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The Background
NIPFP published a PFM Performance Assessment Reportfor India at the Union government level in March 2010
y The coverage is limited to Central Government
y Analysis of performance against the 28 high level indicators of
the PEFA
y Publicly-available data, information and government reports
formed the basis of assessment
y Benefited from the discussions with Government officials
y Peer reviewed by the PEFA secretariat
On June 8-9, 2010, a workshop on PFM systems in India
was held using this Report as a basis for discussion
amongst academics and government officials
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The assessment as a Baseline
PEFA is an integrated monitoring framework
The study is diagnostic in nature and represents an
assessment of current performance only strengths and
weaknesses
It is not intended to provide recommendations to improve
the PFM system in the country in terms of an action plan
It is expected that the assessment would assist policy
makers in identifying subsequent reform efforts
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Six Key Areas
Credibility of the budget: The budget is realistic and is
implemented as intended Comprehensiveness and transparency: The budget and the
fiscal risk oversight are comprehensive, and fiscal and budget
information is accessible to the public
Policy-based budgeting: The budget is prepared with due regardto government policy
Predictability and control in budget execution: The budget isimplemented in an orderly and predictable manner and there are
arrangements for the exercise of control and stewardship in the use of
public funds
Accounting, recording and reporting: Adequate records and
information are produced, maintained and disseminated to meetdecision-making control, management and reporting purpose
External scrutiny and audit: Arrangement for scrutiny of publicfinances and follow up by executive are operating
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Credibility of the Budget
Assessed through expenditure and revenue out-turns as
compared to the budget estimatesy Overall budget credibility is affected by the absence of a hard
budget constraint, thereby allowing substantial adjustments in
the budget during the year through supplementary grants
y Accurate revenue projection has remained a challenge
depending upon the movement of economy, changes in tax
administration, and global market situation
(In Percentage) 2006-07 2007-08 2008-09 (RE)
Deviation in Total Expenditure 12.95 10.52 36.95
Deviation in Revenue Expenditure 17.16 12.38 41.96
Deviation in Capital
Expenditure-10.37 3.64 6.24
Deviation in Revenue Receipts 7.02 10.3 -7.24
C, C, A, NR
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Comprehensiveness and Transparency
Reasonably high level of fiscal transparency
Comprehensiveness of the fiscal information publiclyavailable has improved in recent years
Progress is seen in informing the common citizen about
the policy choices, their implications, and reasons for
preference of choices
Concerns:
y Cash based accounting system
y The distinction between capital and revenue expenditure is
not very clear in transfer to states
y Intergovernmental fiscal transfer system complex with
discretionary elementsy Fiscal risks arising from the activities of public sector
enterprises are not provided in the budget
A, A, A, B+, C, A
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Policy Based Budgeting
Due regard to the Government policies in different sectors
is seen through participation of spending departments Lacking comprehensive expenditure ceilings early in the
budget cycle
A multi-year perspective in expenditure planning and
budgeting is absent
A detailed medium term expenditure framework for sectorsis not worked out by projecting expenditure implications of
programmes undertaken for outward years
y It is maintained that the five year plans provide the basis for a
multi-year perspective for resource allocation
C+, D
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Predictability and Control in Budget Execution
Transparency of Taxpayer Obligations and Liabilities
Effectiveness of Measures for Taxpayer Registration andTax Assessment
Effectiveness in Collection of Tax Payments
Predictability in the Availability of Funds for Commitment of
Expenditure
Recording and Management of Cash Balances, Debt and
Guarantees
Effectiveness of Payroll Controls
Competition, Value for Money and Controls in Procurement
Effectiveness of Internal Controls for Non-SalaryExpenditure
y Expenditure commitment controls
Effectiveness of Internal Audit
C+, B+, D+, C+, A, C+, NR, D+, D+
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Transparency and Effectiveness in Collection of Tax
Payments
While explicit legal provisions and procedural safeguardsexist in central taxes, the scope for administrative
discretion is considerable in practice due to large number
of exemptions and reliefs, and frequent changes in tax
provisions, making the tax laws relatively complex.
A structured taxpayer education programme is absent,which adds to the compliance cost.
Increasing tax arrears
Despite a well laid out tax appeal mechanism, disposal is
time consuming.
Elaborate legal provisions against delinquent taxpayershave not resulted in effective collection of the taxes
assessed due to long running court disputes
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Procurement
Decentralized, managed at departmental level
Exclusive law governing the public procurement absent However, clear rules and directives are provided in the
General Financial Rules (GFR) to be followed by the
departments to procure goods and services in a
competitive manner.
Central Vigilance Commission (CVC) has some role in theoversight functions; Audit by CAG
No central authority to regulate the procurement policies
and oversee the compliance with the established
procedures
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Commitment Controls
The statutory requirements for budget implementation
focus exclusively on controlling expenditures with respectto budget appropriations
Difficult to assess the effectiveness of expenditure
commitment controls
The budget preparation overlooks expenditure arrears as
there is no provision in the budget for the ensuing year todischarge the expenditure arrears of the previous year(s)
The year end financial statement, Appropriation Accounts,
is prepared on a cash basis reporting cash execution of
the expenditure plans approved by parliament and do not
report on commitments
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Internal Audit
Internal audit has remained a weak link in the financial
management system
Internal audit in India is conducted in a routine manner
and the result of this audit on improving the financial
management system is insignificant
Internal audit in India has a restricted mandate, does not
have the ability to evaluate risks.
No standards have been evolved for internal audit and it
did not have the required independence for its effective
functioning
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Accounting, Recording and Reporting
Cash based accounting system; efforts are on to migrate to
accrual based system Well laid out procedures, rules and regulations for
accounts reconciliation
y Needs further simplification to stop increasing number
of suspense accounts
Accounting Standards : Differences are there from cashbasis IPSAS relating to the structure, disclosures and basis
of accounting at present
Year-end financial statements, Finance Accounts and
Appropriation Accounts provide consolidated statements
Financial and reporting management system needs to bemore user friendly, timely to be helpful for decision making
Availability of Information on Resources Received by
Service Delivery Units is not complete
B, A, C+, C+
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External Scrutiny and Audit
Scope, Nature and Follow-up of External Audit
y The scope of external audit by CAG is wide - unitary audit in
federal setup
y Performance audit as independent assessment of organizations
y Audit of local bodies - CAG is responsible for providing
technical guidance and supervision/support
y Timeliness needs improvementy Follow-up of CAG audit report is weak. The PAC examines only
a small portion of the audit reports.
y The Action taken notes submitted by the departments and units
audited by the CAG do not take other audit observations not
examined by the PAC seriously
Legislative Scrutiny of the Annual Budget Law
y The parliamentary scrutiny and approval of budgetary process,
despite having elaborate constitutional provisions, is not
exercised rigorously
D+, A, D+
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Response to the Assessment
Improvement in budgeting process and transparency was
stressed Sectoral MTEF required
Strengthening outcome budget
Procurement process needs to be linked with committedmaintenance funds for various projects
Enabling statutory basis to internal audit and capacitybuilding
Leveraging ICT to strengthen financial management
External audit act needs to be more explicit andimprovement in timeliness
Improved risk analyses and audit reporting to highlightsystemic issues and analyze causes
Legislative Scrutiny of audit report needs improvement andhigher level of transparency in the process of scrutiny
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The Progress
Efforts of the government in strengthening the PFM
systems are evident in many areasy Rule based fiscal management
y Conventional input-based budget to outcome budget
y Initiating the process to move to an accrual based accounting
system
y Improving budget classification
y Reforming internal audit
y Revising the responsibilities and duties of the Financial
Advisors
y Tightening cash management system
y Expenditure tracking system for centrally sponsored
programmes