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Efficient Transfer of Funds for Centrally-Sponsored Schemes

The ongoing dispute between the union and state governments and among the states themselves regarding funds for centrally-sponsored schemes has severely affected the adoption of sound accounting and monitoring practices. It is essential to restore them in an amicable and acceptable manner. This article examines various issues concerning the accounting mechanism and attempts to develop a comprehensive systemic solution to the problems.


Efficient Transfer of Funds for Centrally-SponsoredSchemes

The ongoing dispute between the union and state governments and among the states themselves regarding funds for centrally-sponsored schemes has severely affected the adoption of sound accounting and monitoring practices. It is essential to restore them in an amicable and acceptable manner. This article examines various issues concerning the accounting mechanism and attempts to develop a comprehensive systemic solution

to the problems.


n the Indian context, centrallysponsored schemes (CSSs) account for the largest number of specific purpose grants extended by the union government to states under Article 282 of the Constitution. The number of such schemes has gone up over the years as also the size of the allocations made. At the latest count, there were 155 schemes being operated by 30 central ministries and departments with a total outlay of around Rs 71,997 crore.1 There has naturally been much heartburning among some state governments on this account, since they would like such funds to be routed through “block” (general purpose) grants to states, through the Gadgil formula, approved by the National Development Council (NDC) with their participation and consent and not merely voted by the central parliament. Some states, however, particularly the less developed ones, whose specific problems are addressed by CSSs, support the present arrangement. Even within the more developed states, administrative departments that receive CSSs prefer to continue the existing situation as it ensures them a regulated fund flow for critical areas, free from the vagaries of their own finance departments. The situation has become more complicated after administrative ministries in the centre have adopted

mechanisms to bypass state treasuries and transfer CSS funds directly to district level agencies and local bodies. The ongoing dispute between the centre and the states and among states themselves, has severely affected the adoption of sound accounting and monitoring practices and it is essential to restore them in an amicable and acceptable manner. Fortunately, the widespread adoption of computerised procedures provides an ideal opportunity for saving the situation.

In Search of a Solution

A number of ticklish issues are awaiting resolution concerning the accounting mechanism for centrally-sponsored schemes and the realisation of their developmental outcomes.

(a) State governments have been demanding in the NDC and other fora that the CSSs releases should be routed by the government of India only through their budgets and not disbursed directly to district level agencies or to paragovernmental bodies. At the same time, central ministries and their counterparts in the states have been pointing out that state governments delay release of CSS funds to implementing bodies including local bodies, thereby seriously impairing the achievement of targets. No solution has yet been found for transferring CSS funds from central ministries to state budgets and still making them directly available, when required, to the actual implementing office, agency or local body without any delay.

  • (b) Budgetary information and reporting systems of state governments remain incomplete when CSS funds are directly released by central departments without passing through the state budget or treasury systems. Since such releases have been growing in volume and number over the years, statistics relating to state budgetary provisions and expenditure tend to be incomplete and distorted. These anomalies need to be corrected.
  • (c) The CSS money is released by passing through various levels in the state governments. It is deposited in treasuries and subtreasuries as well as in a large number of bank accounts. At present, it is wellnigh impossible to ascertain the amount spent on a CSS at any point of time or for any specific period. Reports of the comptroller and auditor-general (CAG) have repeatedly drawn attention to CSS funds lying unutilised for long periods and substantial time lags in reconciling figures reported by departments with those maintained by bankers. The scope for leakages and misappropriation is apparent.
  • (d) From the accounting point of view, reconciliation of expenditure and release figures is a huge issue. The present mechanism gives tremendous scope for states and implementing agencies to misreport releases on CSS schemes as expenditure. The need for an automatised tracking system for CSS funds is well-established. This will also generate the data required for policymaking tied closely to the actual fund requirement of specific sectors, annually and periodically.
  • (e) The CSSs which focus on income generation for beneficiaries provide assistance linked to credit disbursement by banks. The general experience is that poor access to bank credit is affecting the achievement of CSS outcomes. Innovative methods are called for to improve access to banks for weaker groups as depositors as well as lenders.
  • This article attempts to develop a comprehensive systemic solution to simultaneously address all the above issues.

    Economic and Political Weekly June 9, 2007

    Chart 1: Existing System ofDisbursement

    Adm Dept GoI State FD State Treasury District Account Block Account Village Account Payees CAS RBI State Adm Dept

    Release Order Fund Release Authorisation “Parking”

    Systems of Transfer of CSS Money to States

    (a) From government of India to state government: The pay and accounts officer of the department concerned in the government of India sends release orders for CSS funds to the central accounting system (CAS) at Nagpur set up by the Reserve Bank of India (RBI), which maintains the consolidated fund of the government of India. The CAS Nagpur, in turn, sends an intimation to the accountant general (AG) of the state and its finance department. At present, there are complaints from the implementing departments at the state level and local bodies that they are unaware of release of CSS funds in respect of their schemes or activities devolved to them. Finance departments of states often make implementing departments bring them copies of release orders. It is essential therefore to put information regarding release of CSS funds on a web site to which all departments of the state government have access. If security and banking secrecy are not compromised, this could even be made available to the public. Intimations should also be sent by CAS

    Chart 2: Proposed System of Disbursement

    Adm Dept GoI State FD State Treasury District Account Block Account Village Account Payees CAS RBI State Adm Dept *

    Release Order Fund Release Authorisation (automatised) * Firewalled Central component of CSS

    Nagpur to treasury network management centres in states where the treasury system has been computerised.

  • (b) From the state finance department to implementing department: On receipt of the release order for CSS funds, the finance department of the state issues a credit authorisation slip to the department concerned under intimation to the treasury. To ensure that CSS funds are immediately available to implementing departments for issue of further release orders, it is essential to make the issue of the credit authorisation slip by the finance department an automatic activity in the computer programmes of these departments. Treasuries must also have no option, but to act on these authorisation slips – this should be built into treasury computerisation programmes.
  • (c) From the implementing department to implementing level(s): At present, fund allocation orders are issued by the administrative department to different empowered levels within its delegated powers without specific authorisation by the finance department and, where required, with the concurrence of the finance department. Copies of such allocation
  • orders are marked to: the offices authorised to do further allocation or to disburse funds; their supervisory levels; the finance department; and concerned treasuries.

    In accordance with these orders, funds are then released to the next subordinate level, which then issues further allocation and release orders till finally the money is placed at the disposal of the actual implementing level or agency. In the case of CSSs, for which funds are routed through state treasuries, expenditure is booked when releases are made to the final beneficiary or payee. However, because of treasury delays and financial constraints of state governments, over the last two decades, beginning with the big ticket budgets of schemes of the rural development department, in the majority of CSSs today, funds are released directly by the central government to bank accounts of district level agencies. Hence after further release, orders are made, funds pass on to accounts maintained by lower levels till they are finally placed in the bank accounts of implementing bodies like panchayati raj institutions (PRIs). As a result, the CSS funds are scattered in a large number of accounts at different government levels and the task of reconciling releases with final expenditure, computing the interest earned on such deposits in banks between the dates of release and final expenditure and formulating guidelines for using this interest has grown to unmanageable proportions.

    It would be desirable to return to a system of routing government funds in treasuries alone from which expenditure can be clearly ascertained, controlled and monitored, but this would be acceptable to implementing departments only, if a mechanism is put in place to ensure that expenditure claims of beneficiaries are settled on line without hindrance and delay. To achieve this, it is essential to remove all scope for finance departments of states to block release of funds against legitimate expenditure claims submitted under CSSs. This article will explain how such a system can be put in place easily under the computerised system of treasury management that is being rapidly introduced by many state governments. The example given below is taken from Karnataka, but it could be applied to many other states too.

    Under the ‘Khajane’ project of comprehensive computerisation of treasuries in Karnataka operational from 2002 (networking all 216 treasuries through a dedicated V SAT network), an access to classified

    Economic and Political Weekly June 9, 2007

    Figure 1: Bill Transaction in New System

    FRONT OFFICE C/W T.O. C/WC/W -HA SERVER C BACK OFFICE N M C VA LI DA T ION Figure 2: Bill Transaction in New System

    Notes: C/W= Clerk; C/W-HA= Head accountant; TO= Treasury officer; NMC= Network monitoring centre.

    accounts has been given to the accountant general (AG) of the state as well as to ‘zilla panchayats’. Budget control mechanisms have also been computerised under this system and there is a provision for online processing of claims. The management information system (MIS) reports required for various purposes are generated automatically from the system and can be made available on real time basis. The PRI accounts are differentiated into three categories within the computer-own funds (raised from house taxes, fees, etc), transfers from the state government and transfers from the central government under CSSs, finance commission grants, etc. Unutilised funds under state schemes which cannot be rolled over to the next year without specific legislative authorisation revert back to the state’s budget at the end of the financial year. This kind of system should be refined and adapted to meet the needs of our comprehensive accounting system for CSSs.

    (1) The first requirement to achieve this objective is to ensure that all CSSs clearly provide for levels within the state which should allocate and release funds. In some CSSs, these are laid down by the administrative department in the central government, but in many more, given the diversity of administrative structures at the district level and below, discretion is left to the states – in some schemes, the criteria for allocation and release among implementing levels within the state have been laid down by the administrative department of the central government. In others, these are to be determined by states. Once criteria are finalised, transparent online fund allocation and release can be done, if criteria are entered into the computer programme. This has been done, for example, in Karnataka, for Twelfth Finance Commission grants to rural local bodies. Hence, CSS guidelines should indicate clearly the criteria if any fixed for allocation and release of funds within the state and, if they have not been determined a priori, the government level which should determine the rational criteria, so that these activities can be done transparently and automatically.

  • (2) The second requirement is to separate the process of allocating and releasing funds from that of actual disbursement. This is essential to ensure that fund movements are minimised and rationalised so that there is no scope for confusing release and expenditure, misreporting or delayed reconciliation of accounts. Every release order for CSS funds need not be accompanied by a corresponding physical transfer of funds from one account to another. Release orders issued by different administrative levels should be entered into the computerised treasury data base, but funds will be released only when the final claim is presented by the beneficiary or payee. Such a system is already operational under the Prime Minister’s Gram Sadak Yojana (PMGSY), a scheme of the rural development department, albeit using bank accounts. Under this system, the CSS funds transferred to a state are deposited in a state level bank account and the bank supplies cheque books to district offices. Cheques issued by district offices are cleared on presentation at any bank branch.
  • (3) The next logical stage is to move from retaining CSS funds in a bank account, as done under the PMGSY, to managing them in the state treasury itself. The treasury will then have to release funds without delay directly to the account of the final claimant, when he presents the cheque received from the disbursing body at any authorised bank branch. If this can be done, the gap between release and expenditure will be eliminated and there will be no scope for reporting or confusing the release of CSS funds for expenditure. From the MIS, accounting and audit points of view, the benefits to the implementing and finance departments at the state and central level will be enormous. The finance departments of states and budget analysts will also be able to capture all expenditure
  • Economic and Political Weekly June 9, 2007 under CSSs at one go for understanding the sectoral distribution of budgetary expenditure and taking policy decisions, without having to separately add back expenditure incurred on CSSs transferred directly by GoI to districts, as is being done now. To achieve this, the state treasury system should be networked with the state’s finance and spending departments and different disbursing and spending levels (like PRIs) and the computerised data base should be connected with the AG’s office. Treasury computerisation should extend to budgetary control also. Such a system is already operational, for example, in Karnataka; many other states must also have introduced it fully or partially. Banks will perform a new role as agents of the state treasury. This will also require the core banking network to be interoperable with the treasury network.

    (4) Retention of CSS funds in the treasury, as was being done in the past, will not be acceptable to administrative departments at the central and state levels, if the state finance department continues to exercise the power to stop or delay releases (when claims are presented by the final claimant) or otherwise divert the central share of CSSs released to states. It is necessary, therefore, to introduce into the computerised system an automatic block that prevents state finance departments from interfering with releases against the central share of CSS funds. How this can be done is suggested below taking the case of the current procedure adopted in computerised treasuries in Karnataka.

    The activity charts (Figures 1 and 2) demonstrate the sequence of events in the release of funds from the treasury under the present computerised treasury system. Figure 1 shows how the bill presented in the treasury is first subject to a routine preliminary examination by the clerk in the front office (C/W who issues an acknowledgement) and subsequently subjected to back office examination by a second clerk (C/W-HA head accountant). It then goes to the treasury officer (TO) for clearance. All these persons are linked in the server set up in any treasury. Once the bill is validated by the TO as seen in Figure 2, there is an automatic intimation to the network monitoring centre (NMC) which clears the bill for payment.

    This is a critical stage of the process as it is controlled by the finance department to manage the state’s liquidity position. Fund flow can be blocked or interrupted by the authorised officer of the state finance department (generally the deputy secretary, budget) in accordance with guidelines developed within the state. For example, when the state’s overdraft situation becomes critical or when big releases are involved, case by case release of funds can be introduced into the computerised system to tide over temporary liquidity problems. What is suggested here is the introduction of an item in the treasury’s computer programme to prevent such blocks being employed in respect of funds falling under one head of account, that is the head of account applicable to the central component of CSSs. The following two requirements should, therefore, be met:

  • a specific head of account should be given by the CAG to distinguish the central component of CSSs, if this is not already there;
  • an item should be introduced into the treasury computerisation programme of the state which will prevent the state finance department from blocking claims booked against the central share of CSSs released to states.
  • (5) Efforts are being made by the finance ministry to make as many of its payments as possible to bank accounts to reduce the scope for corruption, misappropriation and delay. The system outlined above can be completed by moving as quickly as possible to a procedure of directly crediting claims preferred by beneficiaries to their accounts, whenever funds are released under any CSS. The core banking system has become operational over a large part of the country and it is expected to be further extended. Several departments have already begun paying employees’ salaries into their accounts. Schemes like the National Rural Employment Guarantee Scheme are already being operated in the states like Karnataka and Andhra Pradesh by making payments in bank accounts opened by beneficiaries. In some states, instalments under the Indira Awaas Yojana are also being released to bank accounts opened by beneficiaries. It should, therefore, be possible to soon move to a system of making a large number of payments under CSSs through bank accounts only, thus reducing substantially the scope for corruption, misappropriation and harassment. Such a system will also have another desirable, much-sought-after fallout. A large number of bank accounts will be opened of poorer families who now do not have access to the banking network. Once they enter the portals of banks as depositors and valued customers, access to further services like borrowing will become much easier. By this method, therefore, the coverage of banks will be extended in a painless and effective manner.

    A Win-Win Situation

    The modifications proposed above will resolve the issues listed earlier and benefit all interested parties as indicated below:

  • (a) The finance ministry: The biggest beneficiary of the revised procedure will be the central finance ministry. The ongoing battle between central departments and state governments about sending CSS funds to states will disappear, since funds will now be routed only through state treasuries, but state finance departments will not be able to block further releases and booking of expenditure. Funds released cannot be reported as expenditure. Accurate online data regarding expenditure will be available to facilitate preparation of a fund release plan on the basis of actual utilisation. There will be no scope for released funds to lie around unutilised in the bank accounts of different levels of government, PRIs or other agencies. Hence, reconciliation will not be required and audit paras on this account will be reduced. Reduction of corruption and painless extension of the coverage of banks to poorer groups are the other immeasurable benefits that the revised system will generate.
  • (b) The administrative department in the central government: The department that is releasing CSS funds will get accurate real time reports of expenditure incurred with no contradiction between what is reported by states and what is reported by districts. Complaints that state governments are blocking the release of the central component of CSS funds cannot be made an excuse for non-performance. (Release of the state component will continue to be monitored as usual as it will still depend on the liquidity position of the concerned state and the directions of its finance department. However, this need not be a major hindrance as a large number of CSSs today are fully funded by the centre). Administrative departments handling CSSs in the central government might even at the beginning face a situation of lower expenditure than reported by states hitherto because of the elimination of the system of reporting releases as expenditure and removal of the scope for “parking” money in various bank accounts. In the long run, this is highly desirable as it
  • Economic and Political Weekly June 9, 2007

    will force all implementing bodies to focus on the realisation of targeted outcomes. The scope for corruption and misutilisation will be largely reduced, since issue of release orders by various implementing levels will not be accompanied by corresponding movement of funds and payment will be made into bank accounts. Departments handling CSSs calling for bank credit are bound to find it easier to get banks to lend to persons who are already operating accounts with them. Audit paras and reconciliation problems will come down.

  • (c) The finance department of the state government: The finance department in the state will be giving up a major power, that is the power to stop or reroute the movement of the central share of CSS money to tackle overdraft problems. But, it must be remembered that the scope of this power has already been greatly eroded, since funds under most of the big ticket CSSs are in any case already bypassing the state treasury and moving directly from the central government’s account to district level bodies and agencies. The state finance department will, however, gain substantially from the retention of a large quantum of central funding for CSSs in the treasury since this amount can be counted against the state’s account for calculation of its treasury balance and overdraft situation. It will also gain enormously in terms of efficient monitoring of expenditure and better policy-making. Actual expenditure (not just releases) will be reported by implementing bodies and reconciliation and audit become much easier. Funds released through several levels or directly to districts by the central government need not be painfully tracked and periodically added back to state budgets to get a full picture of the expenditure profile of departments and local bodies as this will be available on real time basis. Corruption and misappropriation will come down. State schemes calling for credit linkage will become more successful since banks will become more responsive in lending to their depositors; this will reduce the burden of work of the state level credit committee that meets periodically to review bank credit with special reference to government schemes.
  • (d) Administrative departments of the state government: Release of the central component of CSSs will not have to be tracked since it will be available on a web site. The state finance department will not have to be repeatedly reminded to release money against this component as the authorisation
  • slip to the treasury will be automatically issued through the computer. Further allocations and releases will also be done automatically in the case of CSSs with builtin criteria, once these criteria are entered into the computer programme. Since funds will not be passed through several levels, “parking” can be avoided and reconciliation and audit will become much easier. Administrative work can now concentrate on actual achievement of outcomes and energy will not be frittered away in routine tracking of files and funds. As indicated earlier, however, at the beginning, state administrative departments may find that the expenditure reported is lower than before, because of the elimination of various intermediate blocking mechanisms, but in the long run, this will mean that the focus will be on outcomes alone.

  • (e) Panchayats at all levels and municipalities: A key impediment in the functioning of panchayats and municipalities as institutions of local self-government is the high degree of mismatch between functional assignment and fund allocations. This applies to CSSs too. States continue to divert funds pertaining to functions assigned to panchayats through parallel district-based implementing agencies. Coupled with other ongoing reforms aimed at operationalising a panchayat sector window separately within the state budget to indicate allocations made to each panchayat in accordance with functional assignments, the proposed system will ensure that actual releases to and by panchayats are not irregular and lumpy. Fund releases to beneficiaries of panchayat level schemes and implementing agencies selected by panchayats can also match the working cycle, which is dictated by seasonal conditions. Delays in releases to panchayats caused by cumbersome financial transfer processes involving several intermediate steps will also be eliminated. If panchayat accounts are eventually computerised, as an extension of treasury computerisation as is being done in the case of zilla panchayat accounts in Karnataka, the system will provide a timely record of allocations and releases to and expenditures of PRIs, which can be made available in the public domain.
  • (f) Banks: From the point of view of banks, many accounts opened by PRIs and other agencies at different levels for operating CSSs will no longer be required. On the other hand, there will be a substantial growth in the accounts of beneficiaries and others receiving payments under these
  • schemes as we move to making almost all such payments through bank accounts. The resultant increase in coverage will extend the depositor base and eventually provide a better access for hitherto excluded sections of the population to loans and other services offered by banks, without directions from above or targets fixed and monitored from outside the commercial banking system. This could even lead to the development of innovative services and products most suited to the requirements of such groups. Banks will also gain by providing services to widely dispersed panchayats as agents of the state treasury. Thus banks can function as repositories for bills and invoices received from panchayats. Banks will also gain by providing the service of receiving local taxes and fees levied by local bodies on citizens.

    Gaining Acceptance for the New Procedure

    Modifications proposed in the existing procedure may not be readily accepted by all stakeholders as they would have to abandon their existing viewpoints regarding CSSs and their perceptions about one another. Changes will, therefore, have to be suggested using both persuasion and pressure principally by the finance ministry and the planning commission. The best place to start is probably the subcommittee of the NDC, which is looking at the question of CSSs at present. This should also form a core component of the treasury computerisation report under the government’s National E Governance Programme. Once policy-makers at the highest level in the central and state governments and the Planning Commission are won over to the new line of thinking, pilot projects could be taken up in states which have achieved some degree of technical competence in terms of computerisation of their treasury systems. After the testing phase is over, the revised procedure could be universalised across the country.




    [We owe a deep debt to M Prabhakar, director of treasuries, Karnataka for data furnished and suggestions made by him.]

    1 Report of the Expert Group to Develop Concrete Proposals for Restructuring Centrally Sponsored Schemes, Planning Commission, September 2006, Annexure IV A.

    Economic and Political Weekly June 9, 2007

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