Class note 6

Indian Public Finance Accounting

Arrangement
• India being a federal setup with different layers of
Governments (Central, State and Local Governments),
with strong Union bias hence called Quasi Federal.
• In principle, the study of public finance and estimation
of alternative measures should cover all these levels
separately and also in their combined position.

Indian Budgetary System and

Practice
• Under Article 112 of the Constitution, a statement of
estimated receipts and expenditure of the Government of
India has to be laid before Parliament and for the State
Governments in the State legislature in respect of the
financial year which runs from April 1, to March 31.
• This statement titled "Annual Financial Statement" (AFS)
is the main budget document.
• The estimates of receipts and disbursements in the AFS
and of expenditure in the demand for grants are shown
according to the accounting classification prescribed
under the Article 150 of the Constitution.
 Types of Accounts

• The AFS shows the receipts and payments of

Government under the three parts in which
Government accounts are kept,
i. Consolidated Fund
ii. Contingency Fund
iii. Public Account.

Source: Key to Budget Documents, Ministry of Finance, GoI

Consolidated Fund

• The Consolidated Fund of India (CFI) draws its

existence from Article 266 of the Constitution. All
revenues received by the Government, loans raised
by it, and also receipts from recoveries of loans
granted by it, together form the Consolidated Fund
of India.
• All expenditure of the Government is incurred from
the Consolidated Fund of India and no amount can
be drawn from the Consolidated Fund without due
authorization from the Parliament.
 Contingency Fund
• Article 267 of the Constitution authorizes the existence
of a Contingency Fund of India which is an imprest
placed at the disposal of the President of India to
facilitate meeting of urgent unforeseen expenditure by
the Government pending authorization from the
Parliament.
• Parliamentary approval for such unforeseen
expenditure is obtained, ex- post-facto, and an
equivalent amount is drawn from the Consolidated
Fund to recoup the Contingency Fund after such ex-
post-facto approval.
• The corpus of the Contingency Fund as authorized by
Parliament presently stands at `30,000 crore.

Public Account
• Moneys held by Government in trust are kept in the Public
Account. The Public Account draws its existence from Article
266 of the Constitution of India. Provident Funds, Small
Savings collections, receipts of Government set apart for
expenditure on specific objects such as road development,
primary education, other Reserve/Special Funds etc., are
examples of moneys kept in the Public Account.
• Public Account funds that do not belong to the Government
and have to be finally paid back to the persons and authorities,
who deposited them, do not require Parliamentary
authorization for withdrawals.
• The approval of the Parliament is obtained when amounts are
withdrawn from the Consolidated Fund and kept in the Public
Account for expenditure on specific objects (The actual
expenditure on the specific object is again submitted for vote
of the Parliament for withdrawal from the Public Account for
incurring expenditure on the specific objects).
 Indian Government accounting
Framework
• Inter-governmental Transfers and
Constitutional requirements
• Finance Commission

Inter-governmental Transfers and

Constitutional requirements
• The resource flow from the Central Government
to State Governments and vice versa is a matter
of controversy in the Centre- State financial
relations. In this context, it would be useful to
derive the budgetary balance for the Central and
State Governments taking into account the
resource flow before the federal transfers.

Budget & Accounts

• Under the Constitution of India, Budget has to
distinguish expenditure on revenue account
from other expenditure.
• Accordingly, the Government Budget
comprises:
a) Revenue Account
b) Capital Account.
 Revenue Account

Union/Central Government State Governments

Revenue Expenditure Revenue Receipts

• Gross Tax • Share in Central Tax (SCT)- Finance Commission

• Grant-in-aids (Ministry of Finance) • Grant to States- Ministry of Finance

1. Constitutional
2. Discretionary
 Capital Account
Union/Central Government State Government

• Capital Receipts • Capital Receipts

Debt Capital Receipts
1. Loans from Centre
Non-Debt Capital receipts
2. Market Borrowing subject to State
1. Recoveries of Loans Development Loan (SDL) permission required
from centre (Article 294 (3))
2. Disinvestment

Union/Central Government State Government

• Capital Expenditure • Capital Expenditure
1. Loan to States 1. Repayment of Loan to Centre

Fiscal Deficit
• Fiscal Deficit out of Consolidated Funds of
India = Market borrowings (G-sec + Treasury
Bills) + External Debt
• Remaining Balance out of Public Accounts of
India
 Fiscal Federalism
• Fiscal Federalism in India can be viewed, in
practice, as a game in politics, economics, and
public finance played between the Union and
States.
• It is an interplay of ideologies or beliefs,
intentions or objectives, individuals,
institutions, and instruments.

Federalism & Indian Constitution

• Article 1 of the Constitution states, ‘India that
is, Bharat, shall be Union of States’.
• The word federalism does not find a place in
the Constitution. But it has all the features of
Federal system.
• Seventh Schedule of the Constitution gives
legislative power under 3 lists: Union; State
and Concurrent.
• There was a Two-tier federation until 73rd and
74th Amendment until 1992. Local
Governments were recognized through these
amendments.
 Need for Fiscal Federalism
• In the federal system, powers and
responsibilities are divided between the
Union and States.
• Centre has a larger share of revenue, State
have greater responsibilities creating Vertical
Imbalance.
• States capacity to collect revenue & manage
expenditure differs largely creating Horizontal
Imbalance.
• To correct Vertical & Horizontal Imbalances –
Tax Sharing & Fiscal Transfers from Centre to
State

Discretionary v/s Formula Based Transfers

• The Constitution envisaged sharing of taxes

as the major source of funds for the States
and grants-in-aids were meant to take care of
inadequacies of formula-based sharing
(which is to be guided by the principles
recommended by the Finance Commission).
 Finance Commission
• Finance Commission according to the Article
280 of the Constitution, Statutory body has
been created to correct vertical and horizontal
imbalances.
• Article 270 – tax devolution
• Article 275 – grants

Formula based tax devolution

15th Finance Commission
• 12.5%- Demographic Performance
• 45%- income
• 15%- Population & area
• 10%- Forest & ecology
• 2.5%- Tax and fiscal efforts
 Evolution
• The adoption of Planning implied some centralization of
financial resources and implementation, and transfers
were effected initially through scheme-based assistance to
States & later by Gadgil-formula-based normal plan
assistance.
• Normal Plan Assistance- Channel for resource transfers
to States outside Finance Commission through Centrally
Sponsored Schemes which are discretionary in nature.
• Over a period of time, the share of non-formula based
discretionary transfers to States have increased.
• Formula based schemes calls for States contributions as
well hence States are altering their own priorities in
allocation and this has been rising tensions.

Scheme Expenditure
• Scheme expenditure forms a sizeable proportion of the
total expenditure of the Central Government.
• The Expenditure Profile gives the total provisions for each
of the Ministries arranged under the various categories-
Centrally Sponsored Schemes, Central Sector Schemes,
Establishment, Other Central Expenditure, Transfer to
States etc. and highlights the budget provisions for certain
important programmes and schemes.
 Types of Schemes
• The Guiding Principles of the Sub-Group had been to
resolve the issues between Union and the States /UTs
and to work as Team India in the spirit of Cooperative
Federalism towards realization of the goals of VISION
2022 when we will celebrate the 75th year of
Independence.
• The objectives of the VISION are broadly:
a) providing basic amenities to all citizens in an
equitable and just manner for ensuring a life with self-
respect and dignity,
b) providing appropriate opportunities to every citizen to
realize his/her potential.

Schemes Classification
• The major recommendations of the Sub-Group
are as under:
a) No. of Schemes: The total number of schemes
should not exceed 30.
b) Categorization of Schemes: Existing CSSs
should be divided into Core and Optional
Schemes.
1. Core schemes
2. Core of the Core Schemes
3. Optional Schemes
 Core of the Core Schemes
• Those schemes which are for social protection
and social inclusion should form the core of
core and be the first charge on available funds
for the National Development Agenda.
• Funding Pattern-
• These schemes are fully funded by the Central
government.

Core Schemes
• Focus of CSSs should be on schemes that
comprise the National Development Agenda
where the Centre and States will work together
in the spirit of Team India.
• Funding Pattern:
a) For 8 North Eastern States and 3 Himalayan
States: Centre: State: 90:10
b) For other States: Centre: State: 60:40
c) For Union Territories (without Legislature):
Centre 100% and for UTs with legislature
existing funding pattern would continue.
 Optional Schemes
• The Schemes where States would be free to choose the
ones they wish to implement. Funds for these schemes
would be allocated to States by the Ministry of Finance as
a lump sum.
• Funding Pattern
a) For 8 North Eastern States and 3 Himalayan States:
Centre: State: 80:20
b) For other States: Centre: State: 50:50
c) For Union Territories:
(i) (without Legislature) - Centre 100%
(ii) Union Territories with Legislature: Centre:
UT:80:20