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.

Chart 1: Existing System ofDisbursement

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

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

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

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

FRONT OFFICE C/W T.O. C/WC/W -HA SERVER N M C BACK OFFICE N M C VALID AT IO N

(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.

(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:

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.

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.

EPW

Email: renuka.viswanathan@gmail.com