The Hindu Business Line : Govt finances: Divide to multiply

The monsoon has been unkind. The demands of coalition partners are heavy. The Government needs all the help it can get to reduce the yawning deficit. Decentralisation of finance management will help both by amplifying incomes and by improving the efficiency of utilisation, says P. V. Indiresan.

ALTHOUGH everyone complains about tax administration and Budget utilisation, few bother to analyse why financial administration on the ground does not enjoy as good a reputation as it should. How well taxes are collected and how efficiently they are utilised are as important as the tax proposals themselves.

The problem starts with the practice of clubbing the incomes of all government establishments into one Consolidated Fund of India. According to this principle, all incomes of the government are pooled together and then distributed centrally. In theory, that is ideal: The Finance Ministry alone is best equipped to have an overview of both budgetary resources and demands and to distribute them as systematically and as objectively as possible. The Consolidated Fund is also the tool used by Parliament to assert the people's will and make allocations as it thinks best. Thus, in theory, the Consolidated Fund ensures both administrative efficiency and political control.

Different on ground

Unfortunately, the situation on the ground is different. Consider, for example, the case of an engineering department entrusted with the construction of a culvert. That is a trivial exercise that should trouble neither Parliament nor the senior officials of the Finance Ministry. It could be left safely within the discretion of a low-level functionary such as an Assistant Engineer. Thanks to the principle of the Consolidated Fund, that does not happen. The work cannot start until Parliament approves the budget, and even then, only after the Finance Ministry processes the Budget and releases the grants. That can take several months. Meanwhile, the Assistant Engineer (and the contractors) should wait.

The Works Department knows, the Assistant Engineer knows, the contractor knows that Parliamentary approval is a formality. In recent years, Parliament has rarely discussed the Budget and allows virtually the entire Financial Bill to go through without discussion. The release of the grants too is routine but the administrative procedures are such that it takes quite a lot of effort and hence, time too. Hence, instead of sitting idle till the grants are released, they go ahead with the construction.

Rules broken

Strictly speaking, in law, the Department, the Assistant Engineer and the contractor are all breaking sacred rules. The problem does not end there. The Assistant Engineer gets his or her salary if he or she is lucky enough to be permanent. If, instead, the engineer is on a "work charge" basis, the salary too cannot be paid until the grants are released. Engineers have to live, and they are rarely rich enough to meet their expenses for months without regular income. Seeing their pitiable condition, contractors, out of the goodness of their heart, advance the young engineers suitable sums to help them tide over till their salaries are released. That could take almost a year.

Thus, the system thrusts young engineers into the clutches of all-too-willing contractors right at the start of their career. Obligated as they are to contractors, the engineers are in no position to scrutinise the work contractors do as meticulously as they should.

The Finance Ministry is equally strict with its own officers. For instance, it is not unusual for an Assistant Income-Tax Commissioner to be transferred from one State to another. The poor officer, who may not know the local language, suddenly lands in a strange place and knows no place to live, knows of no school where to put children to study. Thanks to the transfer, the salary too may not be paid for months till all the papers are carefully scrutinised and the salary account is transferred to the new Income Tax Circle, and pay orders are issued.

In this predicament, a helpful businessman turns up to greet the newcomer. He knows a vacant house where the Commissioner can stay. The landlord is a friend and would gladly wait for a few months till the problem of salary payments are sorted out. Oh! Yes! He happens to know the Principal of the local English medium school very well. The Principal is actually the uncle of his son-in-law's cousin's neighbour. The businessman will be glad to put in a word and the Principal will surely oblige.

What can the Commissioner do without salary in a strange city without friends and without official help? Can he starve? Can he sleep on his office table? Can he let his children languish without proper education? Will he not be but human when he accepts gratefully the helping hand the kindly businessman proffers? Having done so, how strictly can he scrutinise the books of that businessman?

Unworkable, unjust

These instances are not imaginary; they are not rare either. The government swears by rules knowing full well that they are unworkable, unimaginative, even downright unfair and unjust even to its own officials, let alone others. The system is not only unfair, it thrusts its young officials into the clutches of not-so-scrupulous businessmen. Top officials know how bad the situation is on the ground. Many of them have suffered themselves from the inequity and absurdity of the rules they enforce. Yet, so high is the inertia in the system that no one ever tries to mend matters, nor correct the obvious flaws.

It is no secret that because of this dysfunctional system, all government orders get bunched and get concentrated in the final months of the financial year. Many manufacturers and suppliers to the government keep most employees grossly under-worked for nine months in the year, and then pay heavy overtime charges to fulfil orders before a sacred deadline. That leads to inefficiency all round and raises prices as well. It also leads to unbridled corruption.

All these sufferings are inflicted and endured in the name of the virtually non-existent parliamentary control. This administrative process contravenes also the Sampling Theorem, which is one of the most fundamental principles of Information Theory. According to this theorem, anything that varies should be sampled at least twice in its shortest cycle, preferably several times. Then, the budgetary period being one year, it should be sampled and operated at least twice a year, preferably three-four times a year. Alternately, the grants may be sanctioned for three-four years at a time but corrected and modified once a year.

For example, much of the harm would be avoided if the annual grants are assessed and released in four instalments or every quarter. Currently, that is not practical because no funds can be released until the Budget is finally approved and even then after detailed scrutiny by the Finance Ministry.

There are several ways of overcoming this difficulty. As allocations do not vary much from one year to the next, 80-90 per cent of previous year's budgeted amount may be released in the expectation that allocations will not fall below that level. Or, the grants may be sanctioned each year for a moving window of three-four years. The latter is better because the Finance Ministry needs several months to complete its scrutiny before it will release the grants.

Abolish pre-audit

The best solution is to abolish pre-audit altogether. Pre-audit has not, by any stretch of imagination, curbed infructuous expenditure, has not improved efficiency, let alone check corruption. Pre-audit is based on the outdated principle of controlling inputs whereas modern control theory has established that only effective control is that of the outputs.

No incentive

Most government departments operate on the principle that their operations are deemed successful if the Budget funds are fully spent, and unsuccessful if any part of it lapses. Instead, before starting any activity, the responsible official should specify what would be the measurable outcomes, who would be the beneficiaries and what the benefit will be. The audit can then check how well these expectations came true. That is the only way the Finance Ministry can force spending departments to make specific promises and deliver them too.

In the prevailing "deficit financing" system, there is no incentive for any government establishment to maximise its earnings because all of it is taken away by the Finance Ministry. In 1980, IIT Madras used to earn the then substantial sum of Rs 2 crore by hiring out its power computer during the night shift. Yet, when the IIT wanted to buy a mini-computer for teaching purposes, it had to fight hard for a one-time expenditure of about Rs 30 lakh. In disgust, the IIT faculty stopped operating the computer in the night shift, and finally, it was the government that lost. As that loss broke no rules, nobody bothered.

The block-grant system offers a better alternative. In that system, the Finance Ministry offers a fixed grant irrespective of the expenses incurred but lets the subordinate units retain and spend whatever they have earned (but only according to specified norms). Then those units have an incentive to earn more and indirectly add to the resources of the government. That is how the IITs (and particularly the IIMs) started acquiring large endowments far beyond expectations.

The coming year will be difficult one. The monsoon has been unkind. The demands of coalition partners are heavy. The government needs all the help it can get to reduce the yawning deficit. Decentralisation of finance management will help both by amplifying incomes and by improving the efficiency of utilisation.

(The author is a former Director, IIT Madras.)

(This is the 128th in the Vision 2020 series. The previous article was published on July 12.)