Book Review by P. Sesh Kumar : Accounting and Budgeting in Government: Spotlighting Completed, Ongoing, And Proposed Reforms, Gennext Publications (2021)

‘Accounting and Budgeting in Government’ by Dr Subhash Chandra Pandey and Sri Mahendra Prakash Gupta, Gen Next Publication, 2021, is a welcome addition to the the rather rare ‘literature’ on the complex subject- one, which may not be on anywhere near the top of the interests of even educated common man.

It is an augmented version of the earlier edition of 1993. It seeks to ‘benefit readers who may not have undergone any formal education or training in accounting theory and practice and who may be mere users of government accounts rather than being actively involved in preparation of the accounts’.

The book elegantly captures the need for some of the significant changes in Government accounting system and practice such as the acceptance in ‘principle’ by Government to introduce ‘Accrual’ accounting (we are at least a decade if not more behind in this) and for introducing a new multi dimensional classification system to capture the ‘geographical nexus’, the class of persons who are beneficiaries and source of funding, in addition to the object and purpose of Government expenditure.

Chapter 1 and Annexure A explain at the beginning itself, in a very effective and simple manner all the basic concepts of Accounting with easy examples of cash book, journal and trial balance in commercial system of double entry book keeping. It highlights the fact that around 54% countries (2013) followed cash or modified cash basis of accounting—simplicity, prudence and absence of profit motive— are stated as reasons.

Chapter 2–‘Receipts, Payment and Accounting System’ not only introduces flow of accounting work in Government (including States)in a lucid manner but also takes the reader through some of the significant new initiatives such as, introduction of digital payments, Public Financial Management System(PFMS) and Direct Benefit Transfer( DBT).

Chapters 3 to 5 deal at length, with the form, system of accounts, role of Comptroller and Auditor General of India(CAG) in accounting system, classification of accounts into various heads, and consolidation of accounts. The subjects of special treatment are, however, an analysis of the ‘myth’ that Government accounting system is a single entry system, revaluation of outstanding external debt liability in a ‘footnote’ at current exchange rates and explaining with examples how Government accounts differ from commercial accounts. Chapter 3 also describes more than discusses, computerisation of the process of compilation and consolidation of Government accounts including the role of Accountants General(AG) in States and Controller General of accounts (CGA) in Government of India.

Chapter 4 deals exhaustively with ‘Budgetary System for Government Expenditure’ explaining the rationale of ‘Medium term Expenditure Framework’(MTEF), FRBM Act, Demand for Grants, Appropriation Act, Vote on account, New Service or New Instrument of Service, merger of Railway budget with General Budget and Contingency Fund. One significant finding of the authors is ‘lack of control on the ability to create new expenditure commitments in disregard of reasonable availability of funds in the Budget(current or future years)’ as one of the major problems of Government Expenditure Management. Another finding is that ‘the Government does not track and does not know the extent of such committed liabilities. Commitment control and monitoring has elbowed out expenditure management for long.’ Such conclusions could have been better appreciated with some specific examples, albeit in an Annexure.

Another significant comment that the authors make is that ‘when funds are advanced knowing fully well that the recipients cannot actually use all the amounts so transferred for final expenditure in the same financial year, the practice invites Audit comment and criticism as defeating the ‘parliamentary financial control’. Such Audit comments have been continuing since the last 50 years, have become more or less ‘routine’, in nature and these apparent technical infringements are rarely viewed seriously or severely reprimanded by the PAC. The solution would lie in working out a practical via-media, say by prescribing some monetary limits preferably though a separate legislation, beyond which these infringements would be subject to some visible or deterrent penal action.

The authors have indeed separately touched upon these matters in Chapter 8. PAC discussions on these deviations are seldom serious. Another serious practical issue that is discussed quite innovatively, is that ‘Finance wings don’t allow expenditure sanctions to remain valid beyond the financial year…the process of revalidation takes weeks if not months and the Finance Wing/Department has every incentive to delay revalidation, if they are facing resource/cash crunch’. Do the authors have any solution to this perennial ‘cat and mouse’ game or it is that they feel that the higher wisdom of the Ministry of Finance enforced through ‘instructions’ to Financial Advisers that should always prevail? The authors however, do prescribe a solution to another common issue of what constitutes a New Service, especially regarding what latitude is to be allowed to the Executive to start a New Service, in anticipation of the approval of Legislature. They clearly say that ‘the executive should not be allowed to substitute for a project approved by the Legislature by another project, the full cost of which will be considerably more, although in a particular year in which it is started the expenditure might not exceed the amount already provided for in the budget’. Similarly, the authors do highlight another area regarding Contingency Fund, where there would be a need to remove existing ambiguity. They say that when Contingency Fund can be used to finance totally unforeseen expenditure, it should certainly be possible to meet expenditure in line with Budget announcements and then seek Supplementary Grant to cover the advances from Contingency Fund. This is a no brainer in times of overwhelming parliamentary majority of the ruling party. Also, some specific examples or instances of grant of Vote of Credit would have explained the latter feature, better.

Chapter 5 deals with Cash Management. The authors have referred to the role of PAOs and AG in the reconciliation of a cash balances with RBI. Faster transmission of funds and eliminating the ‘free float’ that Banks used to enjoy with online monitoring of unspent balances are mentioned. While issues of incomplete reporting by bank branches and issue with Treasuries and Public Works/Forest Divisions in rendering complete accounts and not in time are well known, what are lacking in the authors’ analysis are

(i ) to what extent has the role of AG (as far as State Government accounts are concerned) and the role of CAG in compilation of Annual Finance and Appropriation accounts of Union Government including Combined Finance And Appropriation Accounts or CFRA), have been satisfactory either in terms of quality, timeliness or value addition to cash management by respective Governments or enhancing the effectiveness of MIS,

(ii) to what extent the exercise of Voucher level Computerisation(VLC) has been useful either to CAG in rendering meaningful and complete monthly accounts to States in time or in preparing the Finance and Appropriation Accounts. VLC application was developed and rolled out in pre-IFMS environment.

(iii) has the VLC system of CAG /AG been integrated with State IFMS- otherwise, the States would have diminished or no utility of monthly accounts of AG, leave alone any MIS value. There is a monthly lag or one or more months in State Finance Department receiving monthly accounts from AG, in general.

(iv) what is the utility of CFRA prepared so painstakingly by CAG, both to Union Government or State Government. Even Finance Commission or NITI AAYOG may not have much use from these dated outputs.

(v) the magnitude of the issue of outstanding balances in various ‘suspense’ or intermediate accounts heads, especially in States.

Chapter 6 discusses some issues in Public Debt and deficits. The authors stop at stating the known fact that subsidies are often implicit in public sector deficit which creates distortion in allocation of economic resources. Though they say that subsidies have to be targeted to be meaningful, they do not discuss how exactly this needs to be done either with reference to any international good practices or their own solution say, by providing these directly and upfront in the budget. Probably they intentionally left it unsaid. If the solution were so easy, wonder why successive Governments have found it meaningful to continue with the opaque system. It may not simply be a matter of lack of political will.

A detailed analysis of the history of FRBM legislation (1999, 2003, 2012, and 2017) and the rationale thereof is discussed rather well. How defacto SLR is lower than 11.5% could have been explained better. The authors do, however, acknowledge that universally there are escape clauses in fiscal rules and that FRBM targets need revision in cases of major changes of assumptions. It becomes clear that successive Governments have been seized of the importance of fiscal prudence and there have been a number of high level expert committees and even review committees that have examined all related issues in a holistic manner but it is entirely upto the Government in power at the relevant time to take the ultimate call and to approve a roadmap.

One needs to acknowledge that experts can only give their views and ultimately it is the Government of the day that would rightfully take the final call on what is the best way forward. Thus, it would not be clear when the authors repeat the recommendation of FRBM review Committee that there is a need to effectively utilise provisions of Art 150 of the Constitution to improve accounting and fiscal reporting of Central and General Government finances. The role and effectiveness of the institution of CAG in this effort would also need to be examined and commented upon instead of leaving it unexamined. It is relevant to mention here that the authors have gone ahead and given their views on the ceilings and sub ceilings of debt and on the ‘myths’ of low debt to GDP ratio and reasonable levels of external debt. They have,however, refrained from giving their take on what is the better or proper way to treat arrangements which increase government liabilities technically without the adverse effect of crowding out private investment through Open Market Operations by RBI. Similarly, they have mentioned a prevalent view on standardisation on aspects such as not reckoning non recurring windfall gains from asset sale and disinvestment of Government equity as part of fiscal deficit financing, without giving their take.

On the recommendation of FRBM Review Committee(2017) for creation of Fiscal Council, much on the lines of Sarma Committee (2000), the authors have refrained from expressing any opinion on whether such a Council is at all necessary though they say it may assist the Government in following up on CAG report, given the fact that CAG can always present an independent overview of the status of implementation of FRBM Act, without Government having to ask for it and which is being done. Some very interesting findings of CAG on implementation of FRBM Act have been enumerated (FCI subsidy funding, unpaid liability on annuity projects, transfer of cess to designated funds, impact on operation of NSSF and so on) along with the facts that Government has since come out with improved disclosures and/ or deviation statement.

Chapter 7 on Fiscal Transparency and Accounting reforms, explains very cogently the issue arising out of inefficiencies and drawbacks in the publications and products emanating from the stables of Ministry of Finance, CAG9 (somewhat scantily) and RBI including scope, reporting parameters, formats and ease of access. Delays in availability of the reports are also mentioned. The authors have attempted to bring in some salient aspects of International accounting Standards, International Federation of Accountants and International Public Sector Accounting Standards Board, too in this Chapter. Each of these require a full chapter to do justice to the subject as well as to the reader, though the attempt here appears to be to introduce these features to the reader for further study as one may desire. On Government Accounting StandardsAdvisory Board (GASAB), the later developments in CAG may need to be updated. CAG appears to have approved adoption of cash based IPSAS in financial statements which would be a stepping stone towards proper accrual accounting. Reports of pilot study on gaps of Finance Accounts also appear to have been circulated amongst Accounts offices of CAG. NITI would appear to be working on a project separately based on GASAB experience for transition to accrual accounting. GASAB has notified 3 standards— Guarantees, Loans and Advances and Grant in Aid. 4 standards appear to be pending with Ministry of Finance for possible notification (Fixed Assets, modified one on Loans and Advances, modified one on Grant in Aid, Government Equity, Foreign Exchange transactions and Public Debt and other liabilities). GASAB is working on cash based IPSAS — prior period adjustments, contingent liability, external assistance and revenue recognition. CAG also appears to have completed Asset Accounts on Minerals and Energy Sources in all 28 states and J&K. On accounting reforms, the authors not only referred to recommendations of Lahiri Committee(2004) and Sundaramurthy Committee(2012) but given a clear recommendation that Government needs to invest in a multi dimensional accounting classification through advanced IT based data base management systems. The status of recommendations of Sundaramurthy Committee is missing from the Chapter, unless probably the recommendations are being tossed around among various stakeholders.

The last Chapter 8– Public Finance Reforms: Budget 2021-22 and Beyond captures the developments and salient features of the progress of reforms right upto the Budget presented in February 2021. Some significant refinements and improvements are that the corpus of Contingency Fund has been augmented, a new disclosure statement has been introduced for Extra Budgetary Resources especially for the controversial loans provided by Government to FCI from NSSF and possibility of having a non lapsable modernisation fund for Defence and Internal Security(under discussion?). GASAB has already worked on modified standard on Public Debt based on recommendation of 15th Finance Commission to provide for servicing of off budget borrowings from Government budget. Impact and status of Treasury Single Account System(TSA) needed to be updated. Perhaps, the more significant but likely to be relegated to last pages, is the recommendation that all data and information relating to fiscal operations, budget, policy documents etc should be made available to public in a reliable, timely and comparable manner.


Also equally if not more significant, is the emphasis provided by the authors to a recommendation of 15th Finance Commission that there is room for improvement in timelines of audited financial reports of Governments, ensuring that these are prepared within 6 months of the end of the year and audited within 9 months with specific responsibilities for maintaining such timelines at each stage of preparation of audited financial statements. The authors are charitable when they state that audited accounts of a financial year are presented to Legislatures generally after a lapse of more than 10 months from the close of the concerned financial year. Though they have mentioned delays in consolidation, audit and presentation by Government too Legislature, they have not commented upon specific delays at each stage, say in a sample of Governments, or the severity of the nature of deficiencies or frauds or very significant errors in Government accounts. Audit comments generally pertain to understatement or inadequate disclosure of liabilities, inflating figures of growth, suppressing fiscal deficit through creative accounting or off balance sheet borrowings, overspending with reference to limits sanctioned by Legislature, some sort of window dressing to show superior performance in macro parameters, unspent balances, rush of expenses in March and so on. It is seldom that major instances of defalcation, misappropriation, wrong accounting or fraud are highlighted in audited reports on annual financial statements.

Most of the procedural matters and issues of propriety are settled by respective PACs after oral evidence or replies of Government departments. These instances get repeated more often than not, indicating some inadequacies in monitoring in Governments. The authors have highlighted yet another recommendation of the 15th Finance Commission that lays responsibility on Ministry of Finance in Union Government to launch stakeholder consultation and prepare a time bound plan for implementation of comprehensive PFM reforms at all levels of Government and the need for a PFM Act to replace administrative rules, regulations and orders that presently govern PFM in the country. This is by far the most significant original input one gets to note, in the book.The authors must also be complimented for underscoring the need for

  • abolition of the concept of charged expenditure,
  • modification of the format of Appropriation Act to minimise recourse to supplementary
  • limiting use of Vote on Account,
  • introducing permanent or multi year appropriations for certain expenditures,
  • moving from gross to net budgeting,
  • new metrics for measuring public debt,
  • incentivising recovery of user charges for services rendered by allowing flexibility in
    retention and use of certain non tax receipts without first taking these to Consolidated Fund
  • monthly fiscal reporting in line with budget documents.

Some of these refinements or rationalisations have already been acted upon or introduced in some form or then other and some more would be in the pipeline as Union Government is fully aware and seized of the issues. Once Legislature does not get into micro management say, by regularisation of excess expenditures and changes in demand at sub head level infructuous work all around can be avoided.
The moot point is why these apparently uncomplicated rationalizations cannot be carried out speedily. The authors end their book on the note that a National Fiscal Council, on the lines of GST Council, should be constituted and empowered to articulate concerns and issues with stakeholders on a continuing basis without having to wait for the once-in-five-year report of Finance Commission.
To conclude, the authors have indeed succeeded in not only providing introduction to basics in accounting (including double entry or mercantile system of accounting) in general and Government accounting system in India but also highlighting various reforms that are on the anvil. The book is doubtless a valuable addition to the rather rare literature on what many consider a dreary and technical subject and the authors have brought the subject closer to many young and not so young minds as well as seasoned practitioners of the challenging art of preparing and understanding Government accounts.

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