will also be able to seamlessly switch his savings between fund managers and products as and when he desires. With individual accounts and complete freedom of choice, a member will be able to easily alter his risk profile in an optimum fashion over time – he will be able to move from a high return scheme with relatively higher risk at a young age, to a low or near zero risk, modest returns portfolio when approaching retirement if he desires. The member will receive periodic, consolidated statements of his PRA which will reflect his wealth in his PRA across various products and PFMs. This will be the sum total of his contributions at that point in time and the returns that these contributions have earned. 4. On retirement, a member will be able to use a part of his savings accumulated over the years in his PRA to buy an annuity to obtain a pension for the rest of his life. 5. In this process of accumulating retirement savings, the Pension Fund Regulatory and Development Authority (PFRDA) will provide the members of this scheme with a sound regulatory framework and an umbrella of safety with respect to prevention of fraud and malpractice.
6.15.2 Stake Holders:
• • • • Points of presence(pop) Central record keeping agency Pension fund manager Trustee bank(Bank of India)
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• • • •
Annuity service provider NPS Trust Provident Fund Regulatory & Development Authority Subscriber Point of presence: Point of presence is the first point of interaction of the NPS subscriber with NPS architecture. This POP acts as a collection point and extends a number of services to the customers.
6.15.3 Roles & Responsibility of Stake Holders
LIST OF POPs 1. Allahabad Bank 2. Axis Bank Ltd. 3. Bajaj Allianz General Insurance Co Ltd. 4. Central Bank of India (CBI) 5. Citibank N.A. 6. Computer Age Management Services Private Ltd. 7. ICICI Bank Ltd. 8. IDBI Bank Ltd. 9. IL&FS Securities Services Ltd. 10.Kotak Mahindra Bank Ltd. 11.Life Insurance Corporation of India (LIC) 12.Oriental Bank of Commerce (OBC) 13.Reliance Capital Ltd. 14.State Bank of Bikaner & Jaipur (SBBJ) 15.State Bank of Hyderabad 16.State Bank of India (SBI) 17.State Bank of Indore 18.State Bank of Mysore 19.State Bank of Patiala 20.State Bank of Travancore 21.The South Indian Bank Ltd. 22.Union Bank of India (UBI) 23.UTI Asset Management Company Ltd.
Central Recordkeeping Agency(CRA):
National Securities Depositories Limited (NSDL) has been appointed as the Central Record Keeping Agency by the Pension Fund Regulatory and Development Authority (PFRDA). It has, accordingly, taken over the roles and responsibilities of the Central Pension Accounting Office with regard to the NPS w.e.f. 1st June, 2008.
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PAOs shall remit the pension contributions, including Government’s matching contribution, in respect of Government employees covered under the NPS to the CRA w.e.f. the salary of June, 2008.. For this purpose, the individual subscribers (new entrants to government service excepting Armed Forces on or after 1st January, 2004) the state government employees (for states adopting NPS), DDOs, PAOs and (and equivalent designations in other accounting formations) need to get registered afresh in the CRA system.
Pension Fund Manager(PFM):
Appointed PFs would manage the retirement savings of subscribers under the NPS. PFs would use their secure access codes to confirm receipt of netted assets and instructions regarding fund allocation, confirm allocation of funds and communicate the NAV of each scheme to CRA on a regular basis. The PFs will be required to invest strictly in accordance with guidelines issued by the PFRDA. List of fund managers 1. ICICI Prudential Life Insurance Company Limited 2. IDFC Asset Management Asset Management Company Limited 3. Kotak Mahindra Asset Management Company Limited 4. Reliance Capital Asset Management Company Limited 5. SBI Pension Funds Limited 6. UTI Retirement Solutions Limited • Trustee bank (Bank of INDIA):
A trustee, the bank will be the custodian bank pension fund managers. The bank’s role is to receive the pension money coming from the centre and then pass it on to the three fund managers which have already been appointed. ASP: Annuity Service Providers (ASPs) are be appointed by PFRDA to maintain the annuity contribution of subscribers through their various schemes. Subscribers will have the option to invest their amount into one or more annuity schemes upon retirement/resignation. ASPs would be responsible for delivering a regular monthly pension (annuity) to the subscriber for the rest of his/her life.
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• NPS TRUST: A trust appointed under INDIA TRUST act, 1882 is responsible for taking care of the funds under the NPS in the best interest of subscribers.
Pension Fund Regulatory & Development Authority: PFRDA is the regulator for the NPS. PFRDA is responsible for appointment of various intermediaries in the system such as Central Record Keeping Agency (CRA), Pension Funds, Custodians, NPS Trustee Bank, etc. PFRDA shall also monitor the performance of the various intermediaries. PFRDA has a significant role to play in safeguarding the interest of subscribers. It will regulate the manner in which subscriber contributions are invested by PF(s) and will make all efforts to ensure fair play for subscribers. It shall also ensure that all stakeholders comply with the guidelines/regulations issued by PFRDA from time to time.
• Subscriber: Subscribers will have complete control on how their contributions and savings in PRAN are managed. They will be able to select a professional Pension Fund (PF) from a pool of competing Pension Funds. Each PF in this system will offer a limited number of simple, standard investment schemes with different risk and return profiles. They will also be able to seamlessly switch savings between investment schemes subject to such conditions as prescribed by PFRDA from time to time. CRA Facilitation Centre: CRA-FC is the entity appointed by NSDL to extend various services under NPS, to its users across the country. The entities who have been appointed as CRA-FC shall establish multiple branches across the country to provide services to the nodal offices such as Pay & Accounts Office (PAO) or equivalent office under Central and State Government.
As per present scope of CRA, following services shall be offered by the CRA-FC
1. Acceptance of Application for allotment of new PRAN 2. Acceptance of Subscriber request for change in signature
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The Government of India has decided to roll out the NPS for all citizens of India from 1st May, 2009. Hence, various facilities (like opening Permanent Retirement Account, contributing to NPS etc) will be required to be provided to all the citizens (known as ‘Subscribers’ in the NPS architecture) at various locations across India. These processes shall be carried out through the entities known as Points of Presence (POPs) appointed by the PFRDA. POPs’ shall provide the services under NPS through their network of branches called POP Service Providers (POP-SP). Pay and Accounts Officer (PAO): The pay and accounts officer will be serving as a link between DDO and NPSCAN system. (NPSCAN being the system of CRA). The following are the main functions of PAO: Consolidate DDO registration form and forward it to CRA for registration. Facilitate registration of Subscribers by consolidating the Application for allotment of PRAN received from the concerned DDO and forward it to the CRA-FC. Upload Subscriber Contribution File (SCF) to NPSCAN system. SCF will contain subscriber wise details of pension contribution such as PRAN, Pay month and year, Subscriber Contribution amount and Government Contribution amount etc. Note: NPSCAN: NPSCAN is a platform which is envisaged to maintain subscriber pension account information and contributions. Access to CRA will be provided to the Nodal Office through NPSCAN system www.npscan-cra.co.in. NPSCAN will provide PAO the facility to update the subscriber details in CRA for subscribers associated with it. Further PAO can raise grievance through the CRA site www.cra-nsdl.co.in.
The steps are explained in the following diagram:
Consolidation of FVU FPU CRA Digitizatio Validation Upload to Subscriber Contribution File (SCF) Upload by PAO DDO wise of Records NPSCAN n of Subscriber Records Contribution Records
Note 1: To facilitate the digitization and consolidation of the pension contribution details of the Subscribers, CRA has developed a utility called
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File Preparation Utility (FPU). It is a JAVA based utility which can be easily installable on a desktop machine. Note 2: File Validation Utility (FVU) is a Java based utility developed by the CRA to ensure that SCF prepared by DTA/DTO is in conformity with the file formats of CRA. PAO will deposit the contribution amount in the Trustee Bank as per the SCF uploaded in NPSCAN. This contribution amount will be invested in various schemes of PFM, based on the Scheme Preference of Subscribers for which SCF has been uploaded. PAO will update through NPSCAN, the Switch requests, New Scheme Preference requests, Withdrawal Requests, the request for change in subscriber details received from Subscribers PAO will raise grievance on behalf of DDO and the subscriber. PAO will resolve the grievance raised against it by any entities in the CRA system However, before performing the above-mentioned functions, PAO shall have to register itself with CRA. The system designed by TCS will enable PAO to do so. Now the question arises as to who is this PAO? The PAOs are the ones who have the authority to release payments on behalf of the Government and to collect revenues of the government.
Drawing and Disbursement Officer (DDO):
A DDO is perhaps the most fundamental link in both administrative as well as financial functions. He derives the powers from the Government or from the Head of Department, regional head and head of office, the three- tier structure of administration. This structure helps the DDO to carry out assigned functions effectively. A DDO is “ an officer who by virtue if his position as the Head of Office or any officer, who has been declared as disbursing officer by Government is DDO”. The two most important conditions are that he must be a gazetted officer and hold independent charge of a post. The post of DDO cannot be distinguished separately in every Government office. He is not necessarily the accounts officer from the finance department. He is most probably from the respective department itself. The powers of a DDO include, power to withdraw funds from the treasury, subject to budget provisions and proper sanction. An example to illustrate the importance of this post: The state government budget or even the central government budget
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largely depends upon the figures of actual receipts and expenditure for the previous 3 years. The basis of expenditure is taken as indicative with some scope for the incremental effects. A DDO has to prepare the budget estimate of his/her office in the basis of such record. In the revised estimate, the DDO has to consider the actual expenditure for 4/8/9 months as a base. Each DDO in the state will have a code number without which the treasury office will not entertain their claims.
6.15.4 Main Features of the New Pension System
The new pension system would be based on defined contributions. It will use the existing network of bank branches and post offices etc. to collect contributions. There will be seamless transfer of accumulations in case of change of employment and/or location. It will also offer a basket of investment choices and Fund managers. The new pension system will be voluntary. The system would, however, be mandatory for new recruits to the Central Government service (except the armed forces). The monthly contribution would be 10 percent of the salary and DA to be paid by the employee and matched by the Central Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees. The contributions and returns thereon would be deposited in a non-withdraw able pension account. The existing provisions of defined benefit pension and GPF would not be available to the new recruits in the central Government service. In addition to the above pension account, each individual can have a voluntary tier-II withdraw able account at his option. Government will make no contribution into this account. These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason. Individuals can normally exit at or after age 60 years from the pension system. At exit, the individual would be required to invest at least 40 percent of pension wealth to purchase an annuity. In case of Government employees, the annuity should provide for pension for the lifetime of the employee and his dependent parents and his spouse at the time of retirement. The individual would receive a
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lump-sum of the remaining pension wealth, which she would be free to utilize in any manner. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth. There will be one or more central record keeping agency (CRA), several pension fund managers (PFMs) to choose from which will offer different categories of schemes. The participating entities (PFMs, CRA etc.) would give out easily understood information about past performance & regular NAVs, so that the individual would able to make informed choices about which scheme to choose. Insights from Gujarat Government into the NPS (Being one of the state governments which might take TCS developed software for New Pension Scheme): New Defined Contribution Pension Scheme being introduced with effect from 1.4.2005 Government of Gujarat, Finance Department, G.R.No.NPN2003GOI10P Sachivalaya, Gandhinagar An announcement was made by the Central Government in the Parliament during presentation of the Budget of 2003-2004 to introduce a new structured known as Contributory Pension Scheme for the candidates to be recruited in the services of the Central Government. As one of the measures towards this end, the Government of India has introduced a New Defined Contribution Pension Scheme with effect from 1.1.2004 for its employees except the Armed Forces. The Government of India has also framed an interim method as detailed rules and regulations were to be framed for the implementation of this Scheme. The issue of covering the employees to be appointed in the services of the State Government as well as the employees to be appointed in the Board / Corporations of the State and the employees to be appointed on the teaching and nonteaching posts of all Grant-in-Aid. Institutes and other such Institutes where Pension Scheme is in vogue today, under the aforesaid New Defined Contribution Pension Scheme of the Government of India, was under consideration of the Government for quite some time. After careful consideration, it is decided to implement this New Defined Contribution Pension Scheme from 1st April, 2005 and as such, this New Defined Contribution Pension Scheme shall apply to the following employees:
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(1)All employees of Government and Panchayat who may be appointed on or after 1st April, 2005; (2)Employees who may be appointed in the Board / Corporations where at present the scheme to get retirement benefits equivalent to those of the State Government employees is in vogue and all teaching and nonteaching employees who may be appointed on or after 1st April, 2005 in the GrantinAid Institutes where the present Pension Scheme is in vogue. (3)Employees already appointed prior to 1st April, 2005 under the practice adopted by the State Government for appointment on Monthly Lumpsum Salary and the employees who may be appointed now onwards on Monthly Lumpsum Salary through the regular recruitment procedure applicable as per Government orders in force and who may be converted in the regular payscale on or after 1st April, 2005. (4)Teaching and nonteaching employees already appointed or to be appointed under the 'Vidya Sahayak' or "Shikshan Sahayak' Scheme of the Education Department of the State Government as well as the teaching and nonteaching employees appointed under the aforesaid Scheme who would get salary in the regular payscale on or after 1st April, 2005. The deduction of contribution of the New Defined Contribution Pension Scheme shall commence from the employee's salary from the month subsequent to the month of joining the service, e.g. in the case of an employee appointed in the month of April2005, his contribution shall be recovered from the salary of May to be paid on 1st June, 2005. Separate detailed orders, guidelines and the accounting procedure to be adopted for implementation of the decision contained in this Resolution shall be issued separately. Thus one can see that even the state governments are keen to adopt NPS and have in fact decided to go with an online system for its implementation where the role of Tata Consultancy Services comes in. As a management student I was keen to explore the other side of such an important development by the Government. So I came up with some concerns regarding New Pension Scheme • Government abdicating from responsibility of providing pension • Private management Vs public management • Vagaries of capital markets- investment in Government Bonds • No guaranteed returns • Foreigners will control pension sector (walk away with pension wealth?)
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Premature withdrawals not allowed
Thus there are certain downsides also to NPS but the overall benefits do outweigh the costs.
7. LEARNING FROM THE SUMMER PROJECT
7.1 Augmentation of Soft Skills:
a) It gave me the opportunity to work in office, in the corporate atmosphere.
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b) Till now I had been learning about the work place, the culture at different organizations, useful management tools, personal relations skills, quantitative skills, etc. But this training gave me the opportunity to use that learning in the real situation. c) The project helped me in enhancing my communication skills. d) It was a nice experience to build interpersonal relationships with different people. e) Hours of work increased my stamina to work long hours and also realized importance to finish the work on time. f) The formulation of project report increased my patience and ability to work hard.
Summer training helped me to realize the importance of each and every subject. It gave me the knowledge about the IT industry and some concepts related to it about which I was totally unknown. I have also come to know about the practical use of Information Technologies and Communications Technologies in Governments. I have come to know about the new projects of Government of Gujarat for upgrading the system. I have realized that IT industry is very much useful for managing the business processes efficiently hence it’s the necessary to all the Industries to keep with the latest IT upgrades.
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The first and foremost recommendation for TCS is to change its vision statement. In my humble opinion it is short sighted. TCS needs to have a vision that will show its leadership qualities and long term thinking. Based on current situation, TCS strategists can adapt their positioning and direction, paying particular focus to the following issues to ensure long-term market success: Expect to see the landscape continue to consolidate, clients will seek to cut costs and focus on fewer provider relationships as the economy worsens. TCS should take this opportunity to improve their market positioning. Ensure marketing articulates your value proposition to all stakeholders concerned. In a post recession, marketing can work as a differentiator. TCS should shift focus from Low cost advantage to high quality services commanding a premium being the pioneer in the industry. Especially in IFMS projects, with better co-ordination and communication with customers (Government Authorities) and technical people (software developers), functional team can get better outputs with respect to time and quality.
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PRASANNA CHANDRA, 2008, Financial Management (7th Edition), New Delhi: Tata McGraw- Hill Publishing Company Limited.
Documents of TCS:
RFP of rajasthan government projects Powerpoint Presentations of Different Modules of IFMS
http://www.npscra.nsdl.co.in/ http://rbi.org.in/ http://www.tcs.com/ http://www.scribd.com/
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