15 India: Developments in Government Accounting and Financial Management

A. Premchand
Published Date:
June 1990
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The protective role and responsibilities of government have undergone a radical change in the last few decades. The emphasis has been progressively shifting from maintenance of law and order to developmental activities. Over the years, the growing involvement of the state in the provision of social services and welfare schemes and in public ownership of industrial, manufacturing, and trading activities has added to the burdens of the government in budgeting and financial management.

In India also, the role and tasks of the Government have undergone a transformation since independence. From a Government that was mainly interested in maintaining law and order and in providing raw materials for industrial activities in the United Kingdom and a ready market for its finished products, post-independence India has seen a burgeoning of welfare schemes and developmental activities for the alleviation of poverty.

Modernization of the system of financial administration in India has also gathered considerable momentum since independence in 1947. Designed by the British, the financial system was one of the capable instruments of British administration in this country. However, it was highly centralized, with excessive emphasis on rules and procedures, a concern for details dominated all stages of budgeting and financial control, the executive was not responsible for maintaining accounts, no worthwhile legislative control existed, and the role of audit was far from satisfactory. Excessive centralization, itemized control, and distrust were the hallmarks of the system of financial administration evolved under British rule.

Independence brought about a radical change in character and scope of the Government of India. The system of financial control was found wanting in dealing with the dynamic needs of planning and implementing the massive schemes and programs of economic and social development. Decentralization of responsibility and delegation of financial powers were the first major steps toward modernization of the system of financial administration. Cost-benefit analysis of projects, performance budgeting, accounting reforms, zero-based budgeting, inculcation of financial consciousness in the administrative departments, and changes in the nature, emphasis, and object of audit are the major developments that have taken place in recent years. Although these innovations were made haltingly and piecemeal, they are increasingly being welded into an integrated whole to modernize the system to meet the growing challenges of development administration. While India was greatly influenced by developments abroad, especially in the United Kingdom with regard to modern financial management, the efforts to change the inherited system of financial management that was not suitable for the new role of the Government of independent India in the context of development were organized internally. The main reforms included improved budget agencies, reorganized budget structures, and strengthened financial management capabilities in spending agencies. The emergence of planning in 1950 took care of the problems of expenditure planning.


The overall process of control over the financial administration in India is exercised through the legislature, executive, and audit.

Legislative control over the finances is exercised mainly in two stages: the first at the time of policymaking and the second in controlling the implementation of the policy. The legislature has control of the purse and determines the manner of raising the resources and the amount and manner in which the money so raised is spent. It specifies objects on which the money raised is spent and determines each year the amount to be spent on each of the various objects. This initial control is exercised when the annual budget or the annual financial statement showing the estimated receipts and proposed expenditures of the state administration for the financial year is presented. The second stage of control—the control over the implementation of the policies—is to ensure that moneys voted by the legislature have been utilized for the purpose and in the manner that the legislature wanted. This control is exercised through parliamentary procedures and a system of committees.

The administration is engaged in carrying out the policies acceptable to the legislature. It is accountable to the legislature about how it has collected moneys as authorized by the legislature and how it has utilized them to implement the policies laid down by the legislature on the specified objects. The outstanding feature of a democracy is this accountability by the administration to the legislature. The administration also has to ensure that similar accountability is formulated by each authority subordinate to the one immediately above in the hierarchy.

The scope of the state audit encompasses fiscal accountability—which includes fiscal integrity, full disclosure, and compliance with applicable laws and regulations; managerial accountability—which is concerned with efficiency and economy in the use of public funds, property of personnel, and other resources; and program accountability—which is concerned with whether government programs and activities are achieving the objectives established for them with due regard to both costs and results.


The system of financial control in India is modeled on the British pattern. The Constitution of 1950 created a Consolidated Fund to which all revenues received and all loans raised by the issue of treasury bills and all moneys received in repayment of loans have to be credited. The Constitution also created a Contingency Fund for meeting unforeseen expenditure pending subsequent authorization of the expenditure by Parliament. It also provided for a Public Account in which all transactions relating to debt, deposits, advances, and remittances are accounted for. On the analogy of the position obtaining in the United Kingdom, the Constitution of India also introduced a provision of a “Vote on Account,” to enable Parliament to consider the estimates more carefully over an extended period. Under the system provided for in the Constitution, a statement of estimated annual receipts and expenditures is prepared by the Government and presented to Parliament. This annual financial statement is commonly known as the budget. The budget shows receipts and payments of the Government under three heads: Consolidated Fund, Contingency Fund, and Public Account. The budget comprises the Revenue Budget and the Capital Budget. The estimate relating to expenditure “charged” upon the Consolidated Fund is not submitted to the vote of Parliament though it is open for discussion in Parliament. The other expenditure is submitted to Parliament in the form of demands for grants on the recommendation of the President. A broad demand is proposed for each ministry/department. Each demand contains a statement of the total amount required and a statement of the detailed estimate under each demand divided into items. After the demands have been passed by the legislature, a bill is introduced to provide for the appropriation out of the Consolidated Fund. No money can be withdrawn from this Fund until this bill is passed by Parliament. The bill when passed becomes the Appropriation Act.

The Finance Bill containing the annual tax proposal is considered and passed by Parliament only after the demands for grants have been voted and the total expenditure is known, whereupon it enters the statute as the Finance Act.

The preparation of an annual financial statement—the budget for the approval of Parliament—is a constitutional obligation on the part of the executive. Parliament exercises full control over expenditure through this mechanism. Though executive ordinances can be used temporarily to raise resources, no lasting tax measure can be introduced by an ordinance. Similarly, no expenditure can be incurred by the executive except with the approval of Parliament. The President can, however, authorize the expenditure when the constitutional machinery fails or between two sessions of Parliament. But this authorization of expenditure has to be ratified in the next parliamentary session.

The budget estimates in India are on a cash basis, budgeting is gross, and the amounts voted lapse at the end of the financial year and cannot be utilized in the succeeding year.

The budgetary process generally comprises the following stages:

  • Preparation of the budget;
  • Consideration and adoption of the budget by Parliament;
  • Execution of the proposals in the budget; and
  • A postevaluation of achievement and performance.

The administrative departments have to frame their estimates of receipts and expenditures bearing in mind the general policy of the Government and the developmental schemes approved by the Planning Commission. These estimates are then sent to the Ministry of Finance, which consolidates all these proposals and estimates in the form of the budget.

While finalizing the budget proposals, the Ministry of Finance has to keep in view the amount of resources available and the acceptable levels of budgetary deficits. The next stage of the budgetary cycle is its consideration and adoption by Parliament. Parliamentary discussion of the budgetary proposals affords an opportunity to members to review the working of the Government in general. The process of preparing the budget, discussing it in Parliament, and its subsequent approval can be considered an effective instrument of financial management of government activities.

In India, the expenditures voted by Parliament are immediately available to the spending departments and ministries. However, release of funds by the administrative ministries to the field formations and public sector undertakings is based on periodic profiles of expenditure projected by the spending agencies. This review is carried out with a view to controlling and monitoring expenditure. The spending agencies are mostly equipped with budget and planning units to undertake a periodic review to show the variations, budgetary lags, expenditure patterns, and relationship between physical and financial progress. Such periodic reviews are, however, performed routinely at the time of release of funds at specified intervals. Quarterly meetings are organized at which trends in expenditure vis-à-vis budget provision are reviewed, and midcourse adjustments are made. The Ministry of Finance also takes stock of expenditure trends against budgetary allocations in periodic meetings with financial advisers of various ministries. Economy in unplanned expenditure is emphasized to minimize the budgetary deficit. The postbudget evaluation is carried out through the operations of various parliamentary committees, such as the Public Accounts Committee, the Estimates Committee, and the Committee of Public Undertakings. While the Estimates Committee is charged with undertaking a detailed examination of budget estimates put forth by the Government in respect of each administrative department, the other two parliamentary committees examine the expenditures incurred by the executive to ensure that the moneys disbursed were available and applicable to the service to which they had been applied, that the expenditure conformed to the authority that governed it, and that rules of financial propriety and economy in expenditure were duly observed. These committees also check the aspects of efficiency with which a project or scheme has been implemented and whether its objectives were attained or not.


Audit forms an indispensable part of any financial system and is one of the important organs necessary to ensure the sound functioning of a parliamentary democracy. It is the main instrument to secure accountability of the executive to the legislature. Audit assists Parliament in exercising financial control over the executive to ensure that funds voted have been utilized with due regard to economy and efficiency for the purpose intended, and that the funds authorized to be raised through taxation and other measures have been assessed, calculated, and properly credited to the Government.

Envisaging an important and statutory role for audit, the Constitution installed the Comptroller and Auditor General of India as a high independent statutory authority. Audit of the accounts of the Union and of the States is a Union Subject. A unitary audit in a federal setup is designed to play a significant role in effective financial administration for the overall national interest. The Comptroller and Auditor General is the one dignitary to ascertain on behalf of the elected legislature that the expenses voted are not exceeded or varied, and that the money expended was legally available for and applicable to the purpose for which it was applied. The Constitution safeguards the independence of the Comptroller and Auditor General in a variety of ways. His duties, powers, and conditions of service have been set out in an Act of Parliament passed in 1971 under Article 149 of the Constitution.

Auditing methods, practices, and standards have changed considerably over the years. The support and encouragement of the Speaker of the lower House of Parliament and the Public Accounts Committee have been an important factor in the evolution of the audit. India is now moving more and more from the usual regularity and transactions audit to the economy, efficiency, and effectiveness audit because of the expanding programs in the context of our socioeconomic objectives. The emphasis is now on appraisal of performance of programs and projects as well as of the soundness of the system. The fundamental object of audit is to secure real value for the taxpayers’ money. To conduct all these audits, a variety of methodologies and techniques had to be developed, and in this field the Indian Audit Department has done important work. Recent innovations include a unified audit of scientific departments and institutions and a systems-based manpower audit. The Indian Audit Department is continuously updating auditing standards to keep pace with the international developments in this field. Great attention is devoted to training staff at all levels for quality upgrading and for coping with new audit areas.

To enable him to discharge these duties effectively, the Comptroller and Auditor General is empowered to

  • inspect any office of the organizations subject to his audit;
  • call for any books of accounts and other relevant documents that he requires during audit; and
  • call for such information as he may require to prepare any account or report.

He is also responsible for compiling accounts of the states, except Goa. He was relieved of the responsibility of maintaining accounts of the Union Government in 1976 by an Act of Parliament, after the separate organization of the Controller General of Accounts under the Ministry of Finance was established.

The audit reports of the Comptroller and Auditor General on the accounts of the union/states are submitted by him to the President/Governor, who causes them to be laid before the Parliament/ legislature. They are then remitted to the Public Accounts Committee, which examines them and makes recommendations to Parliament on the various issues involved. The process of public accountability is now complete.


One of the distinctive features of the system of government accounts in India is the minute detail into which the financial transactions of the Government under receipts and payments are differentiated and classified.

Principles of Classification

The conventional pattern of classification was on organizational lines and consisted mainly of the listing of receipts according to various types of taxes and the statement of expenditures according to the department in which they occurred and its objects or grounds. With the phenomenal growth and diversity in government functions involving huge outlays, the necessity arose for a more meaningful classification of transactions for presentation of government operations in terms of functions, programs, and activities.

Accounting Reform

A team set up by the Government went into the question of accounting reform and made recommendations to reform the structure of budget and accounts. The important objectives to be achieved from these reforms were

  • to have a uniform classification for the budget accounts and plan;
  • to present the objectives and purposes of government expenditure clearly in terms of functions, programs, and activities;
  • to bring together under the appropriate functional (major), program (minor), and activity (subhead) heads all expenditures on that function, program, scheme, or activity, irrespective of the organization administering it;
  • to help the management with timely accounts data for monitoring any analysis of expenditure on program and activities and also to secure itemized control over expenditure; and
  • to facilitate the introduction of performance budgeting.

The recommendations of this team were accepted by the Government, and the Comptroller and Auditor General, with the approval of the President, prescribed revised classification of government transactions, which were effective from 1974–75, by the Union, State, and Union Territory Governments.

From April 1, 1987, a revised coding pattern has been introduced that keeps in mind the emerging requirements and provides for computer-based financial information systems. In the revised pattern, a four-digit Arabic numerical code has been assigned to the major heads of accounts, followed by a two-digit code for the relevant submajor heads, and followed further by a three-digit code for the minor heads. The codification pattern for the major heads has been designed in such a way that the last three out of the four digits represent the same function in the four sections, namely, receipt heads (Revenue Section), expenditure heads (Revenue Section), expenditure heads (Capital Section), and “loans and advances,” except in a few cases where more than one function has been grouped together as a submajor head under a single major head.

The advantages of a uniform system of classification for all stages of financial administration—preparation of the budget estimates, voting of demands, implementation, accounting review, and audit—cannot be overemphasized. Such a system improves public accountability by presenting a comprehensive picture of various governmental activities across sectors and also affords the Government an opportunity to review its own performance with reference to objectives of economic and social improvement.

Performance Budgeting

The streamlining of demands for grants and accounting heads to fit the needs of activities and program classification was necessary if performance budgeting was to be introduced. The demand for introducing performance budgeting was first made in the lower House of Parliament as early as 1954. It was followed up by the Estimates Committee, which recommended in its twentieth report on budgetary reforms (1959) that the performance-cum-program system of budgeting would be ideal for a proper appreciation of the schemes and outlays included in the budget, especially for large-scale developmental activities. It went on to say that the experiment toward introducing performance budgeting on a selective basis to supplement the traditional budget should be expedited. These recommendations were repeated in 1959 and 1960 by the Estimates Committee.

However, no serious efforts were made to introduce performance budgeting until the Administrative Reforms Commission on Finance and Accounts recommended in 1968 that it be introduced in all departments and organizations that were directly responsible for implementing developmental projects and programs. The Administrative Reforms Commission stated:

Performance Budgeting which, in essence, is a technique for presenting government operations in terms of functions, programs, activities and projects, seeks among others, to achieve the following important objectives:

  • (a) to present more clearly purposes and objectives for which the funds are sought and to bring out the programs and accomplishments in financial and physical terms;
  • (b) to help a better understanding and better review of the budget by the Legislature;
  • (c) to improve the formulation of the budget and to facilitate the process of decision making at all levels of Government;
  • (d) to enhance the accountability of the management and at the same time to provide an additional tool to management control of financial operations; and
  • (e) to render performance audit more purposeful and effective.

It is nearly 20 years now since performance budgeting was first introduced. However, identification of norms and efficiency yardsticks on performance continue to pose problems. The performance budgets are still prepared only as supplementary documents to the main budget. It will take more time before the performance budget becomes a more effective tool of management in the Government.

Another important development in the field of financial management has been the introduction of the concept of zero-based budgeting. This form of comprehensive budget was first introduced in the United States in the Department of Agriculture. The introduction of this concept envisaged that “all programs will be reviewed from the ground up and not merely in terms of changes proposed for the budget year . . . . The fact that certain activities have been carried out for a number of years will not, per se, adequately justify their continuation. …”

The Government of India has not made any serious efforts to implement the system of zero-based budgeting. However, realizing the importance of this comprehensive form of budgeting in the context of rising deficits and the need to control expenditures, the Ministry of Finance in 1986 directed the major economic ministries to make use of this concept to some advantage. As of now, the concept of zero-based budgeting, that is, de novo examination and scrutiny of all ongoing projects and programs with a view to adjusting priorities in the context of financial constraints, is informally used in the Ministry of Finance and the Planning Commission.


In the pre-independence era, the question of separation of audit and accounts was raised from time to time but could not be given serious consideration. In addition to the practical difficulties, there were problems of cost and manpower. Thus, except that accounts of the Defense Forces were always separated from audit, the setup of accounts and audit continued in other government departments until separation was introduced in the railways in 1925 as an experimental measure and adopted as a permanent arrangement in 1929.

After independence, the process of separation of audit and accounts proceeded gradually. From April 1951 partial departmentalization of accounts took place in the Department of Posts and Telegraphs. Similarly, in April 1955 the responsibility for making payments and maintaining accounts of the Food Rehabilitation and Supply Departments was transferred to the respective ministries. The transfer of accounts relating to payments of the Rajya Sabha and Lok Sabha Secretariats was also made with effect from October 1955. In 1968, the accounting functions in respect of the telecommunications branch were transferred.

It was only in 1976 that a major exercise of departmentalization of accounts covering all the ministries and departments of the Union Government was undertaken and completed in a phased manner, with the main objective of integrating accounts with the administrative ministries and departments. Under this scheme, accounts and finance form an integral part of overall management. Administrative ministries have been entrusted with the responsibility of arranging payments and timely compilation and rendering of accounts.

The salient features of the scheme are that the secretary to the ministry/department is the chief accounting authority and discharges this responsibility through and with the assistance of the integrated financial adviser of the ministry/department.

The integrated financial adviser is responsible for preparing the budget of the ministry/department and distributing budget allocations to the various wings, departments/formations; arranging payments directly to the bodies, corporations, and authorities of grant-in-aid loans, etc., as may be sanctioned by the department; compiling and consolidating accounts of the ministry/department in accordance with the instructions issued by the central government and/or the Comptroller and Auditor General and rendering the appropriation accounts; and introducing a system of management accounting suited to the functions and requirements of the ministry/department.

The payment and accounting functions of the ministry/department are discharged through departmental pay and accounts offices.

The payment as well as receipt transactions relating to the ministry/department and its attached and subordinate offices are transacted at the branches of the Reserve Bank of India and the State Bank of India, or its subsidiaries, or at specified branches of public sector banks accredited to the department without intervention of the Treasury.


With the separation of audit and accounts at the union level, an organization headed by the Controller General of Accounts was created in the Department of Expenditure of the Ministry of Finance. It is entrusted with the responsibility of establishing and maintaining a technically sound departmentalized accounting system; laying down the form of accounts relating to the Union and State Governments; administering the rules relating to the custody of the Consolidated Fund, the Contingency Fund, and the Public Accounts of India; consolidating the monthly accounts of the Union Government from the monthly accounts prepared by the various central pay and accounts offices and the state accountants general/directors of audit; and preparing the annual accounts (commonly known as union government finance accounts) showing under the respective heads the annual receipts and disbursements for the Union Government and also summarized civil appropriation accounts, comparing the actual expenditure under various grants/appropriations with the grants voted/appropriations charged as specified in the schedules appended to the Appropriation Act passed by Parliament.


Allied with the concept of separation of audit and accounts was the question of devolution of greater financial powers to the administrative ministries. Prior to independence there was excessive concentration of authority in the Finance Department. The Estimates Committee of the first Lok Sabha, which examined the matter of financial administration, thought that the control of the Ministry of Finance was more rigid on minor items of expenditure and lax on major items. The Estimates Committee advocated that itemized control should be delegated to the various ministries and departments and the Ministry of Finance should devote its attention to major proposals involving huge outlays.

A well-known authority on public administration, Paul H. Appleby, who studied the Indian administrative process, was also struck by the highly centralized character of the Indian financial system as well as the way in which the matters of detail were referred to the central agencies for concurrence even though the decisions on budgetary allocations had already been made. According to him, financial management could be more effective if the deployment of appropriated funds was left to the discretion of the spending agencies. The exercise of such judicious discretion, he thought, was conducive to a more effective and efficient discharge of responsibilities. The first major step for delegation of enhanced financial powers to the administrative ministries was taken in 1958. It related mainly to sanctioning an expenditure up to a specified limit, and payment of grants and loans under certain conditions. The need for further delegation of powers continued to be felt by various parliamentary committees and by the administrative ministries. In 1961, therefore, the Government prepared a statement on measures for administrative improvements. This policy paper recommended that the existing system of financial control should be reorganized, financial responsibility should be devolved on the administrative ministries, and the control of the Ministry of Finance should be exercised through prebudget scrutiny, adequate reporting, random checks, etc. Thus, further financial delegations were made in 1962. It was envisaged that the administrative ministries would, in their turn, delegate administrative and financial powers to the heads of departments and other subordinate authorities. The delegation scheme of 1962 was reviewed in 1967, and a new scheme incorporating larger financial powers to the administrative ministries was introduced in October 1968. This scheme provided for greater delegation relating to the reappropriation of funds and also enhanced powers for creating managerial jobs required for public corporations. Again, in 1973, a comprehensive review of financial delegations was undertaken by the “Group of Ministers,” who addressed themselves to improving administrative performance. As a result of this review, the Group of Ministers recommended enhanced delegation of powers. These recommendations were accepted by the Government and implemented with effect from April 1975. The main features of the enhanced financial delegations include the power to redelegate to subordinate formations, the creation of posts up to a particular rank, and only prebudget scrutiny to be exercised by the Ministry of Finance. In 1988, administrative departments were given powers to sanction plan schemes up to Rs 20 crores and nonplan schemes up to Rs 5 crores (1 crore is equivalent to 10 million).

Exercise of Delegated Powers

There have, however, been problems in exercising the financial powers delegated to the administrative ministries from time to time. While delegating such powers, the Ministry of Finance had always laid down certain conditions under which these powers were to be exercised. Moreover, in the context of the need to control public expenditures, it had often issued orders for effecting economy in expenditure. Such instructions have somewhat restricted the exercise of delegated powers by the spending agencies. In fact, they created an ambience in which the officers are not always willing to accept responsibilities and routinely refer the cases to superior authorities. The Estimates Committee therefore had to recommend that the officers should understand that they will not be allowed to play safe and transfer their responsibilities to higher authorities but will have to take decisions on matters falling within their own jurisdiction.


With the devolution of responsibility for internal financial management to the administrative ministries and commensurate delegation to them under a system of performance budgeting and management accounting, the role of the administrative ministries and the Ministry of Finance required a radical change. An important reform was accordingly made in 1975–76 with a view to forging closer links between planning and budgeting on the one hand and actual expenditure and performance on the other. Prior to this period there was a system of internal financial advisers in various ministries. They were required to help and advise administrative departments in their budgetary, financial, and related work and to assist them in a proper exercise of control over expenditure. Outside the delegated powers, the proposals had to be referred to the Ministry of Finance. The scheme of integrated financial advisers from 1975 onward is an improvement over the earlier schemes of devolution of financial powers and gives more powers to ministries and also makes them accountable for effective financial management. This scheme has enabled a more direct role to be played by the finance branch in each department in developmental programs.


Another aspect of managing financial resources is the institutional arrangement by which tax revenues are allocated to the federal units—states. India is a union of states. A large number of economic, social, and developmental functions and responsibilities have been assigned to the states by the Constitution. With regard to raising resources, the Constitution has assigned the power of taxation either to the union or to the states, whichever is in the better position to levy and collect them, thereby attempting to avoid overlapping of tax jurisdiction. The principles according to which taxes raised are to be distributed among the union and the states have been made the responsibility of the Finance Commission, which is constituted by the President under the provisions of the Constitution. It is the duty of the Finance Commission to make recommendations regarding the distribution of income tax and the union excise duties between the union and the states and the allocation of the states’ share among them and also regarding the principles that should govern the grants made under Article 275 of the Constitution to cover the gap between the estimated revenue and expenditure. The net proceeds of any tax or duty, that is, the actual proceeds reduced by the cost of collection, are ascertained and certified by the Comptroller and Auditor General of India under a constitutional provision.

Over the years, the main channel for giving grants to the states in meeting outlays on developmental schemes and programs has, however, been the Planning Commission, by taking recourse to the constitutional provision in Article 282. The relative importance of the Finance Commission has therefore diminished according to many financial analysts, as the major responsibility for grants-in-aid to the state governments has been taken over by the Planning Commission. This action has led to some criticism by some state governments.

1In preparing this article, the author has drawn upon the information and analyses in various books on the subject, notably Indian Administration, by Asok Chanda (London: Allen & Unwin, 1958), Government Budgeting and Expenditure Controls, by A. Premchand (Washington: International Monetary Fund, 1983), and Financial Administration in India, by M.J.K. Thavaraj (New Delhi: S. Chand & Co., 1979).

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