SECOND ADMINISTRATIVE REFORMS COMMISSION


 

The Administrative Reforms Commission or ARC is the committee appointed by the Government of India for giving recommendations for reviewing the public administration system of India. The first ARC was established on 5 January 1966.Sensing the need for immediate and comprehensive evaluation of the administrative system government of India appointed the 2nd ARC on 31st August, 2005. Second ARC was appointed by the Government of India under the chairmanship of Veerappa Moily, and V. Ramachandran , Dr. Mukherjee , Dr. Kalro and Dr. Jayaprakash Narayan as its members. It has submitted 15 reports covering wide ranging issues in governance and public life and one of the fifteen report, I am reviewing the fourteenth report that is “STRENGTHENING FINANCIAL MANAGEMENT SYSTEMS.”

 

ARC

14th REPORT: STRENGTHENING FINANCIAL MANAGEMENT SYSTEMS

In this Report on Financial Management, the Commission has examined the issue of reforms in the public financial management system as a part of the overall governance reform. Efforts aimed at improving the efficiency, responsiveness and accountability of Government organizations have to be complemented by reforms in financial management system in order to deliver the desired outcome. Maintaining financial discipline and prudence, while simultaneously ensuring prompt and efficient utilization of resources to achieve the goals of different government agencies, has to be the underlying theme for all government agencies. Towards this end, accountability needs to shift from compliance with procedures to a much greater focus on results and outcomes.

 

Tools of modern of financial management like information technology and financial information system need to be used to improve accountability combined with accurate budgeting and realistic economic assumptions. In order to reform the financial management system in India, the Commission has suggested adoption of medium term plan/budget framework and alignment of plan, budget and accounts, in order to bring greater synergies between the annual budgets and the five year development plan. A paradigm shift from the traditional bottom up approach to budgeting to a top down technique focusing on broader resource allocations as well as on outcomes rather than processes has also been recommended. This has to be combined with greater operational autonomy to government agencies and decentralization of administrative and financial powers to them in order to improve their efficiency. Any financial management system, howsoever sound, will not be able to deliver the desired outcomes unless there are strong internal and external oversight mechanisms. The Commission has therefore recommended

measures for strengthening of both internal and external audit mechanisms.

SUMMARY OF RECOMMENDATIONS

Unrealistic Budget Estimates: The assumptions made while formulating estimates must be realistic. At the end of each year, the reasons for the gap between the ‘estimates’ and ‘actuals’ must be ascertained and efforts be made to minimize them. The method of formulation of the annual budget by getting details from different organizations/units/agencies and fitting them into a

predetermined aggregate amount leads to unrealistic budget estimates. This method should be given up along with the method of budgeting on the basis of ‘analysis of trends’. This should be replaced by a ‘top-down’ method by indicating aggregate limits to expenditure to each organization/ agency. Internal capacity for making realistic estimates also needs to be developed.

Delay in Implementation of Projects: Projects and schemes should be included in the budget only after detailed consideration. The norms for formulating the budget should be strictly adhered to in order to avoid making token provisions and spreading resources thinly over a large number of projects/ schemes.

Skewed Expenditure Pattern: To curb the Rush of Expenditure towards the end of the Financial Year, The Modified Cash Management System should be strictly adhered.

Inadequate Adherence to the Multi-year Perspective and Missing Line of Sight between Plan and Budget: A High Powered Committee may be constituted to examine and recommend on the need and ways for having medium-term expenditure limits for Ministries/Departments through the 5-Year

Plans and linking them to annual budgets with carry forward facility. In order to bring about clarity, transparency and consolidation, the ways and means for implementing an ‘alignment’ project, similar to that in the UK, may also be examined.

Emphasis on Meeting Budgetary Financial Targets rather than on Outputs and Outcomes: Outcome budgeting is a complex process and a number of steps are involved before it can be

attempted with any degree of usefulness. A beginning may be made with proper preparation and training in case of the Flagship Schemes and certain national priorities.

Irrational ‘Plan – Non Plan’ Distinction leads to Inefficiency in resource Utilization, hence needs to be done away with.

Flow of Funds relating to Centrally Sponsored Schemes: The Controller General of Accounts, in consultation with the CAG, should lay down the principles for implementing the system of flow of sanctions/ approvals from the Union Ministries/Departments to implementing agencies in the States

to facilitate release of fund at the time of payment

Development of Financial Information System: A robust financial information system, on the lines of SIAFI of Brazil, needs to be created in the government in a time bound manner. This system should also make accessible to the public, real time data on government expenditure at all levels.

Capacity Building: The capacity of individuals and institutions in government needs to be improved in order to implement reforms in financial management. To facilitate this, a proper programme of training needs to be devised and implemented in a time bound manner.

Accrual System of Accounting: A Task Force should be set up to examine the costs and benefits of introducing the accrual system of accounting. Prior to its implementation, training and capacity building needs of the accounting personnel and all stake holders in the decision making process would have to be addressed and a meticulous schedule worked out in line with the road map of implementation.

Internal Audit: An Office of the Chief Internal Auditor (CIA), directly responsible to the Secretary of the Department, should be established on trial basis in select Ministries/departments to carry out the functions related to internal audit. Its independence, duties, functions, mechanism of coordination with the CAG etc. should be provided by a statute. This should be aimed at assisting

the CAG in concentrating on carrying out specialized audit/tasks. An Audit Committee should be constituted in each Ministry/Department. It should look after matters related to both internal and external audit including implementation of their recommendations and report annually to the respective Departmental Standing Committee of Parliament.

Integrated Financial Adviser: The role of the Financial Adviser as the Chief Finance Officer of the Ministry who is responsible and accountable to the Secretary of the Ministry/ Department should be recognized and the trend of dual accountability should be done away with.

Accountability to Parliament: In order to further strengthen the Parliamentary oversight mechanism, as many audit paras as possible need to be examined by Parliamentary Committees. The

PAC and COPU may decide in the beginning of the year itself, which paras would be examined by them and which by their sub-committees (to be constituted for the purpose). They may consider assigning other paras to the respective Departmentally Related Standing Committees. The objective would be to complete the examination of all paras within one year.

Relationship between Audit and the Government/Government Agencies:

There is need for better understanding and synergy between the audit and auditees for enhanced public accountability and consequently better audit impact. Audit reports should not focus on criticism alone but contain a fair assessment or evaluation, which would mean that good performance, is also acknowledged.

There is need for increasing interaction as well as coordination between the executive and the audit, including at senior levels. These should include regular and meaningful meetings, where important issues could be discussed and conclusions reached on what needs to be done arising out of the recommendations made by the audit. There should also be quarterly communication from the Accountant General to Administrative Secretaries informing them about significant points and areas of improvement noted by Audit.

Timeliness of Audit: External audit needs to be more timely in inspecting and reporting so that their reports can be used for timely corrective action. IT should be used increasingly and effectively for data collection and analysis. Government agencies also need to be more prompt in responding to audit observations and ensure that the remedial and corrective action not only settles the irregularities reported but also addresses the systemic deficiencies.

Inadequate Response to Audit: The pending audit paras should be monitored by having a database on them in each Ministry/ Department. In case of persistent default in submitting replies to the audit paras, a procedure should be laid down for action against the concerned officer.

 

Courtesy: Md. Shahid Sarwar

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