r

12
Fiscal Administration and Budgetary System in India

Economic administration, financial administration and fiscal admin

istrati on are used as inter-
changeable terms by the layman, but to a serious student of public admin
istrati on the nuances in
each case are specific and complex. The economic administration
is the management of the
economy which includes tools of production, factors behind distribution,
determ inants of exchange
and patterns of consu mptio n in a given society with its intern ationa
l ramifications. The financial
administration is more specific and limited with special emphasis on
comm erce, trade and private
public transactions. The budgetary or _fis~al_admini~t.(~~.Qn is still
_more _specific_vlhereiq the
~Il~g ~nt_ of collection and expendiJ4.re Qf public money_in- term s_gL ~en
t
.treasury traosactians....falls_ior___ 12uhlic=--~oup.t_4bility. The plan admin
istration, the public under-
taking management and mone tary administration of Reserve Bank of
India may touch the fringe
areas of all the three kinds of administration. As the governmental functi
ons expand and explode,
the neat boundaries get blurre d and the border areas of public and privat
e administration determine
which is in a flux because of experiments like performance budgeting,
Programme Planning and
Budgetary System (PPBS) and zero base budgeting. The new budgetary
theories, varied patterns of
control and audit of public expenditure and still more innovative measu
res of resource mobilisation
by the governments characterise the fiscal administration of democratic
states, committed to devel-
opmental taxation of popul ar welfare.
Budgetary Theories _
The classical theory of budgeting advocated surplus budget when
governmental spending was
meagre and remained confined to negative functions of a police state. Both
the revenues and expen-
ditures were listed as few items on the budget and the difference of
surplus revenue was called
'surplus budgeting'. After Second World War, when the developed
countries took to balanced
budgetary theory, the developing countries of so-called Third World started
advocating the the~ry
of deficit budgets for development. Meynard Kynes, a great protagonist
of deficit financin? finds it a
useful tool of economic buoyancy and financial discipline. The poor countr
ies cannot wait for long
to have requisite investments from their meagre savings. The welfar
e agenda of these newly
independent states of Asia and Africa can neither be cut short nor postpo
ned in want 0 ~ resource~
So in addition to taxation and savings, they have taken to public borrow
ings, external ~ssi5tance an
deficit financing to mobilise resources for funding of development
project~ and _infrastructure
building throug h public enterprises. As the development drama unfold
ed its dimensions, the sheer

l
 Fiscal Administration and Budgetary System in India 461

size and se~uential_ ~o°?plica~ion_s re nd~red the d~ficit financing exercise inevitable. The Western
viewing deficit financing in a wider sense includes all government expenditures which are
worId bl. b • h
f anced through pu tc orrowtngs sue as commercial banks or individual corporations. Deficit
~n ncing in. India does not include borrowing from people and commercial banks. They are called
fina • 1udes bo:ro~tng
• ' wh.tc h inc • from the Reserve Bank of India, withdrawal of
as-'rnarket borrowing
rt accumulated cash balances and the 1ssu1ng of fresh currency by the government: In other
~ords, deficit finan~ing. reflec~s d~rect increase in money supply to take care of budget deficit
1

because RBI borr?wtngs imply issuing ~f currency notes on transfer of government securities to the
bank. This creation of money, technically speaking, gives birth to various concepts of deficit
1

financing. The Government of India recognises five kinds of deficit financing, namely:
(1) budget deficit,
(2) revenue deficit,
(3) primary deficit,
(4) fiscal deficit, and
(5) monetised deficit.
t Each concept when practised has overlapping impact on the growth of economy as a whole.
Hrevenue expenditure of the government exceeds the total revenue receipts, which include tax
and non-tax revenues, it is called revenue deficit. Here expenditures also include unproductive
expenditures like expenditure on defence, police, judiciary, subsidies and interest payments which
do not create or accumulate assets. The budget deficit is worked out on the basis of budget estimates
wherein total expenditure is more than the total receipts of the government in a particular budget
year. Here, the total receipts and total expenditures include revenue as well as capital figures on
both the sides. In 1985, the Government of India accepted S.M. Chakravarty report on the Working
of Monetary System in India and defined fiscal deficit as budgetary deficit plus market borrowing,
plus varied other liabilities of the government so it includes the total borrowing requirements from
internal and external sources. On account of colossal increase in deficit financing, some economists
~end to view it as a "non-interest deficit which indicates the primary deficit as fiscal deficit minus
interest amount paid by the government". Similarly, the term 'monetised' deficit is used for the
phenomenon of increase in net RBI credit to the Government of India. In other words, monetised
deficit represents financing by borrowings from Reserve Bank of India.
The review of deficit figures in India, howsoever staggering does not cause panic when devel-
opmental deficit is distinguished from other kinds of deficits, caused by unproductive wars and
~ecessio~ in the economy. Deficit financing to ~inance war operations through taxation and
orrow1ngs do not suffice to meet the cost of war. Hence, the governments have no alternative
f"cept to create new money by printing more currency. Deficit financing in Germany· brought a
~!e quantity of money in circulation i~ t~e ec?nomy. This increased monetary i~come ~d
and for goods. Such a situation results in inflation due to absence of corresponding increase 1n
:ty
d
0 ~ goods which creat~ disaster. In 1930, USA confront~d with s~tu~tion _of grea~ depression

lll~s1ve unemployment. J.M. Keynes has suggested the logic of def1c1t financing to fight cyclical
depressions in capitalist countries and to eliminate mass unemployment. He feels that employment
fiepends on the propensity · for consumption.• To overcome t his, • to
• fi1nancing
• he suggests def"icit
d:nce public works projects. This increases the purchasing power of people and results in effective
and for goods.
462 Fiscal Administration and Budgetary System in India

Keynes called it a 'multiplie~ effect'. In _this ~a!, the econ omy

~an b~ revived and l~fted from
depression throu gh deficit financing. In India, deficits econ omy
of financ1n~ has been resorted to
generate resources to finance investment and a~celerate the pro~e
ss of econo mic development. It has
helped rapid formation of capital for e~o~om1c grow th. break~ng
bottle necks a~d structural rigid-
ities in the economy to increase productivity. It has provided stimu
lus to econo mic development by
financing investment, empl oyme nt and outpu t in the econo my.
How ever, it has a negative effect
also in inflationary rise in prices of goods and services. It is·becau
se the deficit financing increases
the supply of mone y in the econo my witho ut a corresponding
increase in the suppl y of goods and
services. This inflationary character of deficit financing changes
the patte rn of investment by people
and results in forced savings. The adverse affects on balance
of paym ents, increases economic
inequalities and increases credit creation by banks. It is a trans
itional situa tion and as development
adds to the capacity of the people and the natio n the debt
situa tion can ease and income and
employment situations get stabilised.
Placed as we are, we cann ot slow down development nor can
we put the present generation
under unbearable pressures of inflationary costs. So, the midw
ay impels the quest of safe limits of
borrowing and public debt. The capital formation has to grow
throu gh deficit financing but
inflation should not repel people from being involved in devel
opmental endeavours. The econo-
mists are engaged in identifying the safe limit an4 expanding
its parameters. Surplus money by
higher taxation and increased loans is being mopped up. The quan
tity of mone y and the extent of
the rate of grow th are being reconciled. The newly created mone
y is being used for productive
purposes. Shor t gestation perio d projects increase the supply of
goods and check price rise. India is
making efforts to transfer non-monetised sector into mone
tised sector. Distribution of goods
through rationing is only for BPL people. The impo rt of capita
l equip ment w.as encouraged and
people have cooperated in the implementation of policies
for reducing price effect of deficit
financing for capital formation. The LPG policies of the gove rnme
nt have increased production in
private sector and credit creation policies have been integrated
with deficit financing.
The Debt -Trap
Deficit economies nowadays mostly survive on public debt whic
h is a net additive of governmental
borrowing and public loans. The resources like land revenue,
urban ta.xation and public under-
taking earnings are too inadequate to keep the economy devel
opment-oriented. Foreign aid has
shrun k to negligible propo rtion s. Only a variety of loans are availa
ble because of the credit and debt
servicing capacity of the nations. These loans or borrowings
for developmental investments ar~
made available by the bankers, financial institutions and the
people. They represent the form~
promises by the treasury to pay to the holders of these promises
a principal sum and intereSt on t e
principal. They are a sort of withdrawal made in retur n for the
government's promise to repay at~
future date and to pay interest at the interim. To pay the mone
y back is an obligation on the l~ 0
the government. The debt incurred by the government in mobi
has very many varieties. For instance, they may be redeemable
lising resources in the for~ 0 0 :;5
and unredeemable. The _re. ee;a . e
debts have to be paid off at a specified date while the irredeemab
le debts have no time lunit. u:~~
latter case, the interest has to be paid and hence they are called
as perpetual debts in contras~ t~rom
former category whic h makes them terminable. Similarly,
internal debts are bo~o :e f eign
individuals, business houses and financial institution inside the
country. Loans float~ Yb %een
governments and institutions fall in the category of exter
nal debts. A distinction e
 --- --- ~ ~:= .:.- --- --- --- ---
Fiscal Administration and Budgetary System in India 463

debts is made by ca11·ing t h em active

• debts for revenue y1eld1n · · g
ro d • and unprod
ucuve . uctive . .
• · all
. incurr ed 1n fund1·n g wars or managing natural disasters. Gener y,
P weigh t debts
purposes and dead
people are fre~ to
public_ debts are volunt ary in nature . because t~ey ar~ aga~nst securiti~s and
n. Anoth er variety
subscribe. Comp ulsory loan ar_e taken in extrao rdinar y situations to curb inflatio
debts
f debt called as funded debts is a long-term borrow ing payable after a year while unfunded
ed short-t erm debts
~re payable within a year. "The funded debts create perma nent assets but unf~nd
etc. If debts add up
are floating deb~. and they 1_nclude t:easu ry bills and advances from central bank,
must make payme nt
to unmanageabihty the natto~ falls in a debt trap. To avoid this, debt servicing
y.
of interest and repaym ent of instalm ents of debts inside and outside the countr
y. It can be a
The debt trap is caused by unbear able and non-repayable debt burden on a countr
into direct real and
direct money burden or indire ct money burden. Similarly, it can be classified
t and repay the
indirect real burdens. The govern ment collects taxes from the people to pay interes
power from poor
principal amounts to the credito rs. This results in the transfer of purchasing
e effect on the
people to the rich people. The increased economic inequalities also have an advers
tive capacity of
capacity of the people to work and save which results in the decline of the produc
to indirec t real
people. The impos ition of additio nal taxes to repay the external debt also adds
sing power from
burden on the countr y. The payme nt of interest results in the transfer of purcha
ts received by the
one section to anothe r. All money payments, paid by taxpayers and the amoun
and the purchasing
bondholders, cancel out. The external debt also imposes direct money burden
to the direct money
power is transferred from citizens to foreigners. The size of the debt also adds
of the govern ment
burden of debt. Indire ct money burden is increased by the productive spending
nal burden on the
which creates deman d for commodities and services. This imposes an additio
t money burden
community due to rise in prices. ·The size of external debt also imposes an indirec
ic welfare of the
because the debtor countr y's interest payme nt causes a decline of the econom
community.
repaym ent of
One effective way of managing debt repayment is called debit redemption. The
annuities, curren cy
public debts can be made in varied ways, like interest payments, terminable
in? conversion
e~p~nsion or outrig ht repudi ation of the set. Some other methods ~nclude refund
itures or old
stnking funds, capital levy and surplus balances of payments. The incurr ed expend
postpo nemen t
debts can be replaced by new debts and the money burden is accumulated due to the
every year by
?f debt repayment throug h refunding. The government may repay a part of the debt and reduce its
loans
~ssuing terminable annuities. The government can convert old loans into new
including rate of
~nterest payments. Unlike refunding, conversion involves changes in terms of loan
n and the gradual
interest. Debt redem ption fund also called as sinking funds involve~ the creatio
to repay the debt.
accumulation of a separate fund by the government every year from its revenues
ent of old debts by
The government may take recourse to new taxes and raise money for the repaym
levy' or capital
transferring the resources from taxpayers to the bondholders. A special 'redem ption
once for all the
levy may lead to heavy taxation on the proper ty and wealth of individuals; levied
money which can
blearance of the debt. The surplus budget may leave the government with some
s balance of
e used for the clearance of debts. The. repayment of external debt requires a surplu
exchange by
pay~ents (BOPs). Hence , the government should accumulate the necessary foreign
ment may print more
creating export surplus and by reducing imports. As a last resort, the govern
mon~y claims.
~r;~ncy to :epay the de?ts whic~ causes inflation and destroys the value ?f fixed
t or principal or
b 1nternat1onal law being chaotic, some governments may refuse to pay interes
0th - The government may ignore the obligation to repay the loans taken by it.
 464 Fiscal Administration and Budgetary System in India

The Bougettee
t Government is fincl!lce i1; pract ic/ All the aspects of financial admin
istration...an.d budgeting raise
the most sensitive issues o ublic o • y. In 1773, when Walpole opene
d his Bougettee (the Bag) to
present his financial plan of the year, it was called 'opening the
budget'. Since then, democratic
governments have shaped and reshaped this tool of management
which is also called as a tool of
coordination and control. Prime Minister Gladstone speaking on
the floor of Commons once
remarked "A budget is not an exercise in arithmetic but it is a horos
cope of a nation that indicates
trends of future economy. In fact, budget is a financial document
presented to legislature for its
sanction. T~l ativ e aurbarisation of budget entitles the gQ_v~
mm~n.t.to_raise reyenue and spend
allocation of s u ~ ~ As a policy do~l_:lmentt i~ reflects ~h_e
prio_tities <?f ~g~~ rn~n t in
power an<!, ajemocra1is_governE1ent~xer~i~~s i!_s m_a12agerial control
thrg_µgh t_h.e instru!E.Sntality~f
the budget." So, a budget is often ccilled:
.--: -- ~.,..~-
(1) A statement of revenue and expenditure.
(2) A tool of legislative control over executive.
(3) A policy document.
(4) A tool of management, coordination and control.
The budget ensures the financial and legal accountability of the execu
tive to the legislature and
accountability of subordinates to superiors in administrative hierar
chy. It is an instrument of social
and economic policy to serve the functions of allocation, distributio
n and stabilisation which facil-
itate efficient execution of the functions and services of governmen
t. The budget is a tool of
administrative management and coordination. It unifies the variou
s activities of the government
departments into a single whole. As a plan of financing governmen
t operations, several forms of
budgetary devices have been evolved which help the executive
and the legislature to translate
people's will into specific policies and projects for execution. Some
of these budgetary systems are:
{1) Line Item Budgeting (LIB)
(2) Performance Budgeting (PB)
(3) Programme Planning and Budgetary System (PPBS)
(4) Zero Base Budgeting (ZBB)
(5) Sun Set Budgeting
Th~ line item budgeting was a traditional way of putting allocations
under specific items. It
had nothing to do with the purpose of the budget but the amount
granted by the legislature 0 ~ a
specific item was to be spent on that item only. The objective was to
prevent wastage, overspendi~~
and misuse of money granted by the legislature to the executive. The
itemwise classification facili-
tated maximum control of public -expenditure. The object of
line item budgeting was the
accountability of funds, which ensured legality and regu}~,rity
of expenditure. Each !ear, the
Parliament reviewed the figures without revising items but enhancing
incremental allocations.
The new systems like PB and PPBS were suggested by Hoover Comm • • • h
ission in t co ntext of
presidential system of government in US. The ZBB of P.A. Phyrr
owes its origin to private ~ector
but has become popular in countries of the developing world. Simil
arly, sunset way ?f lookm ~t
budget is a reform which has gone a long way to cut on waste and
unwanted expansion of pu ic
activities.
 Fiscal Administration and Budgetary System in India 465

Budgets of governments can be classified on four basis:

(1) Organisation
(2) Functions
(3) Nature
(4) Special IRtrpose
There are elaborate administrative and political organisations of finance ministry, cabinet
committee and parliamentary procedures that formulate, enact and execute government budgets.
Similarly, budget can be seen in terms of functions they perform, the kinds of clienteles they effect
or offer benefits. Special needs are taken care of by revised estimates, supplementary budgets or vote
on accounts, etc. The expansion of state activity makes the budget heavier in terms of outlays and
billion, trillion rupees are earmarked for welfare which is a reflection of ideological commitment of
ruling governments of a country. In this sense, the beneficiaries and victims of budgetary change are
varied sections of society, which need to evolve consensus. Generally, the government budget
effects the following:
(1) Prices of goods and services
(2) Inflationary levels and production
(3) Capital formation and investment
(4) Property relations in society
(5) Planning and speed of planned development
(6) Electoral system
(7) Production, distribution, exchange and consumption
Naturally, special care of details should be made to make the budget conform to sound
principles of management and democratic working. Some of these principles have been identified as
under:
(1) The estimated revenue an9 estimated expenditure should match to produce a balanced
budget.
(2) The legislature should grant money to the executive for one financial year. If the granted
money is not spent by the end of the financial year, then the balance would expire and should
be returned to the treasury. This is called rule of lapse.
(3) All transactions of receipts and expenditure of the government should be fully and separately
shown in the budget otherwise it will reduce legislative control over finances due to incom-
plete accounts.
(4) The current financial transactions of the government should be distinguished from the transac-
tions of a capital nature and the two must be shown in two separate parts: (i) the revenue
budget, and (ii) the capital budget.
(S) The form of budgetary estimates should correspond to the form of accounts such as major
head, subhead and detailed head.
(6) The government should incorporate all its revenues and expenditure in a single budget to
reveal the overall financial position of the govern·ment as a whole, that is, overall surplus or
deficit.
7
() The budgetary estimates should be as exact as possible because overestimating leads to
excessive taxation and underestimating may cause ineffective execution of the budget.
 Fiscal Administration and Budgetary System in India
466

(8) The expenditure and revenue estimates of budget should be prepared on the basis of what is
expected to be actually spent or received during the financial year. ~ti~ ~n cont:ast to 'Revenue
Budgeting' wherein estimates are prepared on a demand and hab1hty basis, regardless of
whether they are actually realised or incurred in that financial year.
These principles lead to other relevant principles called as clarity, unity, periodicity variety
and•purity. In simple words, a budget should be a comprehensive document containing specific
policy details or estimates, easy to execute and easier to enforce accounting and audit ~f these trans-
actions for parliamentary scrutiny.
The fiscal administration of the government through the instrumentality of budget can be
divided into two parts:
(a) Preparation and enactment of the budget, and
(b) Execution and audit of the budget.
Each stage can be further sub-divided into:
(-a) Formulation of the budget by finance minister, and
(b) Passing of the budget by the Parliament.
The execution part can be examined as:
(a) Revenue collection and expenditure control, and
(b) Accounts keeping and audit.
There are a number of ag~ncies involved in the total process and each stage of budget making
and budget execution generates processes which make parliamentary control over public finances
and effective. Then these processes, stages and agencies are different in parliamentary and presi-
dential forms of governm~nt for the simple reason that in parliamentary system like that 9f India
the finance _minister, the cabinet and the prime minister pilot, monitor and defend the budget on
the floors of the two houses which is not the case in the presidential system of USA. The agencies
that prepare and get the budget enacted and passed are:
(1) The Administ·rative Ministries and Departments<)
(2) The Finance Ministry /
{3) The Cabinet
(4), The Planning Commission
(~) The Comptroller of Accounts and C&AG.
(6) The Parliament
. .In -the executive part of the budget, all these agencies play their roles and when the finance
m1n1s~ry exercises control over the purse, the Parliament asserts its detailed control through the
independent agency of the C&AG and various committees of the P~rliament, constituted for
~j
scrutiny and ,review of public expenditure. l
Although India and UK follow parliamentary procedures of budgetary administration, y~t
there are -discernable clifferences in the budgetary systems of the two countries. Unlike UK, India
h~: . ·1
(1) Two budgets, i.e., general budget and the railway budget.
(2) There is no committee of the whole house which discuss the budget as 'committee in supply'
I
and 'committees on ways and means', in a non partisan manner.
 Fiscal Administration and Budgetary System in India 467

(3) The practice of finance minister's speech preceding budget discussions is the other way round
in UK where the Chancellor of Exchequer sums up the debate and does not influence the
decisions of the house.
The railwa~ budget was separated from the central budget in 1921 on the recommendation of
Acworth Committee. Although the commencement of budget year for both the budgets is April 1st
of the year.
Preparation of the Budget
in
It i!,an executive exercise which the administrative ministry and finance ministry undertake
of
collaboration with the cabinet and it~~~~mlttees. l'Iie budget formulation means preparation
~11s , viz., the Finance Bill (Revenues and th~ A ro riation Bill (Expenditure). The drafting
o t ese two bills requires all sorts of statistical facts from drawing and disbursing officers of the
ministries. The ministries collect these facts from their subordinate and attached officers around the
in
format of a performa ·which the finance ministry circulates to all administrative ministries
l
A~gust every year. The heads in consultation with their ~igag_,ce officers {FOs) and financia
advisors {FAs) supply this required information in response to the performa which seeks five kinds
of _specific figures in the following format:
Expenditure of the Revised estimates of Estimates of the Details of increase
Heads and subheads Actuals of the
previous year current year the current year next year and deficits
of appropriation

This information from the ministry presents the past, pre.sent aod future J?at;tems of revenue
and expenditures of the ministn:. The actuals sanctioned, revised and future projections explain
now the ministry looks at its;;,n functions and their financial allocations. The head of the
department, after receiving.J.be~mates..£rem-the..dr..awlng offi~i:s.,_s--Cl"JJ.tini.~---and_ f onsoliaates
-
them for the entire ~e.R.,ar..tment_and_submits-them to the administrative ministry. The adminis
trative ministry further scrutinises the estimates in the light of its general policy and consolidates
of
them for the whole ministry and submits them to the b~~get division of th~. ~.ee,art!llent
the
e~onomic affairs of - ~
min,is_tl:.)'-oU-ina-aG&.

Role of the Finance Ministry

T~e _ministry of fina_!lce is charged with the...resP..2.~sibili~ qf_r~siqg the reSOJl.f~ for the ov~all
~penditure... of, the Go_y~i:fil.ll~!!Ltl ,Ip}ii.!1,3.nd to see to the desirability of the demands of other
epanments, taking into consideration the interest of taxpayers. The taxpayer cannot be left to the
s~ending departments. His interests require a careful consideration of each item of public expen-
:~re in its rel~tion to other items and to ~he available r~sources of the st~te. A vigilant sure_rvision
of
f ome authority not directly concerned in the expenditure needs to be involved. !he ministry
fu~;;, acts as an 'extended arl_!l~f the P~rli~ ~nt ~d ens1:~,!!tat_t~_y,,i§.ll.es~~ the:-Parfa~ent are
the
differeO&~ ll;!!,fu ti~. It watches th~ pro~ress of exp_encl!ture and the .obhgations_ w ~1ch
0
ent_ departments are incurring and gives timely warning 1£ that expenditure or obhgattons are
tttrunnin~ the revenue er engaging the nation too deeply in future years. To discharge these obliga-
( ons, the finance ministry performs the following function in relation to budget making:
(;i ~on~olidation of budget estimates on the basis· of classification.
etailed scrutiny of the estimates including standing charges.
I

Fiscal Administration and Budgetary System in India

468

(3) Collection and collation of figures to ~e arranged into Fina?ce ~ill and Arpropriate Bill.
(4) Review of standing charges, on going schemes and new proJects included in the budget.
(5) Resolution of differences with the advice of the cabinet.
(6) Coordination of estimates with the allocations in Five-Year Plans with the consultation of
Planning Commission. . .
(7) Preparation of economic classification of budget and other documents including the speech of
the finance minister.
Based on the estimated expenditure, the finance ministry prepares the estimates of revenue in
consultation with the Central Board of Direct Taxes and the Central Board of Indirect Taxes. It is
also assisted in this work by the income tax department and the central excise and customs
department. The economic classification of the budget in India usually follows the following
pattern:
(1) Capital formation through budgetary resources.
(2) Various levels of budgetary receipts and appropriations.
(3) Resource mobilisation by Central government.
(4) Savings of the Central government.
(5) Total expenditure of the Central government.
(6) Final expenditure of the Central government.
The finance ministry scrutinises all proposals emanating from the spending departments in so
far as they have financial implications. This enables the ministry to have control over the formu-
lation of policies of other departments. Generally the scrutiny exercised by the ministry of finance
is "very broad in nature ... and is more concerned with the overall financial implications of the
proposal and its impact on the expenditure". Thus, every proposal or policy having financial impli-
cations has to be scrutinised by the finance ministry and the cabinet attaches weight to·the opinion
of the ministry. After all the proposals have been received from the spending ministries, it proceeds
to defermine priorities of the schemes and suggests economies where possible, taking into account
the standing and continuing charges. Its main concern is to obtain "proper balance of expenditure
between services, so that greater value could be obtained for the total expenditure by reducing the
~oney spent on the service and increasing expenditure on another,,. To secure a uniform standard
in the measurement of the financial sacrifice involved in the activities of all departments, "the
general criteria adopted" in the selection of new proposals are:
(1) Whether the costs of individual items is reasonable?
(2) Have all parties interested been consulted?
(3) Is the new expenditure necessary or desirable?
(4) Is the ministry competent to propose such an expenditure?
(5) Does the proposal merit an expenditure.from Public funds?
(6) Will the financial arrangements be desirable and economical?
. !t is on t~e answers given to these questions that the ministry of finance formulates its
decisions. The impo.rta~ce of .its control lay in see~ing justification for every proposal from the
departments ~roposin~ it. This control helps to make the departments careful in what they put
foi:ward. ~quip~ed wit~ these answers, the ministry of finance proceeds to review the total
~st1~~te~ 1~ the light 0 ~ likely reven_ue for the year. It can suggest reduction or as technically known
cuts if it finds the estimates too high or 'inflated'. It may also reject proposals which its scrutiny
 .
Fiscal Administration and Budgetary System m .
Ind1a 469

arin the Fi . . .
may reveal as technically 'uns oun d'. While prep eng . . nanc: and Appropr~ati bn bills, the
ministry has to keep several constitutional requireml'dts nd t
tdn mt • FirS of all, there 1s a non- votable
of the bud get calle d as char ge on th C Th· h b
1 ate Fun d of I d'
part ded in the App ropr iatio n Bill and eth onso f . . n ta. is money as to e
• , d , e tnance ministry has to prov ide the expenditure
provt d' d h d' f I d' Th ch arged expen-
'charge· an t eblexpben httur e ma e from the Consolidated Fund o n 1a. e
p 1• is, it can only be disc usse d by the Parl iam ent, while the
diture 1s non-vota e Yt e ar iamen~, that • udes:
l
list of the charged expend'1ture inc
other type has to be vote d by the Parliament • The
t and othe r expenditure relating to his office.
(1) The emo~uments and allowances of the Presiden
sala ries and allo wan ces of the chai rma n and the deputy chairman of the council of states
(2) The
se of People.
and the s~eaker and the dep uty speaker of the Hou
es of Supreme Court.
(3) . The salar~es, allowan_ces and pensions of the judg
exercises jurisdiction in relation to any area
(4) !he pens!ons of th~ Judge~ of Hig h Cou rt ,which
included 1n the Indi an terr itor y.
ller and Auditor-General of India.
(5) The salary, allowances and pension of the Comptro
rman and members of the Uni on Public
(6) The salaries, allowances and pensions of the chai
Service Com mis sion .
Court, the office of the Comptroller and
(7) The administrative expenses of the Supreme
Service Commission including the salaries,
Auditor-General of Indi a and the Uni on Public
these offices.
allowances and pen sion s of the persons serving in
India is liable including interest, sinking fund
(8) The debt charges for whi ch the Government of
ure relating to the raising of loans and the
charges and rede mpt ion charges and othe r expendit
service and rede mpt ion of debt.
ee or award of any cou rt or arbitral tribunal.
(9) Any sum required to satisfy any judgement, decr
ent to be so charged.
(10) Any othe r exp end itur e declared by the Parliam
spend any money with out the authorisation
The Gov ernm ent of India can neit her collect nor
nt. Nat ural ly, the pass age or appr oval of budget estimates has to be ensured by the
of Parl iame
nt and furt her ratif icat ion by the Pres iden t of India is also needed. For this, the Consti-
governme
edure in Articles from 112 to 117 which are
tution of India has laid dow n an elaborate proc
reproduced below:
year cause to be laid before both the Houses ?f
(l) The President shall in respect of every financial
and expenditure of the Government of India
Parliament a stat eme nt of the estimated receipts
l Statement' (Article 112).
for that year. This is kno wn as 'An nua l Financia
the recommendation of the President (Article
(i) No demand for a gran t shall be made except on
113).
3
No mon ey shal l be with draw n from the Con solidated Fun d of India except appropriation
( )
·
made by law (Article 114).
4
( ) No_ Money Bill imposing tax shall be intro
duced in the Parliament except on the :ecommen-
introduced in Rajya Sabha (Article 1ll).
dation of the President, and such a bill shall not be
law (Article 265).
[;~ No shall be levied or collected except by auth orit y of
ot increase it.
(7) Parliament can reduce or abolish a tax but cann roles or position of both the houses of
the Constitution has also defined the relative
get (i.e., the Annual Financial Statement) in
Pt!i ame nt with regard to the enactment of the bud
t e following way:
 1111111
I
470 Fiscal Administration and Budgetary System in India

(a) A Money Bill or Finance Bill dealing with taxation cannot be introduced in
the Rajya
Sabha, it must be introduced only in the Lok Sabha.
(b) The Rajya Sabha has no power to vote on the demand for grants; it is the exclusiv
e
privilege of the Lok Sabha.
(c) The Rajya Sabha should return the Money Bill (or Finance Bill) to the Lok Sabha
within
fourteen days. The Lok Sabha can either accept or reject the recommendations made
by
Rajya Sabha in this regard.
(8) The estimates of expenditure embodied in the budget shall show separately the expend
iture
charged on the Consolidated Fund of India and the expenditure made from the Consol
idated
Fund of India (Article 112). .
(9) The budget shall distinguish expenditure on revenue account from other expenditure
{Article
112).
(10) The expenditure charged on the Consolidated Fund of India shall not be submitted to
the vote
of Parliament. However, it can be discussed by the Parliament (Article 113).
Generally, a financial bill may be considered as any bill which relates to revenue or
expen-
diture. However, the Constitution of India uses the term in the technical sense and prefers
the term,
Money Bill which, in tum, has been defined under Article 110. A bill is deemed to be a
Money Bill if
it contains only provisions dealing with the imposition, abolition, remission,
alteration or
regulation of any tax; and the regulation of borrowing of money or giving of any guaran
tee by the
Government of India, or the amendment of the law with respect to any government
financial
obligations; the bills relating to operation of the Consolidated Fund or the Contingency
Fund of
India; the appropriation of m_oneys out of the Consolidated Fund of India, or the declarin
g of any
expenditure as charged and the receipt of money on account of the Consolidated Fund
of India or
the Public Accounts of India generally belong to the category of a Money Bill which
requires the
certification of the speaker.
Article 109 of the Constitution lays down that a Money Bill shall not be introduced
in the
Rajya Sabha. After a Money Bill has been passed by the Lok Sabha, it is transmitted
to the Rajya
Sabha for its recommendations. In turn, the Raj ya Sabha, within a period of fourtee
n days of its
receipt of the bill, should return the bill, with its recommendations to the Lok Sabha,
which may
accept or reject all or any of the recommendation of the Rajya Sabha. In case any of the
recommen-
dations is accepted, the Money B.ill shall be deemed to have been passed by both Houses
with the
said amendment. On the other hand, if no such recommendation- is accepted by the Lok
Sabha, the
Money Bill is deemed to have been passed by both Houses in the form in which it was
originally
passed by the Lok Sabha. If a Money Bill, passed by the Lok Sabha and transmitted
to the Rajya
Sabha for its recommendations, is not returned to the former within a period of fourtee
n days, it is
deemed to have been passed by the Rajya Sabha. Thus, in matters of Money Bills, the
primacy and
supremacy of the Lok Sabha stands established.
.
Under Article 111 of the Constitution, the President can withhold assent to a 'non-money'
bill
passed by the Lok Sabha and he may :eturn such a bill to the House for reconsider~tio
n, and, _if it is
passed again by the House, with or without the amendments suggested by the Preside
nt, and 1s sent
to him for assent, the President cannot withhold assent to it. This discretion of withho
lding assent
or suggesting amendments has been denied to the President by the Constitution, in
respect of
Money Bills.
 Fiscal Administration and Budgetary System in India 471

All this implies that Money Bill cannot be initiated in the Rajya Sabha but it can recommend
amendn1ents to Lok Sabha which may or may not be accepted. There are money matters which do
not deal exclusively with matters outside the purview of Article 110. They too cannot be intro-
duced in Rajya Sabha except on the recommendation of the President. The Rajya Sabha can amend
or reject such a Financial Bill subject to the limitation that an amendment other than for reduction
or abolition of a tax cannot be moved in either House without the President's recommendation. In
the case of the second kind of Financial Bills, which involve expenditure from the Consolidated
Fund, either House has powers to reject or amend it; but, it requires the President's recommen-
dation before it can be considered (as against before it can be introduced).
According to Article 114 of the Constitu tion, when the demand for grants has been voted for,
the Appropriation Bill authorises the withdrawal of the funds from the Consolidated Fund of India,
as regards both the votable and the charged items. The bill includes all those items which have
already be~n included in the demands for grants of individual ministries and is a replica of the
statement of those amounts , which had earlier been approved by the Parliament. No amendments'
can be proposed to this bill because that would amount to altering the once decided amount of a
grant. The Appropr iation Bill provides an occasion for a full-fledged discussion on subjects chosen
by the various parties in the House.
The Budget in Cabinet
The cabinet gives its final aeeroya l to th_eJ:i..~ce.BillandAppropriation Bi1Lt_0.-b_e_presented in the
------=::::, ---,..-----7~
Parliament. Before this, the draft bills are debated and discussed to finalise the quantum of deficit
-

and the state of loans and borrowi ng along with taxation proposals. The policy decisions are
concretised in terms of budget allocations and adjustments are made accordingly. The finance
minister convinces his colleagues about the desirability of cuts and enhancements. Some estimates
are revised on the basis of percentage changes necessitated by policy or plan allocation revisions.
The budget is a secret docume nt and leakage can cause disaster to the economy. Hence, Prime
Minister has a special responsibility to get the differences resolved and prepare the basic documents
for parliamentary approval.
The Budget in Parliament
IGs_abo called as 'enactment5_of_ by_gget: wbjch· _m~~nS_fQ!lY.,etting_th~ two ,bi_l ~ts. The
£assage in Parliame nt has five stages:
(1) Presentation of budget
(2) General discussion
(3) Voting on demands for grants
(4) Passing of Appropr iation Bill
(5) Passing of Finance Bill
Article 112 of the Constitu tion enjoins upon the President cf India to get the budget presented
~efore both of the houses of Parliame nt. Being a Money Bill, it has to be presented to the Lok Sabha
first and must classify the charge on the Consolidated Fund and expenditure on the Consolidated
Fund of India separately. There is a prescribed legislative procedure in each house and the Raj ya
Sabha should not delay it for more than fourteen days. The Consolidated Fund, Conting ency Fund
and public account transactions are updated to appraise the Parliame nt which operates the
I'

472 Fiscal Administration and Budgetary System in India

Consolidated Fund at the P~esident' s disposal and takes stock of public account assets and liabilities
without voting on them. The budget in India had to pass through three readings without any
committee stage. The first reading is called the presentation of the budget which includes the
following documents:
(1) The economic survey report,
(2) Economic classification of the budget,
(3) Annual reports of the ministries,
(4) An explanatory memorandum on the budget,
(5) An Appropriation Bill, and
(6) A Finance Bill containing the taxation proposals.
· The presentation of the budget to the Lok Sabha is in two· or more parts, and each part ends
within the manner as if it were the budget. Accordingly, the budget is presented as Railway Budget
and as General Budget. The introduction of Railw.ay Budget precedes that of the General Budget.
While the former is presented to the Lok Sabha by the railway minister in the third week of
February, the latter is presented to the Lok Sabha by the finance minister on the last working day of
February. The finance minister presents the General Budget with a speech known as the 'budget
speech'. At the end of the budget speech in the Lok Sabha, the budget is laid before the Rajya Sabha
which can only discuss it and has no power to vote on the demand for grants.
The general discussion on budget takes place during budget session. It lasts for three to four
days. During this stage, the Lok Sabha can discuss the budget as a whole or on any question of
pri~ciple involved therein but no motion is moved or submitted for the vote of the House. The
finance minister has a right of reply at the end of the discussion. After the general discussion on
budget, the Lok Sabha takes up voting of demands for grants. They are presented ministrywise and
a demand becomes a grant after it has been voted. The voting of demands for grants is the exclusive
privilege of the Lok Sabha and not of Rajya Sabha. The voting is confined to the votable part of the
budget but the expenditure charged on the Consolidated Fund of India can only be discussed. The
General Budget ·has totally 109 demands (103 for civil expenditure and 6 for defence expenditure),
the Railway Budget has 32 demands. Each demand is voted separately by the Lok Sabha. During
this stage, the members of Parliament can discuss the details of the budget. They can also move to
reduce any demand for grant. But increase or upward revisions of estimates are not permissible. The
members who propose reduction of grant bring three kinds of cut motions which are either
withdrawn or dropped because their passing will be tantamount to a vote of no confidence i~ the
government. Still to attract the attention of the government, the cut motions are moved to hnng a
moral pressure on the executive. Ihese cut motions are:
~ n Cut Motion: It expresses a specific grievance which is within the sphere of responsibility
of the government. It states that the amount of the demand be reduced by Rs 100. On the 26th
day, the Speaker puts all the remaining demands to vote and disposes them whether they have
b~ discussed by the members or not. This is called as 'Guillotine closer'•
9J,/[>o/icy Cut Motion shows disapproval of the policy underlying a demand. It states that the
._. amount of the demand be reduced to Re 1.
_~nom y Cut Motion asks for economy in the proposed expenditure. It states that the ~ount
of the demand be reduced by a specified amount which may be either a lump sum reduction or
omission or reduction of an item in the demand.
 Fiscal Administration and Budgetary System in India 473

Article 113 and 114 provide for the presentation of various kinds of demands for grants by the
Parliament. Some of them are:
(1) Vote on credit
(2) Vote on accounts
(3) Vote on exceptional grants
(4) Supplementary grants
(5) Excess grants
(6) Token grants
In addition to the budget, various other kinds of grants are made by the Parliament under
extraordinary or special circumstances. When the amount authorised by the Parliament through
the Appropria tion Act for a particular service for the current financial year is found to be insuffi-
cient for the purposes of that year supplementary grants are sanctioned by t_he Parliament.
Similarly, when a need has arisen during the current financial year for additional expenditure upon
some new service not contempl ated in the budget, Parliament may consider additional grants.
Excess grants are_gi.ven..~hen._I!!.9n_e_y Ji~s be~t1; w,sm.. gn..au~ sewice.during_a£nancial,¥,,eai;..ia.excess
~he'AD.o unt.grante d £or tbt-it...s~..e.!l&.tlJe bl}_dgruouhat..~eac. It is voted by the Lok Sabha after
~e financial year. Only if approval by the Public Accounts Committe e to meet an unexpected
demand upon resources and if the account is huge or of indefinite character, the vote on credit is
resorted to like a blank cheque given to the executive by the Lok Sabha. For special purposes that
form no part of the current service of any financial year, exceptional grants can be made. Parliament
makes token grants available if funds to meet the proposed expenditure on a new service are
available by reappropr iation. A demand for the grant of a token sum (of Re 1) is submitted to the
vote of the Lok Sabha and if assented, funds follow. Supplementary, additional, excess and excep-
tional grants and vote of credit are regulated by the same procedure which is applicable in the case
of a regular budget.
The Appropria tion Bill and Finan~e-Bill _':fte!_ ~ba~e ~are put ~,q_v<?te on t_he fl.2.0J;. ,oLthe
Parliament sequentially. The Appropria tionllill comes first and, th~n the Fjnance Bill has to make
revenue provisions for the stipulated exEenditure sanction~fl.l>.YJ.he...~i:,lj~eru. No amendment
can be proposed to the Appropr iati~ill in ei'tlier house of the Parliament which will have the
effect of varying the amount or altering the destination of any grant voted. The Appropriation Bill
becomes the Appropri ation Act after it is assented to by the President. This Act authorises the
payments from the Consolida ted Fund of India. If the government needs money to carry on its
normal activities after 31st March, the Constituti on authorises the Lok Sabha to make grant in
advance in respect to the estimated expenditure for a part of the financial year, pending the
enactment of the Appropri ation Bill. This 'Vote on Accqunt' is psssed after general dis.cussion on
httdget and is generally granted for two months for an amount equivalent to one-sixth of the total
estimation.
The Finance Bill when passed legalises the income side of the budget. According to Provisional
Collection of 'faxes Act 1931, the Finance Bill in India has to be passed within 75 d~. The bill
gives effect to suppleme ntary financial proposals£or any period. It is a money bill for procedural
purposes and unlike the Appropria tion Bill the members can move amendments to reject or reduce
a tax in a prescribed manner. The proposals for new taxation require a previous consent of the
President before presentation. The procedures for Railway Budget and Central Budget are identical.
'
\

474 Fiscal Administration and Budgetary System in India

The Execution of the Budget

Execution of budget means raising the revenue and controlling the spending ?f government _depart-
ments in such a manner that they rem.ain within bounds of the budget or desires of the Parliament.
The various agencies responsible for this execution task are:
(1) Administrative ministry
(2) Finance ministry
(3) Comptroller and Auditor-General of India
(4) Parliament and its committees
· After the budget has been passed, the responsibility for the control of expenditure from
thereon lies on the administrative ministry and ~ach head of the department who is aided and
advised by an internal financjal adviser, a representative of the ministry of finance in the discharge
of his responsibilities. During the execution of the budget, it is the responsibility of the ministry of
finance to ensure that the amounts are spent properly and economically. It has also to see that the
achievement is in accordance with the plans included in the budget of the other departments. Prior
consultation of the ministry of finance is sought whenever any department wants to spend on
schemes whose estimate exceeds a particular limit. This is technically known as 'expenditure
sanction'. Similarly, prior approval of the finance ministry is essential before amounts can be trans-
ferred from one sub-head to another, technically know:n as 're-appropriation'. .Besides, the ministry
of finance, through its financial adviser, conducts financial reviews after every quarter in order to
know the progress of expenditure. This enables the ministry to get a review of the performance of
other departments in monetary terms. It also helps the ministry of finance to forecast next year's
budget. The other matters arise in various specified fields of expenditure such as grants-in-aid,
write-off of losses, waiving of recoveries, contracts, inspection of establishment of other. ministries
through staff inspection unit. The control exercised by the ministry of finance helps in promotion
of a financial discipline in the country. In almost all fields where risk is involved in spending huge
amounts, the shadow of the ministry of finance is present though it minimises the effect of financial
delegation of powers.

Collection of Revenue
The execution of the Finance Bill, i.e., revenue side of the budget requires three kinds of activities
which again involve various administrative agencies. These activities are:
~ollection of money as receipts,
~ ~ t e d y of public funds collected, and
_J3y'Disbursement of funds according to the procedure.
F~ance ministry exercises overall ~ontro! ..an~ supervisiQn over the.m,ac~ed w~th
the collection of taxes through_the Central Board of Direct Taxes and...tht Cenm,1_ Board of Excise
a~ustom~. The d~ar:iment of reyenue administer_s]etailsJWeserVe Bank of India, the ~ta_t_e__
Ba~k of India, the district treasuries and the sub-treasuriesµe_._engagedjqJ,be.,,custody an~d_Qt!tn-
but1on of funds. The Constitution of Iydia provides for the custody of public funds of the central
government:
(1) Consolidated Fund of _India (Article
(2) Public Account of In1ia (Article 266}
(3) Contingency Fund of India (Article 267) /
 Fiscal Administration and Budgetary System in India 475

All receipts ar~ credited .and all payment s are debited to CFI. Revenues received by the
Government of India; loans raised by the governm ent by the issue of treasury bills, loans or ways
and means_ of advances; and ~9neys received by the governm ent in repayme nt of loans contribu te
the consolidated fund of India. All authoris ed payment s of the Governm ent of India are made out
of this ~d and ~o money can be appropri ated, issued or drawn from this fund except in accor-
dance with a parliame ntary law. All public moneys (other than those which are credited to the
Consolidated Fund of India) received by or on behalf of the Governm ent of India are credited to the
Public Account of India. This includes providen t fund deposits, judicial deposits, savings bank
deposits, departm ental deposits , remittances, etc. This account is operated by executive action and
payments are mostly in the nature of banking transactions.
The Constitu tion authoris es the Parliame nt to establish a 'Conting ency Fund of India' into
which are paid sums as may be determin ed by the law. The Parliame nt has enacted the Co~ting ency
Fund of India Act in 1950 and it is placed at the disposal of the President, who makes advances out
of it to meet unforese en expendit ure. To collect revenue as desired by the budget, the finance
ministry has devised machine ry for tax administration and determin ation of procedur e. Assessment
( of tax, that is, preparat ion of a list of persons liable to pay tax and determin ing the amount to be
paid by,)hem is conduct ed on annual basis. Objections and appeals are heard and realisation of the
amount. due from the various assesses is put into the treasury. Realisation of arrears and dealing
I

with the defaulters is a part of administration.

Contr.2!._Q_w f!lb.lii_Exp_enditure
It is also called 'Executi on of Bud~t' which ipeans implel}lentation of tpe Ape_ropriation Bill by the
various ministries under the supervision of the minista of finance. The finance ministry is the
cerural financial agency of the union govern~ ~ni ind has the ~verall responsibility regarding
expenditure of public funds. Because of the concentration of fiscal authority · the ministry enjoys
tight control over the purse. There are prescribed rules of procedures and the compete nt officials
are entitled to disburse money in prescribed limits. Notwith standing some delegational freedom,
the Finance Ministry controls the administrative ministries through some of the following
methods:
(1) It sanctions expendit ure, subject to powers delegated to spending ministries.
(2) It gives acceptance of provisio n in budget estimates.
(3) It prescribes a financial code for internal audit system of the ministries.
(4) It approves policies and program mes in principle.
(5) It offers financial advice through integrated financial advisor.
(6) It permits re-appropriation of grants.
The Integrated Finandal Advisors
To play this role effectively and efficiently, the finance ministry has a network of controlli ng
officers. The head of the departm ents is the chief disbursing officer who withdraws funds on
receiving financial sanction from the compete nt authorities. The rules elaborate the powers pf
drawing and disbursing officers in each ministry. The accounting section of the administrative
machinery operates the payments arid maintains accounts books for further audit. Re-appropriation
requires the formal approval of the finance ministry or the administrative ministryI departm ent.
Re-appropriation is permissible within the same grant only and is not permissible from charged
 476 Fiscal Administration and Budgetary System in India

items of expenditures. Expenditure on a new service not ~rovided for in the budget does not fall in
re-appropriation category. It is not allov:ed between different gran~ voted by the. Lok Sabha.
Similarly, expenditure which are not sanctioned by the ~ok Sabha and involve outlays in the future
financial year or are between the r~v~nue and the cap1:al parts of_ the ~udget. cann~t be r~vised
through executive act of re-appropriation. A s~heme of integrated f1nanci~l adv~sors 1s :vork~ng in
all the ministries of the central government since 1975. The Integrated F1nanc1al Advisors 1n the
ministries are of the rank of joint secretary or additional secretary. They are selected jointly by the
administrative ministry and finance ministry and their confidential reports are written jointly by
both the ministries. The IFA is under the dual control of both the ministries and also answerable to
both. He assists the administrative ministry in the exercise of enhanced delegated financial powers
and his advice can be overruled by the se.cretary of the ministry. But outside the scope of delegated
powers, he functions under the general direction of the finance ministry and has direct access to the
finance secretary. Some of the functions of IFA include preparation of budget, scrutiny of projects
and programmes for the approval of finance ministry and post-budget vigilance. The formulation of
performance budget of the ministry and monitoring of the progress of schemes through assistance
to the secretary in discharge of his responsibility as the chief accounting authority of the Ministry is
the duty of the finance advisor.
Parliamentary Control
There is a prescribed P:~~gyre~by...:whi.~h l~..f in_agc~_fil.!!.~n.q_J..!}.~A£E[O£Q~tion, Bill are e.resented,
debated and .P-1-~~- The Parliament being sovereign -gives grants to the executive, which makes
~ h e s e demands can be of varieties lik~ ~he demands for grants, supplementary grants,
additional gr:~tsz. ~c. The estimates of expenditure, otllertlian""thos·e·sr-e11fte&fu"r ftieConsolidated
Pund of India, are presented to the Lok Sabha in the form·-ofdemands for grants. The Lok Sabha has
the power to assent to or to reject, any demand, or to assent to any demand, subject to a red_µction
of the amount specified. After the conclusion of the general;i~bate Of! th~_budg~t, the demands for
grants of various ministries are presented to the Lok Sabha·. Formerly, all demands y;e~e_introduced /
by the finance minis~~r; but, now, they are formally introduced by the ini~ist~rs of the-concenie~
deparinients. These demands are not presented to the Rajya Sabha, though a general debate on the
budget takes place there too.
A vote on account is a rant a roved by the Parliament in advance of the detailed exami-
nation of v.anous emands _presente _ to it. ince'1egislati~e 'programmes proceed on sc'hedule and
Caim~t be ~urried, merety·to ena6!e t:ne executive to get its grants exactly at the beginning of ~he
new f1n_anc1al ye~r' the executive is given an advance grant to meet its temporary and other running
ex~e~d1ture until the demands are voted by the legislature. The idea is that no gove_rn~ental
activity s_hould be held up for want of funds. Such g~ants are passed, after a detailed ~sc~ssion in the
Hou~e, since no money can be taken without the sanction of the legislature. It again gives a ch~ce
to discuss matters of policy' to ventilate grievances and to propose cut motions. In practice,
howe:er, the approval of such grants in the Parliament has been a smooth affair on almost all
occasions.
_ The Constitutio~ P;ovides that the Parliament may make a grant for mee~ing ~- unexpected
demand u~on the nation s resources, when, on account of the magnitude or the indefinite c~aract_er
of the service; the demand cannot be stated with the details ordinarily given in the annual financial
statement. An Appropriation Act is again essential for passing such a grant. It is intended to me~t
specific purposes, such as for meeting war needs. The process of reappropriation consists in
 .
F1scal Administration and Budgetary System in India 477

approp~iating f~om one head, wh~re there is saving, to another where there may be need for more
expenditure. It is a proc~ss wh~rein the total amount of the grant remains the same but, there are
internal transfers and shifts _which change the composition of the demand.
Another related techniq~e of control is through token grants. They are variations of supple-
mentary grants and are submitted when the proposed expenditure is not within the ambit of the
demand alrea~y approved, bu~, .can be met from the savings within that demand. Thus, this demand
also does not involve any additional expenditure.
~ontrol of the ministry of finance is essentially executive and bureaucratic. The sovereign
Parliament which auth~~ises the e~~cutive government to spend public funds has the right to know
and c ~ the obserrat1ons rhat can take place-in the-fe-Fm--0t:misspindi.ii.g..,-misappropriatioJ! and
improp~r ~tilisation of public funds. To have thi~jo.dependent-and ex-pert-coat-rol,-the Constituti~n
under Article 148 has created a watchdog which acts as a friend, philosopher and guide of the
1 Parliament. The office of the Comptroller and Auditor-General of India, which was created as early
as 1757 by Lord Canning had the purpose of introducing rigour and uniformity in the accounting
and audit systems of accounts. The Government of India Act 1935 accorded it the status of a judge
of Federal Court, which the republican Constitution maintains by mentioning that "f~~G wi}lbe
appojoted buh.e. PresidenJ 9.f_IgJ_gr_~.,p.~r:iQ.d...gf.,,fil!J'_g,i;-~Qt:..YP t.o.the_age.,qf...~"-1":§_W.,.,gicpe~r is
0

earlier". He ccl_u~moyegJr.Q!!l~o.ffj__ce..inJike.manner and onJike goounds,.as4114erotse of a judge

ofJhe Supr,~!!}e C2-.-l!!!:....Th!~ makes him ineligible for reappointment in any office of profit. His
independence has been guaranteed by the Constitution and removal is possible only by an order of
the President passed after an address by each house of Parliament supported by a·majority of the
total membership of the house and by a majority of not less than two-thirds of the members of the
house present and voting on the ground of proved misbehaviour or incapacity. His salary and
service conditions also cannot be varied to his disadvantages after he is appointed and he is not
,.
I
eligible for further office under the Government of India or of any state, after he leaves qffice.
I
l Q The scope of activity domain of the C&AG is quite comprehensive and wide. Before 1976, he
was the chief accounts officer as well as the Auditor-General of India. The 1976 refor-m has
separated the two functions and today he is the chief auditor of accounts. His original. functions
included, prescdption of forms of accounts, performance of duties in relation to accounts and
reporting to President/Governors on the accounts of the union and states. Accounting in modem
~arlance means keeping of systematic record of transaction to protect handling of funds and facil-
itate adjustments of expenditure. It is an aid to audit and reveals financial conditions for reporting to
higher authorities. Accounting as a system classifies and summarises transactions for determination
of fidelity and to keep the budgetary expenditure within limits for purposes of future policy
making. Audit on the other hand is "an examination of the ace unts to discover and re ort to the
legislature t e unaut ,orise 1 e a or irre u ar ex en itures and SJ nd •n n i }?LlCJ:ices on the
P:_,rt o • • ration. It is a process of ascertaining whether the administration has spent or is
spending its funds in accordance with the terms of the legislative instrument which appropriated
the money" .
., The C&AG heads the Indian audit and accou_!!!J_epai:£ui~J1t. He !~ ~ssisted QY_nyo_deputy
C&AGs of India, one ·of whom istheehaimiat}_of_b.u~it B93r_d. There are five additional deputy
d&AGs controlling assi~tant - co,~p'tr~fl~rs, director-general, principal directors, directors and
deputy directors. The states have· their respective offices of accountant gener~Lwith corresponding
0
f"'ers and functions. The C&AG Activity Report 1991-92 presents the organisational set-up as
0 llows:
 Organisational Set-up of Comptroller and Auditor General of India: Organisational Setup
....00
1
DAI I DAI-CUM
CHAIRMAN
AUDIT BOARD

I ADAI I J
I Ai°AI
I A~AI I ii ADAii
DG -r,
H ~·
+
I
(AE&C)
-
n
QI

... •
)>

7 CL
3
--
!Pol !Pol
iJ
::,
PD PD PD
(INDT)
PD PD PD PD --
v,
(STAFF) (PPRE) (OT) INS) ) (RS-I) (O&M&T) """
@
!:t.
0

... ...
::J
.____ QI
;, ::l
0..

DIRECTOR DIRECTOR DIRECTOR 1-1 DIRECTOR DIRECTOR DAI-CUM AND cc

L-.j DIRECTOR (REPORT STATE) {AB) SEC. TO CAG
C:

l
(CUSTOMS) (OT- I) (EDP} CL
(PERSONNEL) (I) •
S'
DIRECTOR DIRECTOR '<
+
+I AC{P) l DIRECTOR
(CENTRAL
(OT- II) DIRECTOR
(ACCOUNTS)
1--1 (EXAMINATIONS)
DIRECTOR
(COMMERCIAL) 1------..;
V,

"""
(I)

-
DIRECTOR
DIRECTOR I
EXCISE) DIRECTOR
(DT- SR) 1:--1 {TRAINING} --
3
::,
{RAILWAYS) DIRECTOR : :J
1--1
DIRECTOR (COMMERCIAL)
CL
-·
QI
(EDP}
AC (N} - ASSTT. COMPTROLLER & DG - DIRECTOR GENERAL
AUDITOR GENERAL (NON- DT - DIRECT TAXES DIRECTOR DY. DIRECTOR 1 1
GAZffiED) PD - PRINCIPAL DIRECTOR l--1 (O&M) (HINDI-I)
AC (P} - ASSTT. COMPTROLLER & INDT - INDIRECT TAXES
AUDITOR GENERAL INS - INSPECTION _
DY. DIRECTOR
(PERSONNEL) MSAB - MEMBER-SECY. AUDIT BOARD
(HINDI-II)
AOAI - AODL. DY. COMPTROLLER & RC - REPORT STATE
AUDITOR GENERAL RS - REPORT STATE
DAI - OY. COMPTROLLER & AUDITOR SR - STATE RECEIPTS DY. DIRECTOR
GENERAL OF INDIA (COST) I+--
Source: CAG Activity Rcpon, 1991-92 in Arora, Indian Public Administration.
 479
Fiscal Administration and Budgetary System in India

was:
The pre-1971 situa tion perta ining to accounts functions
(1) Preparation of annu al accounts,
(2) Maintenance of accounts,
(3) Submission of annu al repo rt to the President,
(4) Offering assistance in the prep arati on of accounts,
(5) Providing relevant infor mati on.
ing:
Similarly, in the area of audi t the C&A G has been audit
n territories,
(1) The accounts of centr al and state governments and unio
and publ ic accou~ts,
(2) Reporting upon all expe nditu re from contingency fund
n and state departments, and
(3) Reporting on all trading, prof it and loss accounts of unio
tantially financed from gove rnme nt
(4) Reporting on the receipt of expenditure of bodies subs
orati ons after 1971.
revenues, gove rnme nt companies and selective public corp
ing centres to equi p its staff for audit
For this, it has a wide field netw ork of offices and train
C&A G activity repo rt 1992-93 is repro-
efficiency. The func tiona l char t of IAA D as appearing in
I
1 duced on the following page.
1976 and Afte r
of accounts from audit. The comb inati on
There is a long histo ry behi nd the demand of separation
rule in India. The Inchcape Com mitte e
of two functions was cond emne d as a public of British
mission (1929) and later on a series of
(1923), the Mud dima n Com mitte e (1924) and the Simon Com
k Chan da stood for the muc h needed
estimates comm ittee repo rt including the former C&A G Asho
separation and independence on the following grounds:
(1) The separation will increase the independence of audit.
exceed appr opria tions sanctioned by
(2) The separation makes the spending departments not to
the Parliament.
ments in appr opria te comb ine and
(3) The system had inhe rent danger of frauds and err1bezzle
executive func tion in the quasi-parliamentary function.
it will conc entra te on audit functions
(4) It will increase the efficiency of audit department and
only. ern govern-
st the practice of mod
(5) It placed the C&A G in a embarrassing position and was again ,

ments.
management will impr ove efficiency.
(6) The use of accounting in decision-making and financial
ove th~ system of accounting.
(7) The accounting responsibilities to departments will impr
tive form ulati on of revised estimates.
(8) It will facilitate close budgeting and shall make more effec
oted the gove rnme nt to take two
The Com ptrol ler and Auditor-General Act, 1976 prom
decisions:
, and
(1) To launch a scheme for separation of accounts from audit
of advisory committee.
(2) To transfer employees work ing in IAAD with the help
In 1971, the Com ptr~l ler and Auditor~General's (dutie
s, powers and conditions of service) Act
ved a scheme of departmentalisation of
was passed. In June 1975, the Gove rnme nt of India appro
and departments. It was completed by
accounts in a phased mann er in all the central ministries
 Functional Chart of IAAD Office of the Comptroller and Auditor-General of India 00
0

Direction, Monitoring and Control

I
Audit of
Union
I
Audit of States
I
Accounts and
l
Training
,.,
.....
V,
n
Q)

l i
,--
Entitlement State )>

l
c..

! + .....
3
.....
:::s
,....
V,

34 field offices of Principal 26 offices of Principal National Academy of Audit & International ....
,....
.....
Q)

Accountant General/ Accountant General Accounts and 8 Regional Training Centre 0

Accountant General (Audit) /Accountant General (A&E) Training Institute each headed :::s
in CAG's Office Q)
by a Director/ Principal :::s
c..
OJ
C:
c..
c.c
Q)

'<
V')
'<
Civil Audit State Revenue State Commercial State Commercial (1)
3
Receipts Undertakings Undertakings ....
-
:::s
:::s
c..
....
a,

Civil Minister & External Affafrs & Defence Railways Posts & Tele- Central Commercial
Departments Overseas Establishments Communications Undertakings
Autonomous Bodies

Source: CAG. Activity Report, 1992-93, p. 6 in Arora, Indian Public Administration.

 Fiscal Administration and Budgetary System in India
481

October, 1976. Thus, in 1976 the Central gove

·nee that year the C&AG of India has been rrl~mendt sfepharated accounting from the audit, and
st e 1eve o t e res ·b·1· c ·1· f h
. ounts of the Central government and • d . ponst 1 tty 1or comp11ng o t e
a1..c , ts concerne with th d• f •
separation of accounts from audit was completed • h h e au It ? accounts only- This
i9
(covering three ministries of the central governmenttl ~u~ee 7:e(s effe~ttve. from 1 A~n!, 1_976
covering nine more m1rustnes);
d 1 October, 1976 (covering the rema· • . . . ) Y,
an. . h tntng mtntstnes · As a result, there is now de artmentali-
accounts
sauon of'b'l' • •
1n tk' e Central government. and the admin1strat1ve p
• departments have assumed full
f
responsi 1 tty or ma ing payments and their accounting.

Departmentalisation of Accounts
This new scheme of departmentalisa tion of accounts envisaged that:
(1) The ~o~ptroller a~d Auditor-General of India will be relieved of the responsibility of the
compil~tton and ma1ntena~ce of accounts and will be concerned with auditing only. However,
he ~onttnues to be responsible for the compilation and maintenance of accounts of the states
which have not separated accounts from audit.
(2) The sec:etary of the ministry will be designated as the chief accounting authority for all the
t~ansact1ons of the ministry as well as its attached and subordinate offices. He will be respon-
si~l~ for the monthly accounts with the assistance of the integrated financial advisor of the
ministry.
(3) The administrative departments will assume responsibility for making payments and their
accounting.
(4) The integrated financial advisor will be the head of the payment and accounting organisation
of the ministry on behalf of the chief accounting authority (i.e., secretary of the ministry). He
will look after formulation of the budget of the ministry and its departments and control of
expenditure. He will arrange payments sanctioned by the ministry and will prepares the
consolidation of the accounts of the ministry as a whole. Preparation of appropriation
accounts for the grants controlled by the ministry and introduction of system of management
suited to the functional requirements will be evolved by him. He will make internal audit of
payments and accounts to ensure accuracy of accounts and efficiency of operations. The
integrated financial advisor will be assisted by principal accounts officers, the heads of pay and
accounts offices, the chief controller of accounts, and the controller of accounts.

The New Office of the CGA

A new office of th~ Co,,nJ:r9]er Gener~J_of :r~ccounts_(C.G.i:-) . has been created .as a part of the
depanment of expenditure of the ministry of finance. He ad~inisters matters relatt?g to the dep~rt-
mentalisation of accounts of the Central government. Since 1976, the CGA 1s the technical
authority who heads the new accounting set-up of Central government. He is responsible for
pre~cribing the form of accounts and framing rules and regulations in the ar~a _of accounts. Intern~
audit, publication of accounts codes and manuals and cadre management of c1v1l accounts personnel
is CGA's responsibility. He makes monthly and annual consolidation of accounts of the Central
government. under Article 283 of the Constitution, the CGA will deal with the custody and other
aspects of Consolidated Fund Contingency Fund and moneys credited to the Public Accounts. He
will also prepare a condens:d form of the appropriation accounts and finance accounts of the
 Fiscal Administration and Budgetary System in India
482

Central.government. These, after getting aud~ted by the Comptr?ll~r and Auditor-General o~India,
are placed before the Parliament by the President. The appropriation ac~~un~ compare the ~ct~al
expenditure under various grants wit~ the amount of voted grants as specified 1n the ~ppropnatton
Act passed by the Parliament. The finance accounts must show (under the respective hea~) the
annual receipts and disbursements for the purposes of the Central government. According to
Article 150 of the Constitution, the form of the accounts of the Central and state governments is
prescribed by the President of India on the advice of the Comptroller and Auditor-General of India.
The form of budget corresponds to the form of accounts. The existing accounting practice could
not meet the requirements of performance budgeting. Consequently, a revised accounting structure
was introduced in 1974 by the Central government to serve the objectives of management and the
need of financial control and accountability. To ensure this revised scheme, a five tier classification
of accounts as sectoral head, major head, minor head, sub head, and detailed head has been adopted.
This sectoral classification further sub-divided the functions of government into three sectors:
general services (with six sub-sectors), social and community services and economic services (with
seven sub-sectors). In addition, there is a fourth sector, namely, grants-in-aid and contributions. The
major head of acc9unt denotes a function of government while the minor head is assigned to a
programme. The sub head denotes the scheme covered by a programme and the detailed head repre-
sents the expenditure on the scheme in terms of inputs. The 'object head' (i.e., the object level of
classification) has been retained and placed under the last tier. It provides itemwise control over
expenditure. The approval of the Comptroller and ~Auditor-General of India is required for any
change in the major head.
Und.er the new system, the secretary, as the chief accounting authority, has a total and overall
responsibility for the efficient working of the payment and accounting set-up. The payment
functions have been taken over by the ministries themselves and are discharged by their own pay
and accounts officers. The cash transactions of ·the government are being handled by the Reserve
Bank of India, State Bank of India and its subsidiaries and by oth~r public sector banks. It is
expected that the departmentalisation of accounts will enable the min'istries to watch the flow of
expenditure regularly and take effective connective action wherever necessary. It will facilitate the
settlement of all claims directly by the departments by cheques. The large variations from the
budgeted· allocation v,hich were very common till 1976, are expected to disappear under the new
system of separation. It will also help in proper maintenance of provident fund accounts and
prompt settlement of claims. This will speed up the compilation of accounts. The accounts of the
ministries and departments are to be compiled within 25 days after the close of the mqnth.
Even when the Act of 1971 envisages separation, the C&AG under the Constitution has not
been totally relieved of his accountant's responsibility. The new dispensation expects the C&AG to
perform his constitutional obligations. These powers and duties relating to accounting envisaged
under the new Act are as under:
(1) Article 150 of the Constitution empowers the Comptroller and Auditor-General with the
approval of the President to prescribe the form in which the accounts of the union and the
•States are to be kept.
(2) The A~t empowers C&AG for preparing accounts every year showing the annual receipts and
disbursement of the union and each state. These accounts are designated as 'Finance Accounts'·
It'

Fiscal Administration and Budgetary System in India 499

expenditure. "The basic feature ~fa zero-based budget is that the departments, while preparing their
budgets, sh~uld not take an?7thing for granted and, therefore, should start on a clean slate. The
budget making for the ensuu~g yea~ should be started from zero instead of treat_ing the current
budget as t~e base or the starttn~ P?int. _The ZBB is an operating, planning and budgeting process
which requires each manager to Justify his entire budget request in detail from scratch and shifts the
burden of proof to each manager, to justify why he should spend any money at all, as well as how
the job can be. done better." The ZBB technique eliminates or minimises the low priority
programmes to improve programme effectiveness. In fact, it makes high impact programmes to
obtain more finances by reducing tax increase. It facilitates critical review of schemes in terms of
their cost-effectiveness and cost benefits to provide for quick budget adjustments during the year. It
allocates the scarce resources rationally and has increased the participation of the line personnel in
the preparation of budget.

The ARC Reforms

The department of science and technology was the first to introduce ZBB in India in 1983 and other
ministries followed in the year 1986-87 fiscal year. The ARC's team on finance accounting and
auditing examined the fiscal administration in depth and identified the ailments that afflict the fiscal
system. Over a period of time, these problems have multiplied and cumulated into serious threats
which need to be rectified by budgetary reforms. Some of these problems are:
(1) Tax evasion,
(2) Non-realisation of tax arrears,
(3) Black money in the economy,
(4) Corruption in ad.ministration, and
(5) Ineffectivity of control measures.
Since 1968, these problems have deepened and the policies of liberalisation and globalisation
have added a number of new dimensions to tax policies, loan liabilities and scientific management of
public revenues and expenditure. The ARC suggested:
(1) Financial year from November 1 to October 31, to have a better appreciation of fiscal
resources.
(2) Performance budgeting to make the executive responsible and legislators better informed.
(3) Separation of audit and accounts which-has already been done in 1976 with the appointment of
integrated finance advisors to assist the head as chief ac~o~nti°:g officer. . . . ,
(4) Economic classification of central budget so that adm1nistrat1ve efforts of the ministries get
reflected in the budget. The suggestion has been accepte_d_ by the g?vernmei:it. .
(5) The Public Accounts Committee must undertake a positive exercise to review the implemen-
tation work of ministries involved in fiscal administration.
(6) The three audits or propriety audit should have an extended realm bordering on continuous
budgetary reforms.
I

l Thus fiscal administration in India passes through the throes of change. The closed economy
has opened itself to globalisation. The budget as a tool of coordination has become more relevant
today than budget as a tool of control of the past. T~e managerial reforms presuppose tax reforms
..t
r and radical change in budgetary processes ~f a parham~~tary democracy. Dev~lopment budgets
have to be dove tailed with regulatory restraints of a deficit economy. Democratic development is
what should be writ large on the budgetary theory of a fast transforming society in India.

,\