Chapter 31: FINANCIAL ADMINISTRATION

Introduction

1. Remove inequality of income, transfer income from rich to poor.
2. Ensure proper functioning of economy through taxation, expenditure, debt.
3. Facilitate a smooth flow of investment and its optimal allocation to increase national income.
4. Stabilize inflationary trends.
5. Make state a producer of both public and private goods to maximize social welfare.

1. Ensures financial, legal accountability of executive to legislature.
2. Ensures accountability of subordinates to superiors in administrative hierarchy.
3. Facilitates efficient execution of functions and services of government.
4. 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.

Advantages:

1. Presents clearly purpose, objective of funds being sought and brings out programs, accomplishment in financial, physical terms.
2. Facilitates better understanding and review of budget by parliament.
3. Measures progress towards long term goals.
4. Possible to have effective performance audit by work measurement, unit costs, performance standards.
5. More accountability to management. Improves formulation; facilitates process of decision making at all levels of government.
6. It is a tool for management control of fiscal operations.
7. Brings annual budget and development plan through common language.

Components of performance budget:

1. Program that shows range of work.
2. Framework of specified objective of each program
3. Stimulate targets of work.
4. Brings out ratios that justify financial needs of each program.

Criticism of performance budgeting:

1. Can't organize all government work into functions, activities, programs.
2. Programs are too broad to reveal significant activities of the department to serve as a basis for decisions and management.
3. Focus on quantitative than qualitative evaluation.
4. Process of allocation of cost estimates over program elements is difficult.

Planning, Program, Budgeting system / Program budgeting

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

1. Regulatory: Ensures conformance of expenditure with legal, technical aspects like law, regulation and procedures.
2. Propriety: Detects extravagance, waste even expense made as per law.
3. Performance: Measures performance of administration against expense incurred.
4. Preventive of waste, curative to rectify faults and promotive of financial probity.

Separation of accounting and auditing

1. Remove conflict of interest.
2. Increase efficiency of both.
3. Accounting is executive, auditing is quasi parliament.
4. Department assigned with accounting role ensure spending within limits.
5. Department assigned with accounting can help in fiscal management, decision making, formulation of revised estimates.

Controller general of accounts

1. Prescribes general principles of forms of accounts of center and state.
2. Carries of budget control, payments, receipts collection for center.
3. Provides status of finances.
4. Technical advice on accounting matters.
5. Internal audit of center.
6. Consolidates monthly, annual accounts of center.
7. Prepares condensed form of appropriation, finance account.