Chapter 31: FINANCIAL ADMINISTRATION
It operates through budgetary cycle i.e. formulation of
budget, enactment of budget, execution of budget, accounting
and auditing. Budget is a statement of estimated receipts both
revenue / income and expenditure of government in respect to a
Nature of financial administration:
- Remove inequality of income, transfer income from rich
- Ensure proper functioning of economy through taxation,
- Facilitate a smooth flow of investment and its optimal
allocation to increase national income.
- Stabilize inflationary trends.
- Make state a producer of both public and private goods
to maximize social welfare.
Purpose of budget:
- Ensures financial, legal accountability of executive to
- Ensures accountability of subordinates to superiors in
- Facilitates efficient execution of functions and
services of government.
- Administrative management and coordination is
facilitated as various activities of government
departments are unified into a single plan.
Systems of budgeting
Line item budgeting: Emphasizes on items
of expenditure without highlighting its purpose and
conceives budget in financial terms. Amount granted by
legislature on an item should be spent on that item only.
Objective is to prevent wastage, overspending, misuse also
called incremental budget as funds are allocated on
incremental basis after identifying existing base.
Performance budget:Output oriented budget
with long range perspective so that resources can be
allocated effectively or efficiently. It presents budget in
the form of functions, programs, activities, projects.
Established correlation between physical performance and
financial aspects of each program. It leads to a
functional classification of budget.
- Presents clearly purpose, objective of funds being
sought and brings out programs, accomplishment in
financial, physical terms.
- Facilitates better understanding and review of budget by
- Measures progress towards long term goals.
- Possible to have effective performance audit by work
measurement, unit costs, performance standards.
- More accountability to management. Improves formulation;
facilitates process of decision making at all levels of
- It is a tool for management control of fiscal
- Brings annual budget and development plan through common
Components of performance budget:
- Program that shows range of work.
- Framework of specified objective of each program
- Stimulate targets of work.
- Brings out ratios that justify financial needs of each
Criticism of performance budgeting:
- Can't organize all government work into functions,
- Programs are too broad to reveal significant activities
of the department to serve as a basis for decisions and
- Focus on quantitative than qualitative evaluation.
- Process of allocation of cost estimates over program
elements is difficult.
Planning, Program, Budgeting system / Program
Integrates planning, programming, budgeting functions.
Planning is done to select the best out of a number of
choices and optimizing the choice in terms of economy while
allocating funds in the budget. Programming links planning
and budgeting. Its documentation of decision on resources,
needs and output targeted. This is decided during planning
and scheduled over the years.Budgeting translates long term
plans to annual range format with more precise tags. All
elements of P.P.B.S. are like a system and work in
coordination. The main drawback is that PPBS is
illsuited for monitoring.
Zero based budgeting
Every scheme has to be reviewed critically and re-justified
from zero before including in budget. Hence no reference to
previous appropriation. Manager has to justify demand by
explaining why money should be spent at all and how a job
can be done better. Group schemes as per cost benefit ratio,
evaluate each scheme and rank them in order of performance.
Decision oriented process and connects short, long range
goals by monitoring achievements of objectives. Advantage is
that low priority programs are removed. Reallocate scarce
resources. However it challenges past practices and
attitudes and so needs time and effort. Paper work is high
as detailed costs, necessary information for decision
packages aren't available.
Role of Auditing
- Regulatory: Ensures conformance of expenditure with
legal, technical aspects like law, regulation and
- Propriety: Detects extravagance, waste even expense made
as per law.
- Performance: Measures performance of administration
against expense incurred.
- Preventive of waste, curative to rectify faults and
promotive of financial probity.
Separation of accounting and auditing
- Remove conflict of interest.
- Increase efficiency of both.
- Accounting is executive, auditing is quasi parliament.
- Department assigned with accounting role ensure spending
- Department assigned with accounting can help in fiscal
management, decision making, formulation of revised
Controller general of accounts
- Prescribes general principles of forms of accounts of
center and state.
- Carries of budget control, payments, receipts collection
- Provides status of finances.
- Technical advice on accounting matters.
- Internal audit of center.
- Consolidates monthly, annual accounts of center.
- Prepares condensed form of appropriation, finance