Column : Where did the rupee go

Written by Yamini Aiyar | Updated: Dec 5 2012, 07:16am hrs
In the age of increased public attention on state failures and corruption, it may come as a surprise to many readers that the government simply lacks the ability to track actual expenditures for thousands of crores of welfare funds.

The government of India (GoI) finances the bulk of its social welfare schemes through a transfer mechanism known as the centrally sponsored schemes (CSS). CSS are specific purpose fiscal transfers from the GoI to state governments for implementing social sector programmes. GoI funds and designs these schemes while state governments implement them. Almost all of the United Progressive Alliances flagship social welfare programmes, including the MGNREGA, are designed as CSS.

To implement CSS, GoI transfers funds either directly to the state government treasury or to specially created societies. Within the governments accounting system, the act of releasing funds is treated as an expenditure. A similar procedure is followed for fund release at each subsequent level. So, when funds are transferred from the state departments to the district, these are again recorded as expenditures and so on. Thus, central, state and district level government expenditure statements are merely statements of intenta list of funds released to the next level of governmentrather than actual expenditures.

For CSS financed through the state treasury, actual expenditures are captured through the annual audited accounts of the government but these have a two-year time lag and are hampered by poor quality record keeping. To add to the confusion, the audited accounts and annual expenditure statements prepared by line departments are not reconciled with each other, resulting in multiple expenditure numbers that rarely match.

The problem is compounded by the fact that significant amounts of money for CSS do not make their way to the state treasury and are thus not audited by the state accountant general. According to the Rangarajan Committee on public expenditure management, in 2011, R1.22 lakh crore of plan expenditure was transferred through specially created societies. These societies are set up by line departments at the state and district level. While they are staffed and run by government authorities, they do not need to adhere to government financial rules.

Bank accounts for these societies are independent of the state treasury and GoI deposits money directly into these accounts. Expenditures are monitored by the concerned line department and audited by private chartered accountant. The Rangarajan Committee points to several flaws in this model, including the fact that there is no regular mechanism to authenticate utilisation certificates and collect monthly expenditure statements. These accounts are also non-lapsable. If unspent during the financial year, they do not get re-credited to the treasury and can be spent at any point. But, the accounting system has no mechanism to track expenditure on these unspent balances and it is possible that these monies are quite substantial.

From time to time the Comptroller and Auditor General (CAG) undertakes performance audits of CSS, including those that are implemented through societies. However, these performance audits are sporadic and not done for all CSS. Importantly, even here disaggregated expenditure data is only available up to the district level and not below.

But even if the government were to resolve these basic accounting failures, the poor quality of record keeping on the ground may well make it near impossible to accurately track expenditure. For the last two years, my colleagues and I have been involved in an ambitious effort to track government expenditures in elementary schools. But weve often been stuck because cashbooks and passbooks in schools have been stolen, lost in floods or burnt in kitchen fires. Weve even found cases where account books had not been updated because the headmasters were under trial for murder!

At the district level, accounting capacity is weak. Districts simply lack the human resources to compile their monthly reports. And when reports are compiled, the quality is variable. Weve come across monthly reports where numbers reported have been based on a formula devised by authorities rather than actual releases by the district. In another case, we found that the annual statement was missing months because the officers hard disk had crashed and the data for some months could not be retrieved!

This failure to monitor development funds and track expenditures impacts state capability to implement welfare programmes in important ways. For one, in the absence of information on money flows, inefficiencies such as delays in disbursements, wastage and leakages become impossible to identify and correct. So, while plans are made and budgets allocated annually, these have little connection to the actual financial needs and experience of expenditure problems faced on the ground. Consequently, we have a delivery system where plans are poorly designed, monies are inefficiently allocated and inefficiencies from one year simply transfer on to the next.

Second, to borrow a clich, what gets measured gets done. In the absence of a proper mechanism to monitor and measure real expenditures, the administration is simply unable to incentivise performance. It is no surprise that large amounts of government money lie untouched in bank accounts all over the country. The result: a loss that may well exceed the CAGs estimates for the 2G scam.

Of course, expenditure alone is no guarantee that money will be spent well. But if we dont get the simple things rightlike ensuring that money reaches its destination, tracking how it is actually spent and removing inefficiencies and bottlenecks to its intended useit is unlikely that we will be able to tackle the bigger challenge of ensuring implementation-quality. Fixing the governments inability to track welfare expenditure is as urgent as the need to tackle large-scale corruption.

The author is director, Accountability Initiative, and senior research fellow, Centre for Policy Research