Different criteria can be used to evaluate whether funds have been put to efficient use. The bottom line is full utilization of sanctioned funds or achievingthefinancial targets of a scheme. Achievement of financial targets by itself is of no avail; it has to be accompanied by achievement of corresponding physical targets. Recently, the emphasis has shifted to project outcomes from physical targets. For example, in a child nutrition programme, the focus is not on purchase of materials or their supply to childcare centres but on the actual reduction of malnutrition in children as reflected in measurable medical parameters.
However, full utilization of funds is the first indicator of a scheme’s performance. Unutilized funds mean that financial targets of a scheme have not been met. It is a clear indication that the scheme has underperformed. Further, funds made available to a department, agency or institution are budgetary resources for specific programmes or schemes. The implementing agencies have to utilize the funds fully within the prescribed time limit for the purposes for which they are intended.
In Indian government finance system, funds are provided from budgetary line items and lapse at the end of the financial year on 31st March. Although budgetary allocations for some special programmes (such as those for vulnerable or distressed groups) are made non-lapsable, in most programmes, unutilized funds have to be surrendered to the finance department usually around March 15, and are no longer available to the concerned agency or programme.
Fund Utilisation in Social Sector
In India, the plan budgets, whether at the Centre or in States, are seldom fully utilized. This is particularly the casein social sector programmes which have a vital bearing on human development index. This point can be illustrated with numerous examples. But the following extract from the Twelfth Five Year Plan will suffice: “During the Eleventh Plan, the Central Plan outlay for secondary education was Rs.54,945 crore. Against this, an amount of Rs.17,723 crore (or 32.26 per cent of the outlay) was actually spent. Elaborate consultation process with stakeholders including the State Governments preceded launch of the new schemes, resulting in sub-optimal utilisation of planned resources in the first three years of implementation. However, in the last two years of the Eleventh Plan period, the Ministry was fully geared to implement schemes rapidly, but only limited resources were made available.” (Twelfth Five Year Plan p.70)
Generally, the large, capital intensive sectors are able to more fully utilize their plan budgets. These expenditures consist mostly of a small number of relativelylumpy items. They represent large equipment,largepurchases of commodities,andlargeadvance orrunningpayments to contractors.
Often such agencies are skilled in project implementation. But presently the economy is passing through a phase marked by stalled project implementation. Project developers are hamstrung by agitations over land acquisition and environmental causes. Some MNCs have abandoned their projects. Economists have also been referring to ‘policy paralysis’ in government. Government has appointed a cabinet committee to look into these problems. It is to be hoped that the implementation problems affecting infrastructure projects will be resolved soon. To recall our general point: fund utilization is much better in big spending departments which implement projects in sectors like irrigation, roads, power and ports.
Incontrast to suchsectors, social programmes are unableto speedilyutilizefinds. Social sectors include education, health and family welfare, water supply and sanitation, social security and welfare, and nutrition. As part of its drive towards improving India’s social development indicators, the Central government hasincreased the magnitude of budgetary support for social sectors considerably since 2004-05. Still, India’s annual public expenditure of both Central and State governments on social sectors is below 7 per cent of its GDP. This is far below what most developed nations have been spending on social sectors. The OECD countries spend nearly 14% of their GDP on social sectors or doubleof what India spends.Planning commission hassignificantlyscaled up planoutlays forsocial sectors in the Twelfth plan. It observes: “The pace of public expenditure in the last fewyears has increased dramatically and a large part of this expenditure is aimed at promoting the welfare of the weaker and more vulnerable sections of the population. Nearly Rs7 lakh crore have been spent on the 15 major Flagship programmes during the Eleventh Plan period.”
Some observers now argue that the problem in social sectors is no longer insufficiency of funds but poor programme implementation and poor utilization of funds. This situation presents a great administrativechallenge. In a broad sense,theproblem of fund utilizationcan be ultimatelyreduced to implementation of programmes, projects and schemes. It can be seen as one facet of general administrative inefficiency. But the question needs more detailed analysis in terms of the specific hurdles which hamper progress of social sector schemes.
In discussing expenditure or fund utilization trend, we need to recall the earlier mentioned distinctionbetween plan expenditure and non-planexpenditure.Planexpenditurecan be on capital items such as school buildings, hospital buildings, roads and bridges or on revenue items such as salaries of staff, wages of workers, textbooks and medicines incurred on the programmes/schemes of the current Five Year Plan like Sarva Shiksha Abhiyan, Mid-day Meal scheme, and Integrated Child Development Services.
Non-Plan expenditure is outside the Five Year Plan– such as expenditure on defence services, interest payments, organs of the state, and those on the running of existing government institutions in different sectors. Most of non-plan expenditure in social sectors which state governments incur is on the salaries of staff. This gives rise to an interesting fact. On the non-plan side of State social sector budgets, funds are usually spent fully. The reason is quite simple. The staff is already in position, and the budgetary provisions are largely for paying the salaries and allowances which are obligatory payments under law. We may note that payments which are in the nature of entitlements likescholarships and widows pensions get spent if the number of beneficiaries is correctly estimated while framing the budget estimates. It is, therefore, on the plan side that social sector funds are underutilized in state governments.
Constraints on Fund Utilisation
The Centre for Budget and Governance Accountability (CBGA), New Delhi carried out studies under Budgeting forChangewith support fromUNICEFIndia. One studyhas analysedtheimplementation of major Plan schemes in social sectors like Sarva Shiksha Abhiyan, National Rural Health Mission, Integrated Child Development Services and Total Sanitation Campaign, at the district level in selected states. It points to various constraints which hamper States from fully utilizing the plan outlays for social sectors received from Centre. Planning Commission has also sponsored studies on low utilizationof central funds by states. The problems are more acute in backward than in forward States.
Plan schemes can be classified into three categories. Central sector schemes are formulated, funded and implemented by the Centre. Centrally sponsored schemes (CSS) are designed by Centre in consultationwith States. Statesimplement theseschemesand partlybearthe expenditure on them. Finally, Statelevel schemes are formulated,funded and implemented by states.
Budgetary processes of schemes frequently create problems of implementation. Many Central programmes in social sector are centrally sponsored schemes or central sector schemes. Central ministries set their financial parameters with usually some sharing of costs by states. Although the state ratio of expenditure is usually around 20% - 30%, many states cannot afford it. In the process, the programme implementation suffers.
Another long standing complaint of states is that Central Ministries formulate the schemes with the same all-India pattern without allowing for regional or State variations. The schemes are often castintopredeterminedformat whichallowslittlescopeforflexibility.Theseareproblemsassociated with programme design and not with financial details of the schemes. But they act as a drag on programme implementation and result in low fund utilization.
Centrally Sponsored Schemes (CSS)
The Twelfth plan has made proposals to resolve these problems. It recognises that: “Over a period of several Plans, the number of Centrally Sponsored Schemes (CSSs) has been growing. Large funds are being transferred to States under these Schemes. In view of the large diversity of physical and economic infrastructure in the States, their potential for development and investment requirements, the schemes need to provide greater flexibility in their design”. Based on the report of theB.K.Chaturvedi committee,Planning Commission hasproposed following changesintheCSSs.
¤ The physical and financial norms for the Schemes may be varied depending on the requirement of the State. A mechanism for developing flexibility in such norms, as against the normal CSS prescription, has been suggested. This should take care of large variation often requested by North East States or States like Kerala, Rajasthan, Uttarakhand and Himachal Pradesh which have special needs.
¤ All CSS must have 20 per cent flexi funds (10 per cent for flagship schemes). These should be utilised by the States to prepareschemeswhich are especiallysuitedfortherequirements of that State.
¤ Each flagship programme will provide a flexible pool of financial resources to be used to facilitate and incentivise innovative practices that blaze a trail for others to follow during the Twelfth Planperiod.
Approvals, Cost Norms and Staff
The financial approvals of schemes often get delayed. In the government systems, not only new schemes but also continuing schemes need approval. Even for ongoing schemes, financial sanctions, authorization of expenditure and transfer of fundstake time. After receiving approval the implementing agencies have to followprescribed procedures, such as invitingtenders for purchases for incurring expenditure. Sometimes implementing agencies do not enjoy adequate delegated financial powers to incur expenditure. If the amount of expenditure crosses a particular limit, they have to move matters to higher levels for decision making. This takes time, and many departments are still unwilling to fully delegate powers to the implementing levels.
Government programmes are funded based on cost norms. Where government staff costs are concerned, there are clear yardsticks like salary structures. But even here the situation has become complex due to systems of part time employees and outsourcing. In many schemes like mid-day meals and hostels, costs are estimated on per unit or per head basis. In an inflationary situation, such unit costs escalate quickly, and it becomes difficult to run the programme, particularly if it involves private participants.
A major difficulty in social sector schemes, and in fact in other grassroot schemes, arises from inadequate staff and lack of project planning and management skills. Here we are talking about decentralized planning and needs of small scale scattered projects in the countryside. There is inadequate appreciation of the need for skilled staff at the ground level where rural development and social programmes are implemented. Allied to this is the problem of inadequate involvement and participation of local community leaders in the planning process. There is an urgent need to scale up training and capacitybuilding of staff and communityleaders for decentralizedplanning.
The CBGA study directs attention to another aspect: the systemic weaknesses of the State government apparatusespeciallyin thebackwardstates.Thereis shortage of trained,regularstaffin functional management areas such as project management, finance, accounts and frontline service provision. As we have seen, staff costs are borne on non-plan side. Overthe years, stategovernments had drastically reduced staff recruitment to contain fiscal deficits. The administrative systems in the backward states appear to have weakened as a consequence.
To sum up:theinability of the stategovernments to fully utilizethe availablefunds in the Central schemes is due to systemic weaknesses in the government apparatus in social sectors across many states, besides the rigidity in the norms, guidelines and unit costs governing the Central schemes and the lack of fiscal decentralization from Centre to state governments as well as from state government to local governments.
The Twelfth Plan has noted such weaknesses and proposed remedial measures. According to The Twelfth Five Year Plan document: “A key diagnostic conclusion regarding the relative lack of success of Planprogrammes is that these are designed inatop down manner and do not effectively articulate the needs and aspirations of the localpeople,especially the mostvulnerable.With the 73rd Constitutional Amendment,severalfunctions were transferred to Panchayati Raj Institutions (PRIs). Since 2004, there has also been massive transfer of funds, especially after the enactment of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). But institutionally, the PRIs remain weak and they do nothave the capacity to plan or implementprogrammes effectively. Many studies show that the impressive figures on the formation of Self-Help Groups (SHG) under Swarnjayanti Gram
SwarojgarYojana(SGSY) hide a lot of poorquality work. Toaddress such problems,The Centre has formulatedthe Rajiv Gandhi Panchayat Sashaktikaran Abhiyan meant for strengthening human resource and systems capacities of PRIs”.
It goes on to add: While preparing the schemes, the central ministries role would be to act as a knowledge partner and enabler to the project implementation, which will be typically in the states. For this ministries will prepare capabilities in preparing for scheme design and creation of learningsystems and networks from whichthe statesand localimplementers can learn.
Rangarajan Committee examined the mode of transfer of funds from the Centre to implementing agencies for various programmes. The funds are transferred in two ways – the treasury mode and the society mode. In the treasury mode, funds are sent to States through the RBI. They get reflected immediately in State treasury and in state Accountant-general’s records. The State governments transfer funds to District Rural Development Agencies (DRDAs), Panchayati Raj Institutions (PRIs), Non-Government Organizations NGOs and other Implementing Agencies (IAs).
In the society mode, Central ministries transfer funds directly to IAs which are DRDAs, PRIs and NGOs and others. After incurring expenditure, IAs get the expenditure audited by chartered accountants and send utilization certificates for funds to Ministries. Both systems have problems. They allow Central Ministries to ‘book’ expenditure or show fund utilization by simply releasing grants to States. Statesin turn show expenditure by releasing finds to IAs. These devices are used to avoid lapse of funds at the end of the financial year. Rangarajan committee recommended that all central funds should be released through treasury mode. The rationale is that it enables better tracking of released funds andalso guards against frauds.
The Twelfth Plan advocates a paradigm shift in funding from demand-based grants and input- based budgeting to normative and entitlement-based grants and outcome-based budgeting. For example, block grants should replace line-item budgets and Plan allocations should be based on long-term strategic plans developed by the institutions. Consequently, annual funding should be linked to the performance of institutions against the milestones and targets laid down in their strategic plans. In turn, institutions need to provide complete transparency about their financial performance and use of funds by putting their financial statements online. All institutions should implement the recently finalized accounting standards developed by ICAI that lay down a common format for the reporting of financial statements.
Uptil now, we looked at the major causes which hamper fund utilization or from another angle programme implementation. One method of improving is tracking released grants, that is the Central Plan Scheme Monitoring System (CPSMS) which has recently set up its portal. CPSMS integrates tens of thousands of implementing agencies through a common system and tracks fund movement at successive stages starting with the initial release from the Centre till the money actually reaches the ultimate beneficiaries. It has covered over 1000 Central Plan schemes; captured more than 75,000 sanctionsforrelease of funds;andregisterednearly20,000programmeimplementingagencieswith
the system. CPSMS is linking with State treasuries and State AGs to obtain real time expenditure information for schemes for which funds are transferred from the Central Ministries to the States.
On full implementation, the system would provide a platform on which the management at each level would be able to monitor fund utilization under various developmental schemes operated through treasury route or society route. CPSMS is expected to provide customized information of fund deployment and utilization vertically under each scheme to programme managers and horizontally across schemes in one geographic area for senior management and political functionaries. Inputs provided by the system would be vital for programme management and policy planning. The information on fund utilization is also planned to be placed in the public domain for greater public awareness, public participation in the policy making and execution and for enhanced transparency in Government operations.
Problems of Fund Releases and Utilisation
Rangarajan committee has noted many problems with the monitoring of fund releases. The direct releases of funds from the Centre have become huge. During 2011-12, such releases were Rs 124,605 crores - constituting 28.22% of the plan budget of Rs 441,547 crores. Large amounts are also going to NGOs, and this raises concerns over accountability.
In this regard, CAG reports and other studies have revealed many problems. They are outlined briefly below.
¤ The Ministries release funds mechanically without considering the capacity of State
Governments or the utilization of funds released earlier.
¤ The Ministries were unable to ensure correctness of the data and facts reported by the State Governments.
¤ The internal audit function in both the departments implementing the projects and in the societies was inadequate or nonexistent. The State Governments are keener on getting funds from the Central ministries rather than on ensuring the quality of expenditure or on attaining the programme objectives.
¤ The Ministries and State Governments were not serious about checking misuse of funds; expenditure booked in accounts assumed precedence over the veracity and propriety of the expenditure. Expenditure figures given by IAs do not tally with the figures reported by the District level agencies. On the whole, expenditure information is unreliable.
¤ There is no assurance that the IAs spent the funds on the schemes. The Ministries were unable to ensure the correctness of the data and facts reported by the State Governments.
¤ Over-statement of the figures of physical andfinancial performance by the StateGovernments was common. There is no system of accountability for incorrect reporting and verification of reported performance.
¤ The Ministries were more concerned with expenditure rather than the attainment of the programme objectives. Large parts of funds were released in the last month of the financial year, which could not be expected to be spent by the respective State Governments during that financial year.
¤ Misuse of the funds provided for vulnerable sectors and sections of the society was evident. The State Governments did not pay much attention towards such misuse. The controlling Union Ministries had little clue to such misuse.
¤ The DRDAs, State level societies, NGOs or the autonomous bodies which receive funds directly from the Centre, release the amounts further to their constituents (PRIs, District level societies etc). It has been observed that the amount of fund reported as received by a Taluka or Block panchayat from a DRDA, or a district level society from a State level society differs from the amount stated to have been released by the DRDA and state level agency. Expenditure figures given by down the line IAs do not tally with the figures reported by the District level agencies. On the whole, expenditure information is unreliable.
¤ This undermines the very foundation of our parliamentary system as it shows lack of legislative control and oversight over such expenditures. These views were endorsed in an address to the NDC by the then Finance Minister: “Lack of an accurate, transparent, reliable and regularly updated monitoring mechanism also adversely affects the efficacy of any plan scheme. In 2005, the Planning Commission estimated that the Government spends Rs 3.65 to transfer Rs 1 worth of food, suggesting leakage of about 70 percent.”
The connection between release of funds by the Central Government and the actual expenditure for physical inputs by the implementation agency is currently very obscure. The present monitoring mechanism, as has been highlighted above, suffers from many shortcomings. The implementation of CPSMS alone cannot resolve all the accountability issues of direct transfer of funds of Centre to implementing agencies. An MIS can complement audited accounts and financial statements but cannot take their place. There is a need for properly audited accounts of these IAs. Adequate validation along with independent supervision of central schemes funds is required at all levels in order to provide satisfactory assurance.
As we noted earlier, the purpose of fund utilization is to realise value for money, and achieve the programme objectives. Achievement of these objectives depends on provision of facilities, inputs and services. Physical targets of programmes are necessary but not sufficient for achieving their ultimate goals. As a result, there is considerable emphasis in recent times on the final outcomes of the programmes. It is necessary to distinguish between outputs and outcomes. To take an example, the goals of health programmes are now stated in terms of reducing infant mortality rates, maternal mortality rates, and total fertility rates. The outputs will be hospitals, beds, equipment, medicines, nutrient supplies and medical services of doctors and para medical staff.
Similarly, in primary education or secondary education, the focus is not merely on recruiting teachers, enforcing their attendance or building schools. What the programmes aim at is achievement of scholastic skills such as reading with comprehension, writing clearly and skills in solving mathematical problems. As the plan document says on this subject: “In implementation, equal emphasis would be placed on provision of inputs for quality education (infrastructure, teachers, training, enrolment and other inputs) as well as ensuring that these inputs translate into improved processes (attendance, instructional time) and outcomes (retention, learning outcomes, equity).” Fund utilization should lead to outcomes.