GoI tracks the money trail: How PFMS will pull plug on spending slippages

The updated Public Financial Management System will complete one year in operation on March 31, but challenges to full integration remain

By midnight of March 31, just a couple of weeks from now, in all government offices across the country, millions of data entries for purchases and spends being keyed into terminals will come to a halt. By next morning, the officers of the Controller Gen­eral of Accounts will tell the respective finance secretaries, what got spent and what didn’t in FY22. Armed with the data, in less than a week, Finance Minister Nirmala Sitharaman will be able to figure out if the new financial year is starting with adequate cash reserves.

The elaborate public money-tracking system that makes this possible is the Pu­b­lic Financial Management Sys­t­em (PFMS). It has cut the diff­er­­ence between audited and un­audited public accounts data of the central government to less than one per cent, Fin­a­nce Secretary TV Somanathan said earlier this month. That is a huge improvement in how the Centre would have spent Rs 37.7 trillion in FY22. Slippages in government spending, at the Centre and the states, have been one of India’s public fin­ance bugbears. “A sound public financial management process will be necessary at the sub-national level to take informed decisions regarding resource allocation and implementation of policies,” a recent National Institute of Public Finance and Policy paper points out. This process becomes all the more critical when the government needs to respond rapidly to black swan events, such as the Covid-19 pandemic.

There are implications, tho­ugh. The PFMS makes every agency using public money to route it through bank accounts. Earlier, states, short of money, often bypassed the route, using their treasuries instead. Since banks report to the Reserve Bank of India in real time, any fiscal stress now becomes app­arent immediately. If a state builds in additional subsidies such as waiver of power bills, or others, this transparency in accounts would be costly.

It has taken years to reach here. The PFMS was conceptualised in 2009 but had to wait almost a decade before the gargantuan government machinery was able to integrate, piece by piece. A note of urgency came in when an exp­enditure management commission rep­o­rt of 2016, chaired by former Re­serve Bank of India Gove­r­n­or Bimal Jalan, showed over a tr­illion rupees sloshed throu­gh government finances every year. The sum went undetec­t­ed, through convoluted chains of bank accounts and district-level treasuries. It was a huge float.

A subsequent study by Su­mit Bose, former finance secre­tary, pointed out that when the money spent is not tracked, the weakest links, such as rural de­v­elopment, are hurt the most. Bose’s study suggested “quality monitoring” for all program­mes of panchayats. Hardly any country has tried such a vast tra­nsfer of their accounts to a digital platform riding on bank platforms. The direct benefit transfer and the payment of wages for the Mahatma Gandhi National Rural Employment Gu­arantee Act are only two ex­a­mples of the scope of the cha­n­­ge. The World Bank has supp­o­rted the switch and rec­­­o­m­mended African and oth­er countries to emulate the model.

The Union finance ministry sent out a detailed worksheet for states to monitor the usage of funds under the centrally sp­o­nsored schemes in the second fortnight of March last year. Still, the 25-item list arri­ved too late to implement with­in the financial year. FY21-22 will be the first year when the full im­pact of these instruct­i­ons will be visible. One of the re­a­sons Sit­haraman has been able to cap expenditure plans for FY23 to a less than 5 per cent rise over FY22 is the coming of age of the PFMS. She can track, al­m­ost daily in real time, how mo­ney is being spent by the go­vernment at the Centre down to the targeted beneficiaries.

One of the instructions from the ministry asks states to open only a single nodal acc­ount for each centrally sponso­red scheme with a bank. “Impl­ementing agencies down the ladder should use the same account with clearly defined drawing limits…,” in the same bank. Only, if necessary can they open another account for downstream usage but those should be “zero balance subsidiary accounts”.

For banks, parking government money with them used to be a prized catch. Even Rs 1 crore parked in such an acc­o­unt at the beginning of the year in April or May and spent by the government agency only by Mar­ch next year makes for a very happy branch manager. But this allure may diminish because of the design of the PFMS scheme. For instance, sometimes those sums were co­n­verted to fixed deposits. The PFMS instruction to inst­e­ad make those zero balance ac­c­o­u­nts acts as a huge disincent­ive. It goes further and says even the mother account has to transfer any interest earned on the sum parked to the Con­soli­dated Fund by showing it ex­pl­icitly. Even the limited flo­at is thus impossible. This has been done to prevent funds from being misappropriated. In the Bengaluru municipal co­rpo­r­at­ion, for example, a senior officer was prosecuted some time ago for running a few cr­o­re rupee of public receipts thro­ugh his personal accounts brie­f­ly and investing them in mu­­­­­­t­ual funds and others. The re­turns earned were his earnings.

States, as sovereign entities, have the freedom to make exp­enditure decisions from their own resources and the shared tax corpus in which the Centre cannot interfere. But the PFMS route makes the usage rules for centrally sponsored schemes di­fficult. “Once you create an accounting machinery for it, a different machinery to handle state funds separately beco­mes difficult,” said a government officer.

States like Karnataka and Rajasthan have made matters easier by simply adopting the PFMS model. Others, like West Bengal, have created their own IT models, but now those too have to work in sync with the PFMS. 

“States are using both PFMS and their own integrated financial management inform­ation systems,” said Bornali Bha­ndari, senior fellow, National Council of Applied Economic Research, who has been tracking the experiment for years. “These are some conceptual challenges that have to be overcome,” she added.

To make those integrations possible, the PFMS has provi­ded four models for the states to adopt. But habits are difficult to change, even at the Centre. The Railways, for instance, with a pan-national presence and in every reckoning in need of transparency about its acc­ounts, is yet to board the PFMS. In December last year, the Dep­artment of Expenditure had to stop other ministries from rele­asing money to states without ensuring they used the new accounting system. The department stopped their authority to release any more money. More strong-arm tactics could be needed in sectors like def­en­ce. Expect the stakes to rise.