Economic Development - Paper 3

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Evernotesharednotebook:Paper3
EconomicDevelopment
Thursday,May302013,1:38PM
InclusiveGrowth
PPPIssues&Recommendations
1. CentreStatecoordination
1. The Centre and the State have different levels of jurisdiction in different things needed for the
successofPPPprojects.Landacquisition,power,watersupplyistheresponsibilityoftheState
Governmentwithoutwhichnoprojectcanfunction.SimilarlytheabilityoftheStateGovernmentto
developaportcanbesubstantiallyjeopardizedbyineffectivedecisionmakingregardingsecurity
orcustomarrangementsattheCentrallevel.
2. Obtainingofclearancesrelatedtodefence,airspaceandenvironment.
2. Enhancingviabilityoftheprojects
1. VGFfromgovernment.
2. Structuringthemtomakethembankable.
3. Deepeningofthedebtmarketandfacilitatinglongtermdebt.
3. Selectionofland,acquisitionthereofandresettlementandrehabilitationofdisplaced
persons
1. Creation of land pools/land banks. The States should identify the lands available for
infrastructure development. All such identified land could be pooled together and offered to
prospective project developers. The creation of such land pools would significantly reduce the
costofacquisitionandalsoleadtofasterimplementationoftheprojects.
Displacedpeoplemustgetameaningfulshareoftheriseinlandpricesduetodevelopment.
2.
4. Capacitybuildingatvariouslevels
1. ProperstructuringofPPPscontractsanddocumentationisessential.
2. EstablishmentofSPVforprojectexecution.
InclusiveGrowth
Need
1. Sustainablegrowthrequireshighhumancapital.Itneedsskilled,educated,healthy
workers.
2. Politicallyandsociallynoninclusivegrowthisnotsustainable.LWE,terrorism,
communalism,castewarscanbetheissues.Soinclusivegrowthflowsdirectlyfrom
thePreamble,DPSP.
3. Moralconsiderations.
4. Humanrightsconsiderations.
Challenges
1. Politicalcommitmentislacking.
2. Lawsandpoliciesneedtobealigned.
https://www.evernote.com/pub/crazyphoton/paper3
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3. Governancechallenges.
4. Cronycapitalism.
5. Physicalandsocialinfrastructureneedstobebuiltup.
6. Inequality.
AmritsarDelhiKolkataIndustrialCorridor(ADKIC)Project
1. Set on of DMIC, the ADKIC will boost industrial development along the Eastern
Dedicated Freight Corridor (DFC) that connects Ludhiana in Punjab with Dankuni
nearKolkata.
2. TheADKICnotonlyhasawiderspreadbutalsotouchesthemoredenselypopulated
andlessdevelopedStateslikeUP,Uttarakhand,BiharandJharkhand.
3. Theregionaccountsforabout40percentofthecountryspopulationandhasbeen
cryingfordevelopment.
4. The eastern industrial corridor will also enhance the importance of the inland
waterwaysystembynavigatingtheGanga.
Q.ManishankarAiyyarReportonPRIs
1. DirecttransferstoPRIs.
2. Untiedgrants.
3. GrantstogointocapacitybuildingofPRIs.
Q.BRGF
Q.HigherEducationCooperationInitiativeBetweenIndiaandUS
Q.Goodeconomics,badpoliticsetc.exploreallcombinations.
InvestmentModelsforFundingInfrastructurein12thPlan
FIPBvsCCEAvsCCI
1. Ifprojectworthis<Rs.1200crore,FIPBapprovalissufficient.Ifprojectisworth
more,thenafterFIPBapproval,CCEAapprovalisalsoneeded.CCIisahighlevel
coordinatingbody.
SEZ
1. ThisyearinthePublicTradePolicy,theminimumlandrequirementformultiproduct
SEZshasbeenreducedto500ha(from1000ha),singleproductSEZto50haand
nominimumlimitforITbasedSEZs.
2. MATanddividenddistributiontaxwillbeleviedbackonSEZ.
NIMZvsSEZ
1. Minimumsizeis5000ha.
2. NotaxbenefitsinNIMZexceptSMEs.
3. FocusismanufacturinginNIMZ,focusisexportsinSEZ.
4. NIMZhasaseparatemunicipalsetupofitsown.
5. NIMZisexecutivedecision,SEZhasstatutorybacking.
QSince1991whatistherelevanceoflandreforms/Newdimensionsoflandreforms?
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1. Focusof12thFYPisontenancyreformsandgroupfarming.
2. Poollandandthenleaseitouttosmallandmarginalfarmer,women.
3. Kerelamodel:makeSHGsofpoorfarmersandthenlease.
IssuesArising
SpecialCategoryStates
CriteriaforSpecialCategoryStatus
1. Therationaleforspecialstatusisthatcertainstates,becauseofinherentfeatures,
havealowresourcebaseandcannotmobilizeresourcesfordevelopment.
2. Someofthefeaturesrequiredforspecialstatusare:
1. Hillyanddifficultterrain.
2. Lowpopulationdensityorsizeableshareoftribalpopulation.
3. Strategiclocationalongborders.
4. Economicandinfrastructuralbackwardness.
5. Nonviablenatureofstatefinances.
BenefitsofSpecialCategoryStatus
1. PCallocatesfundstostatesthroughcentralassistanceforstateplans.Central
assistancecanbebroadlysplitintothreecomponents:
1. NormalCentralAssistance(NCA)~20%oftotalcentralplanassistanceto
statesi.e.56%ofthetotaltransfers.
2. AdditionalCentralAssistance(ACA).
3. SpecialCentralAssistance.
2. NCA,themainassistanceforstateplans,issplittofavorspecialcategorystates:the
11statesget30%ofthetotalassistancewhiletheotherstatessharetheremaining
70%.Itissplitinto90%grantsand10%loansforspecialcategorystates,whilethe
ratiobetweengrantsandloansis30:70forotherstates.
3. Forallocationamongspecialcategorystates,therearenoexplicitcriteriafor
distributionandfundsareallocatedonthebasisofthestatesplansizeandprevious
planexpenditures.Allocationbetweennonspecialcategorystatesisdeterminedby
theGadgilMukherjeeformulawhichgivesweighttopopulation(60%),percapita
income(25%),fiscalperformance(7.5%)andspecialproblems(7.5%).
1. But what benefits would Bihar actually get if it is made into a special category state? During the
2.
3.
4.
EleventhPlan,undertheGadgilMukherjeeformula,theBiharsshareintotalNPAwas11%,2ndhighest
amongallnonspecialcategorystates.
Besidesthehigherassistancetospecialcategorystates,taxbreaksforexcisedutyaswellasincome
taxexemptionsarealsoavailableforsettingupofindustrieswithintheirterritories.
Even though the number of special category states has increased from only three to 11 between 1969
andnow,thekittyof30%ofthecentralPlanfundshasremainedunchanged.Asaresult,theshareof
individualstateswithinthecategoryhaddeclined.
Asperthe201314budget,thetotalcentralassistancetostatesisRs1.3lakhcrore,ofwhichtheNPA
isonlyRs27,636crore,andaboutathirdofthismoneywouldonlygotothespecialcategorystates.
RaghuramRajanCommitteetoDetermineBackwardness.Criteria
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1. ChidambaramarguedforinclusionofHDIindicatorsindeterminingwhetherastateis
backwardornot.
2. BackwardstateswillalsobenefitfromBRGF.
Employment
Planning
GrowthandDevelopment
EffectofLiberalization
IndustrialPolicy
InvestmentModels
MobilizationofResources
FDIRestrictivenessIndex(FRI)
1. Despite successive moves to liberalize the FDI regime, India is ranked fourth on
FRIcompiledbyOECD.
2. FRI gauges the restrictiveness of a country's FDI rules by looking at the four main
typesofrestrictions:
1. Foreignequitylimitations.
2. Screeningorapprovalmechanism.
3. Restrictionsontheemploymentofforeignersaskeypersonnel.
4. Operationalrestrictions.
3. Ascoreof1indicatesaclosedeconomyand0indicatesopenness.FRIforIndiain
2012was0.273(itwas0.450in2006and0.297in2010)asagainstOECDaverage
of0.081.
4. China is the most restrictive country as it is ranked number one with the score of
0.407in2012indicatingthatithasmorerestrictionthanIndia.
GovernmentBudgeting
BudgetingTechniques
TheLineItemBudget
1. Hereindividualitemsaregroupedbycostcentersordepartments.
2. It also shows the comparison between the data for the past budgeting periods and
estimatedfiguresforthecurrentperiod.
3. These line items include detailed ceilings on the amount a unit would spend on salaries, traveling
4.
allowances,officeexpenses,etc.Thefocusisonensuringthattheagenciesorunitsdonotexceedthe
ceilingsprescribed.
AcentralauthorityortheMinistryofFinancekeepsawatchonthespendingofvariousunitstoensure
thattheceilingsarenotviolated.
PerformanceBudgeting
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1. Concept
1. A Performance Budget gives an indication of how the funds spent are expected to give outputs
andultimatelytheoutcomes.
2. Aperformancebudgetreflectsthegoalsoftheorganizationandspellsoutperformancetargets.
3. Thesetargetsaresoughttobeachievedthroughastrategy(s).
4. Unitcostsareassociatedwiththestrategyandallocationsareaccordinglymade.
2. Issuesinimplementation
1. Itisdifficulttoarriveattheunitcostswhilerelatingthemtotheobjectiveinsocialprogrammes.
2. Itsscopeislimitedtoplanprogrammesandhenceutilityseverelycurtailed.
3. Performance budgets were presented on a supplementary basis. The departments continued the
4.
practice of preparing performance budgets annually in addition to their regular budget. The
preparation of performance budget has become a routine affair without any discernible influence
onexpendituremanagement.
Itisnotsufficienttohavetheperformancebudgetdocumentasasupplementaryone,asinthat
case it will not have any impact whatsoever on the existing system. For one, the performance
budgetisbeingevolvedtoovercomethedeficienciesintheexistingbudgetaryprocess.Theidea
ofasupplementarydocumentwouldinevitablymeanthecontinuationoftheexistingprocess.
ZerobasedBudgeting(ZBB)
1. Concept
1. Unlike the earlier systems where only incremental changes were made in the allocation, under
2.
zerobased budgeting every activity is evaluated each time a budget is made and only if it is
establishedthattheactivityisnecessary,arefundsallocatedtoit.
ThebasicpurposeofZBBisphasingoutofprogrammes/activitieswhichdonothaverelevance
anymore.
2. Issuesinimplementation
1. Because of the efforts involved in preparing a zerobased budget and institutional resistance
relatedtopersonnelissues,nogovernmenteverimplementedafullzerobasedbudget.
2. Ideally,prioritisationshouldbedoneamongallitemsofexpenditurewhetherongoingornew,Non
Plan or Plan. But the system in which Plan and NonPlan expenditure are treated differently and
assigned varying priorities, ZBB would have to be applied separately to Plan and NonPlan
expendituresandhenceefficacylimited.
OutcomeBudget
1. Performance budgets lack of clear estimation of unit costs and inadequate targetsetting. Hence there
2.
3.
4.
wasaneedfortrackingoutcomesandnottheoutputs.
However, the outcome budget experience shows that in many cases the measurement of outputs and
outcomesseemstohavebeenmixedup.Measuringoutcomesisdifficultgiventhefactthattheycould
beinfluencedbymanyotherextraneousfactors.
It is also seen that in some cases Departments have merely reproduced the outputs targets as
outcomesand,inmanyotherplaces,generalintentsoftheprogrammesaredescribedasoutcomes.
OutcomeBudgetcannotbepreparedforallMinistries/Departmentssimplybywayofdeclaration.
ProgrammeBudgetingandResultOrientedBudgets
1. The basic building block of the system was classification of expenditure into
programmes.Programmeswithcommonobjectivesareconsideredtogether.
2. Thequestionishowwellhavethereformsworkedinintroducingresultorientationinto
thebudgetingprocess?Notwellforthefollowingthreereasons:
1. Firstly, even though performance targets are being developed, they are
actuallykeptseparatefromthebudget.
2. When they are included in the budget, often outputs are confused with inputs
and outcomes remain unconsidered. Targets / objectives are not identified
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effectively.
3. Thirdly,andthemostimportantpointisthatevenwheneffectivetargetsareprovided,thebudgets
failtospecifywhoshouldbeaccountablefortheresults.
3. So programme budgeting by itself may not bring the outcome orientation. Unless
thereareinstitutionalreforms,likebringingintheagencyconcept,wheretheheads
of the agencies are made accountable for delivery of services in an efficient and
effectivemanner,thereforminbudgetingprocesswouldbedifficulttoimplement.
Topdownbudgetingtechniques
1. Bottomupbudgeting
1. Budgetinghastraditionallyoperatedonabottomupprinciple.Thismeansthatallagenciesandall
2.
3.
ministriessendrequestsforfundingtothefinanceministry.
2. Theserequestsgreatlyexceedwhattheyrealisticallybelievetheywillget.
3. Budgeting then consists of the Finance Ministry negotiating with these ministries and agencies
untilsomecommonpointisfound.
Disadvantagesofbottomupbudgeting
1. It is very time consuming and it is essentially a game all participants know that the initial
requestsarenotrealistic.
2. Thisprocesshasaninherentbiasforincreasingexpendituresallnewprogrammesorexpansions
arefinancedbynewrequeststhereisnosystemforreallocationwithinspendingministries.
3. Difficulttoreflectpoliticalprioritiesinthissystemasthebudgetemergesfromthebottomatthe
endofthisprocess.
Topdownbudgeting
1. Thishasbeenofgreatassistanceinachievingfiscalconsolidation.
2. The starting point is the government making a binding political decision as to the total level of
expenditureandthendividingthemamongindividualspendingministries.
3. This decision is made possible by the mediumterm expenditure frameworks which contain
baseline expenditure information, i.e. what the budget would look like if no new policy decisions
weremade.
4. The political decision is whether to increase expenditures for a highpriority area, for example
education,andtoreduceexpenditures,forexampledefenceprograms.
5. Oncethisdecisionistaken,theFinanceMinistrylargelywithdrawsfromthedetailsofbudgetary
allocationsforeachministry.TheFinanceMinistryconcernsitselfonlywiththelevelofaggregate
expenditureforeachministrynottheinternalallocations.
6. Each minister becomes his own Finance Minister. Each ministry has a total amount and it can
freelyreallocatethatmoneyamongitsvariousprogrammes.
7. Advantages
1. It serves to hamper creeping increases in expenditures as new policies are funded by
reallocationswithintheministry.
2. Itcreatesownershipintherespectiveministries.
3. Decisionsarealsobetterinformedasspendingministriesareinthebestpositiontojudge
therelativemeritsoftheirprogrammes.
BudgetingReforms
MediumTermFrameworkStatements
1. Theyclearlystatethegovernmentsmediumtermfiscalobjectivesintermsofhighleveltargetssuchas
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2.
3.
4.
5.
6.
thelevelofaggregaterevenue,expenditure,deficit/surplus,anddebt.
They then operationalize these highlevel targets by establishing hard budget constraints for individual
ministriesandprogrammesoveranumberofyears.
They contain baseline expenditure information, i.e. what the budget would look like if no new policy
decisionsweremade.
Utility / need: Budgets are however enacted for a time period of one year, and are notorious for their
shorttermfocus.Thisshorttermtimehorizonisoftencriticisedforineffectiveexpendituremanagement
decisions on resource allocation are said to be made on an ad hoc basis. Mediumterm budget
frameworksbridgethisgap.
Theygenerallymirrortheformatofthebudget.Thesearerollingframeworksthatarepresentedwiththe
budgeteachyear3isadded.
These frameworks are not, however, enacted into legislation they are planning documents that reflect
thepoliticalcommitmenttofiscaldiscipline.
PrudentEconomicAssumptions
1. Deviationsfromtheforecastofthekeyeconomicassumptionsareakeyfiscalrisk.
2. Sensitivityanalysisshouldbemade.
3. Acomparisonshouldbemadebetweentheeconomicassumptionsusedinthebudgetandwhatprivate
sectorforecastersareapplyingforthesametimeperiodwherepracticable.
4. Theestablishmentofanindependentbodytorecommendtheeconomicassumptionstobeusedinthe
budgetmaybeconsideredaswell.
TopDownBudgetingTechniques
1. Thishasbeenofgreatassistanceinachievingfiscalconsolidation.
2. The starting point is the government making a binding political decision as to the total level of
3.
4.
5.
6.
7.
expenditureandthendividingthemamongindividualspendingministries.
This decision is made possible by the mediumterm expenditure frameworks which contain baseline
expenditureinformation,i.e.whatthebudgetwouldlooklikeifnonewpolicydecisionsweremade.
Thepoliticaldecisioniswhethertoincreaseexpendituresforahighpriorityarea,forexampleeducation,
andtoreduceexpenditures,forexampledefenceprograms.
Once this decision is taken, the Finance Ministry largely withdraws from the details of budgetary
allocations for each ministry. The Finance Ministry concerns itself only with the level of aggregate
expenditureforeachministrynottheinternalallocations.
Each minister becomes his own Finance Minister. Each ministry has a total amount and it can freely
reallocatethatmoneyamongitsvariousprogrammes.
Advantages
1. It serves to hamper creeping increases in expenditures as new policies are funded by
reallocationswithintheministry.
2. Itcreatesownershipintherespectiveministries.
3. Decisions are also better informed as spending ministries are in the best position to judge the
relativemeritsoftheirprogrammes.
RelaxingCentralInputControls
1. Thisisbasedonthepremisethattheheadsofindividualagenciesareinthebestpositiontochoosethe
mostefficientmixofinputstocarryouttheagencysactivities.
2. The endresult is that an agency can produce the same services at less cost, or more services at the
3.
samecost.Thisgreatlyfacilitatesfiscalconsolidation.
Itoperatesat3levels:
1. First, the consolidation of various budget lines into a single appropriation for all operating costs
(salaries,travel,supplies,etc.).
2. Second,thedecentralisationofthepersonnelmanagementfunction. The above may not enough
togeneratemanagerialflexibilityasvariouscentralmanagementrulesinhibitthisflexibility.Itisin
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theareaofhumanresourcemanagementwheremostofthecentralmanagementrulesexist.
3. Third, the decentralisation of other common service provisions, notably accommodations

(buildings).
AnIncreasedFocusonResults
1. An increased focus on results is a direct quid pro quo for relaxing input controls as described
2.
3.
above. Accountability in the public sector has traditionally been based on compliance with rules and
procedures.Anewresultsbasedsystemisneededtoholdmanagersaccountable.
Thisisafundamentalchange:holdingmanagersaccountableforwhattheydo,nothowtheydoit.
Difficultiesinimplementation
1. Resultsmeasurementmaybemuchmoredifficultinsomeactivitiesthaninothers.Varioussocial
servicesaretheoutstandingexample.
2. Fromanaccountabilitypointofview,thequestionariseswhetheryouholdmanagersresponsible
foroutputsoroutcomes.Anexamplehighlightsthis.
A government may wish to reduce the number of fatalities on highways caused by drunk
drivers. This would be the outcome. In order to achieve this, it may launch a series of
advertisementswhichistheoutput.
Lets,however,assumethatatthesametimethenumberoffatalitieswentup,notdown.
The link between the advertisements and this outcome is very unclear, since many other
factorsthantheadvertisementswouldimpactontheoutcome.
Alternatively, do we want an accountability regime based on outputs even though the
outputsmaynotbecontributingtothedesiredoutcome?
Findingtherightbalancebetweentheoutputsandoutcomesisadifficult
choicetoimplement.
BudgetTransparency&CitizenParticipation
1. When the governments need to institute large fiscal consolidation programmes, it is often painful and
2.
3.
gettingthepublicsunderstandingoftheproblemsisnecessary.Themosteffectivemannerforachieving
thatwassimplytothrowopenthebooksandsaytothepublic:Look,thingsarereallyasbadaswetold
you,werenothidinganything.
Thisisalsoinconsonancewiththeprinciplesofgoodgovernance.
Thestepsinvolve:
1. The first is the release of budget data systematic and timely release of all
relevantfiscalinformation.
2. The second element is an effective role for the legislature. It must scrutinize
the budget reports and independently review them. It must debate and
influencepolicyandeffectivelyholdthegovernmenttoaccount.
3. The third element is an effective role for civil society, through the media and NGOs. Citizens
mustbeinapositiontoinfluencebudgetpolicyandmustbeinapositiontoholdthegovernment
toaccount.
ModernFinancialManagementPractices
1. Accrualbasedbudgeting
1. DrawbacksofCashAccounting
1. Cash accounting does not provide a full picture of the governments financial position at
2.
3.
4.
any given point and the changes that take place over time as a result of government
policy.
Itfailstoreflectaccruedliabilities.
It is unable to track current assets as well as capital assets. It does not provide
informationontheassetsheldbythegovernmentatall.
Itprovidesroomforfiscalopportunism,astaxrevenuescanbecollectedinexcessduring
a period followed by high incidence of refunds, payments can easily be deferred. It takes
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nonoteofstateguarantees.
2. IssuesinImplementationofAccrualAccounting
1. There is a high cost of transition from cash to accrual accounting as it
requireshighertraining,identificationandevaluationofassetsandsetting
upthetechnologicalinfrastructure.
2. The transition period takes a fairly long time to settle, sometimes even
morethanadecade.
3. A number of activities associated with the accrualbased accounting
system involve high level of subjectivity for example valuations and risk
assessment.
4. Many countries have attempted to move towards accrual accounting but
successhasnotbeenwidespread.
5. Evenincountrieswhereithasbeenimplemented,itisnotbeing used in
decisionmaking.
6. Agradualapproachisthusrecommended.Focuscouldbefirstonimplementingmethods
tobetterrecognizefinancialliabilitiesandassetsandtheircapitalcosts.
1. Capitalcharges
1. Capital has tended to be viewed as a free good in the public sector. This
involvesputtingacostonthebalancesheet.
2. Thegovernmentdecidestolevyachargeonthecostofcapitaltiedupinallassetsinanagency.
3.
For example, if an agency has $10 million in assets, the government will levy a charge (often
equivalenttothelongtermgovernmentbondrate),of10%.Thismeansthattheagencywillhave
topaythefinanceministry1milliondollarsannually.
When the system is first introduced, the appropriations to all agencies will be increased by the
amount of their capital charge, so theres no net impact on agencies. However, agencies will in
futurebeallowedtodisposeoftheassetsandthusrelievingthemselvesofthecapitalcharge.
Thissavesalotofgovernmentbalancesheet.
4.
2. Carryovers
1. Currentlyallappropriationslapseattheendofthefiscalyear.Thiscreatesagreatandirrational
2.
3.
rushtospendmoneysbeforetheendofthefiscalyear.
Notonlybecausetheywouldotherwiselosethemoneythisyear,butalsobecausefutureyears
appropriationswouldtakeaccountofthisunderspendingaswell.
Hence the need of carryovers. Only in cases where an agency continuously, year after year,
buildsupcarryoversdoestheMinistryofFinanceintervene.
3. Interestbearingaccounts
1. Thismeansthattheappropriationofanagencyisdividedintotwelfths(representingeachmonth)
2.
and deposited into an agencys account. If an agency spends at less than this rate, they will
receive interest on the difference. If they spend at a faster rate, they will pay interest on the
difference.
Thismakesthemmuchmoreawareofcashmanagementpractices.
BudgetaryProcess
PreparationoftheBudget
1. Itfollowsboththetopdownandbottomupapproaches.Whileguidelinesandinstructionsareissuedby
theMinistryofFinanceandPlanningCommission,thespendingMinistries/Departmentsmakerequests
forbudgetaryallocationsbasedontheirownestimates.
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2. TheMinistryofFinanceissuesaBudgetCircularwhichcontainstheguidelinesandinstructionsinthe
3.
4.
5.
monthofSeptember.
ThisCircularisissuedfortheguidanceofMinistries/DepartmentsinframingtheRevisedEstimatesfor
thecurrentyearandtheBudgetEstimatesfortheensuingyear.
ThedepartmentalestimatesareexaminedandanalyzedbytheFinancialAdviserandthenforwardedto
theBudgetDivisionintheFinanceMinistry.ThisisfollowedbyprebudgetmeetingswiththeSecretary
(Expenditure).
Once this stage is over, the expenditure ceilings are communicated (which include ceilings on both
revenue and capital expenditure). The Departments then prepare the Statement of Budget Estimates
(Final).
IssuesinBudgetaryProcessandRecommendations
1. Emphasisonexpendituretargets,notresults
1. At present, government departments often measure their performance in
relation to the expenditure targets laid down in the budget without adequate
regardtooutputsandevenlesstooutcomes.
2. Unrealisticbudgetestimates
1. Weakness in preparing proper estimates leads to frequent revisions
andsupplementaries.
2. Despite having such an elaborate and time consuming system of making budgetary estimates,
3.
large amounts of unspent money have been surrendered every year. This indicates lack of
efficiency in estimation at the departmental level. It shows that proper forecasting methods are
not used to estimate expenditure. The concerned Ministries/Departments have not made any
seriousattemptstoapplyeffectivecorrectivemeasuresasperPAC.
Therootcauseoftheproblemliesintheprevalentmethodofformulationoftheannualbudgetby
getting details from different organizations and fitting them into a predetermined aggregate
amount. This method should be given up along with the method of budgeting on the basis of
analysis of trends. Topdown budgeting techniques along with a mediumterm expenditure
frameworkshouldbefollowed.
4. Budget Estimates and Revised Estimates should be prepared with reference

tothemeasurablecommitmentsmadeintheOutcomeBudget.
5. Ministries/Departmentsmayrevieweachmajorschemeatregularintervalsand
applytheresultatthetimeofbudgetformulation.
3. DelayinImplementationofProjects
1. In many cases, such delays are due to token provisions made on account of poorly conceived
4.
5.
projects.Notonlythis,theyalsotiedownresourcesandhencedelayothergoodprojectsaswell.
2. Budgetary provisions should be made only when administrative and technical sanctions have
beenobtainedandadetailedfeasibilityreportandcostbenefitanalysishavebeenmade.
SkewedExpenditurePattern
1. Themajorportionisspentinthelastquarterofthefinancialyear,especiallyinthelastmonth.
2. AMonthlyExpenditurePlanshouldbeworkedoutforeachDemandforGrant.Savingsshouldnot
beavailableforautomaticcarryforwardtothenextquarter.
InadequateAdherencetotheMultiyearPerspectiveandMissingLineofSightbetweenPlanandBudget
1. Adhocdeviationsdistortthelongtermplanobjectives. Majorprojectsandschemesarelaunched
bygovernmentwhicharenotprovidedforintheplan.
2. Anotherweaknessofthecurrentbudgetexerciseistheabsenceofaclearlinkbetweentheplan
andthebudget.While preparing the budget estimates, the allocations indicated by the Planning
Commission get dispersed over various heads and subheads of expenditure. Further, while the
plans are formulated schemewise and sectorwise, the budgets are formulated under different
headsandsubheads.Thusaclearlineofsightisnotpresent.
3. Consequently, even the final accounts reflect the expenditure only under various heads. This
makes it difficult to link the expenditure under various heads to the objectives sought to be
achievedbythedifferentdevelopmentalschemes/projects.Therebytheaccountingprocessloses
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itspotentialasameasuringtoolforachievementofobjectives.
6. NoCorrelationbetweenExpenditureandActualImplementation
1. The expenditure figures do not reflect actual expenditure. At present, the release of funds from
2.
anyheadofaccountisdeemedasanexpenditure.Inalargenumberofcases,especiallyinCSS,
suchreleasescannotbeconstruedasexpenditurebecausefundslieinthepipeline.
Thepresentsystemofreleaseoffundstoprojectauthoritiesoutsidethegovernmentoftenleads
to parking of funds which is often resorted to in order to prevent lapsing of funds. This leads to
idlefundsbeingmaintainedoutsidegovernmentaccountsandthusportraysanincorrectpictureof
governmentfundsbesidescausinglossofinteresttogovernment.
7. IrrationalPlanNonPlanDistinction
1. It has led to ever increasing tendency to start new schemes/projects to the utter neglect of
2.
3.
existingones.
The distinction also often leads to the misperception that nonplan expenditure is inherently
wastefulandshouldbeavoided.
The problem is assuming greater significance with higher priority to social sectors where salary
constitutes an important element of the programme. The embargo imposed on recruitment for
nonplanpostshavecausedseriousproblemsofservicedeliveryinhealthandeducationsectors.
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3. Third, the decentralisation of other common service provisions, notably accommodations

4. Budget Estimates and Revised Estimates should be prepared with reference

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