Accountability through
financial reporting
Dr. Subhash Chandra Pandey, IAAS
Director General (Strategic Management)
O/o the Comptroller & Auditor General of India
National Academy of Audit & Accounts
8th August 2014
Accountability levels
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Government
– Own citizens
– Donors
– Currency Union
– Regional Trade Grouping
– International Community in general
Sub-national government
– National government
– Own people
Parastatal(PSUs, Autonomous Bodies, SPVs-Societies/Trusts)
– Funding government
– Statutory Regulator
What we wish to explore, time permitting
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International norms on fiscal transparency and country practices:
Moving Towards Greater Transparency and Accountability of
national governments to international community
Standardization of accounting framework, integration of national
income accounting and government accounting
Extension of commercial accounting ideas to government and
extended public sector accounting (SNA-2008/GFS2001/IPSAS
and IFRS)
Fiscal responsibility legislation and fiscal transparency
Accrual accounting
Outstanding issues in public financial reporting
Mere financial reporting is insufficient. Need robust M&E systems
and reliable data to track financial and operational info in sync
Monitoring of sub-national indebtedness
Recurrent crises emphasize need for
international oversight on fiscal risks
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Fiscal transparency is part of fiscal discipline/
responsibility in mature economies [only AngloSaxon consensus?]
Is there adequate monitoring and disclosure of
emerging “Fiscal Risks”?
Governments are often caught napping as crises
erupt, degree of foreseeability varies
South East Asian currency crisis 1996, US Financial
Crisis 2008 and European sovereign debt crisis that
followed soon after
The Greek ‘tragedy’
Dr Rajan playing Cassandra again?
Transparency: General issues
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How much to disclose and to whom? A constant dilemma, a perennial
issue in Public Administration
Analogy of disclosure responsibility to shareholders as part of good
corporate governance
Legitimate concerns on creating avoidable confusion and panic, misuse by
“who cannot understand or not willing to understand”, irresponsible and
even misleading media coverage and resultant damage
Paternalistic view of blocking access to information in “public interest”
often provides unintended cover to errors and omissions
Often there is both lack of transparency to general public as well as lack
of proper internal monitoring of problem areas
Emerging consensus: Good governance calls for democratic polity
in its truest sense, peoples’ empowerment and awareness,
transparency, freedom of information except for a small negative
list of national security to facilitate informed public debate, wider
ownership of reforms and control on corruption
Fiscal transparency as an aid
to good fiscal management
( Paint me, warts and all)
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Improved disclosure requirements help the top management in
taking better informed decisions
Additional disclosures may bring out not only intentional wrong doing
but also unintentional oversight, corruption and negligence
Being aware of a problem is the first step towards efforts to solve it
and acknowledging the existence of problem speeds up the process
Bretton woods’ response
to 1996 SE Asian crisis
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IMF code of good practices on fiscal
transparency (1999) revised in 2007
Fiscal Transparency assessments by
IMF teams for various countries ROSCs
2001 Revision of IMF’s 1986 Manual
on Government Statistics (GSFM 2001)
Reference material on Fiscal Transparency
and cognate issues
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IMF Code/Manual of Fiscal Transparency (1999)
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Report of the Committee on Fiscal Responsibility Legislation (2000)
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OECD Best Practices For Budget Transparency (2001)
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Report of the Core Group on Voluntary Disclosure Norms for State
Governments (2001)
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Report of the Advisory Group on Fiscal Transparency (2001)
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Report of the Standing Committee on International Financial Standards and
Codes (2002)
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Fiscal Responsibility and Budget Management Act (2003)
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Fiscal Responsibility and Budget Management Rules (2004)
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Report of the Expert Group on Review of Classification System for
Government Transactions (2004)
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IMF Code/Manual of Fiscal Transparency (2007)
Code of Good Practices on Fiscal Transparency (2007)
http://www.fiscalreform.net/index.php?option=com_content&task=view&id=654&Itemid
=53
International Monetary Fund has revised its Code of Good Practices on Fiscal
Transparency, following a public consultation process. Nine new practices have been
added to the Code and many existing practices have been broadened in scope.
The four pillars of the original Code remain unchanged:
-clarity of roles and responsibilities
-open budget processes
-public availability of information
-assurances of integrity.
Code of Good Practices on Fiscal Transparency
(2007)
The revised Code
will be used in IMF surveillance and in voluntary assessments of fiscal
transparency in member countries under the standards and codes initiative.
Two associated documents - the Manual on Fiscal Transparency (2007) and the Guide on
Resource Revenue Transparency (2007) - provide supporting in-depth coverage of good
practices.
Standing Committee on International
Financial Standards and Codes
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After the Asian crises, the need was felt to redesign international financial
architecture; identify indicators of financial vulnerability; develop sound
international codes, standards and best practices; introduce pre-emptive
measures and safety nets, and design a framework for crisis
management.
Financial Stability Forum (FSF) established in 1999 to promote
international financial stability through better supervision and surveillance
of financial markets. FSF identified a set of 12 standards as as minimum
requirements for sound financial systems for priority implementation.
In 1999, a Standing Committee on International Financial Standards &
Codes was set up by RBI, which constituted Advisory Groups in ten core
subject areas, broadly covering the 12 key areas prescribed by FSF
pertaining to the financial system: Transparency in Monetary and Fiscal
Policies, Fiscal Transparency, Insurance Regulation, Bankruptcy Laws,
Corporate Governance, Data Dissemination, Payments and Settlement
System, Banking Supervision, Securities Market Regulation and Accounting
and Auditing.
IMF ROSC on India, 2001
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IMF had in February 2001 released a Report on the
Observance of Standards and Codes (ROSC) for
India, benchmarking India's fiscal transparency
against the IMF Code.
It observed that India has achieved a reasonably
high level of fiscal transparency, especially as
regards the amount of fiscal information that is
made available to the public.
Government Finance Statistics Manual
2001
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The first edition of the Manual was published by IMF in 1986 with the title A
Manual on Government Finance Statistics. The 2001 version updates the
internationally recognized standards for a specialized macroeconomic statistical
system required for fiscal analysis . The revised standards have been harmonized
with the corresponding standards of other internationally recognized
macroeconomic statistical systems to the extent consistent with the goal of
supporting fiscal analysis.
The manual draws heavily on the text of the 1993 SNA to avoid an inference that
a different meaning is intended . The GFS system pertains to the general
government and public sectors as defined in the 1993 SNA. The other statistical
systems are the overarching System of National Accounts (hereafter referred to as
the 1993 SNA) and two specialized systems that are focused on the balance of
payments and monetary and financial statistics.
The primary purpose of the GFS Manual is to provide a comprehensive conceptual
and accounting framework suitable for analyzing and evaluating fiscal policy,
especially the performance of the general government sector and the broader
public sector of any country.
Objectives of Fiscal Transparency
(IMF Code of Good Practices on Fiscal Transparency)
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Fiscal transparency would make a major contribution to the
cause of good governance.
It should lead to better-informed public debate about the
design and results of fiscal policy, make governments more
accountable for the implementation of fiscal policy, and
thereby strengthen credibility and public understanding of
macroeconomic policies and choices.
In a globalized environment, fiscal transparency is of
considerable importance to achieving macroeconomic stability
and high-quality growth.
However, it is only one aspect of good fiscal management,
and attention has to be paid also to increasing the efficiency
of government activity and establishing sound public finances.
Declaration of Basic Principles
(IMF Code of Good Practices on Fiscal Transparency)
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I. Clarity of Roles and Responsibilities
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II. Public Availability of Information
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III. Open Budget Preparation, Execution,
and Reporting
IV. Independent Assurances of Integrity
I. Clarity of Roles and Responsibilities
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Clearly defined boundary between the general government
and the rest of the economy. “General Government” includes
both central government and lower levels of government and
their extra-budgetary activities.
Government involvement in the rest of the economy through
regulation, equity ownership etc should be conducted in an
open manner on the basis of clear, nondiscriminatory rules.
Clear demarcation of responsibilities between different levels
of government, and between the executive, the legislature,
and the judiciary
Clear mechanisms for the coordination and management of
budgetary and extra-budgetary activities, and well-defined
arrangements vis-à-vis other government entities (e.g., the
central bank and state-controlled financial and nonfinancial
enterprises)
I. Clarity of Roles and Responsibilities (Contd)
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Clear legal and administrative framework for fiscal management.
Fiscal management should be governed by comprehensive laws and
administrative rules applying to budgetary and extra-budgetary
activities. Any commitment or expenditure of government funds
should have a legal authority.
Taxes, duties, fees, and charges should have an explicit legal basis.
Tax laws and regulations should be easily accessible and
understandable, and clear criteria should guide any administrative
discretion in their application.
Ethical standards of behavior for public servants should be clear and
well publicized.
II. Public Availability of Information
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The public should be provided with full information on the
past, current, and projected fiscal activity of government.
1.
The annual budget should cover all central government operations in
detail including government’s extra-budgetary activities.
2.
Provide sufficient information on the revenue and expenditure of lower
levels of government to allow a consolidated financial position for the
general government to be presented.
3.
Provide information comparable to that in the annual budget for two
preceding fiscal years, together with forecasts of key budget
aggregates for the two years following the budget.
4.
Publish Statements with the annual budget giving a description of the
nature and fiscal significance of contingent liabilities, tax expenditures,
and quasi-fiscal activities.
5.
Regularly publish information on the level and composition of
government debt and financial assets.
II. Public Availability of Information
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A public commitment should be made
to the timely publication of fiscal
information.
Specific commitments should be made to
the publication of fiscal information
Advance release date calendars for fiscal
reporting to the public should be
announced.
III. Open Budget Preparation, Execution, and Reporting
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Budget documentation should specify fiscal policy objectives, the macroeconomic
framework, the policy basis for the budget, and identifiable major fiscal risks.
1.
A statement of fiscal policy objectives and an assessment of sustainable fiscal
policy should provide the framework for the annual budget.
2.
Any fiscal rules adopted for lower levels of government (e.g., a balanced budget
requirement or borrowing limits) should be clearly specified.
3.
The annual budget should be presented within a comprehensive and consistent
quantitative macroeconomic framework, and the economic assumptions and
key parameters (e.g., effective tax rates) underlying budget estimates should be
provided.
4.
Existing commitments should be distinguished from new policies included in the
annual budget.
5.
Major risks to the annual budget should be identified and quantified where
possible, including variations in economic assumptions and the uncertain costs
of specific expenditure commitments (e.g., financial restructuring).
III. Open Budget Preparation, Execution, and Reporting (Contd.)
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Budget data should be classified and presented in a way that
facilitates policy analysis and promotes accountability.
Government transactions should be reported on a gross basis, distinguishing
revenue, expenditure and financing, and expenditure should be classified by
economic, functional, and administrative category. Data on extra-budgetary
activities should be similarly classified. Budget data should be presented in a
way that allows international comparisons.
A statement of objectives to be achieved by major budget programs (e.g.,
improvement in relevant social indicators) should be provided.
The overall balance of the general government should be a standard
summary indicator of the government’s financial position. It should be
supplemented by other fiscal indicators (e.g., operational balance, structural
balance, or primary balance) when economic circumstances make it
inappropriate to base judgments about fiscal policy stance on the overall
balance alone.
The annual budget and final accounts should include a statement of the
accounting basis (i.e., cash or accrual) and standards used in the
preparation and presentation of budget data.
III. Open Budget Preparation, Execution, and
Reporting (Contd.)
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Procedures for the execution and monitoring of
approved expenditures should be clearly specified.
A comprehensive, integrated accounting system should be
established. It should provide a reliable basis for assessing
payment arrears.
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Procedures for procurement and employment should be
standardized and accessible to all interested parties.
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Budget execution should be internally audited, and audit
procedures should be open to review.
III. Open Budget Preparation, Execution, and Reporting
(Contd.)
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Fiscal reporting should be timely, comprehensive, and reliable,
and should identify deviations from the budget.
1.
During the year, there should be regular, timely reporting of budget and
extrabudgetary outturns, which should be compared with original
estimates. In the absence of detailed information on lower levels of
government, available indicators of their financial position (e.g., bank
borrowing and bond issues) should be provided.
2.
Timely, comprehensive, and audited final budget accounts, together with
full information on extrabudgetary activities, should be presented to the
legislature.
3.
Results achieved relative to the objectives of major budget programs
should be reported to the legislature
IV. Independent Assurances of Integrity
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The integrity of fiscal information should be subject
to public and independent scrutiny.
1.
A national audit body, or equivalent organization, should be
appointed by the legislature, with the responsibility to
provide timely reports to the legislature and public on the
financial integrity of government accounts.
2.
Macroeconomic forecasts (including underlying
assumptions) should be available for scrutiny by
independent experts.
3.
The integrity of fiscal statistics should be enhanced by
providing the national statistics office with institutional
independence.
Where do we stand in meeting these norms?
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We publish a large volume of information connected with fiscal
management: Main Budget documents, Detailed Demands, Annual
and 5-Year Plan documents, Performance Budgets, Annual Reports,
Appropriation and Finance Accounts, Audit Reports and reports of
Working Groups, Task Forces and Committees/Commissions.
Often, an overdose of fine print disclosures may actually defeats
their purpose if there is no highlighted attention to problem areas
Report of the Advisory Group on Fiscal Transparency
(2001) made a self-evaluation of how far we in India
have been able to meet the transparency requirements
built into the IMF Code, which are open to voluntary
adoption by all member countries.
Where do we stand in meeting these norms?
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The Advisory Group Noted:- The overall assessment that
emerges from our review is that current fiscal practices at the
central government level satisfy the minimum requirements of
the Code on Fiscal Transparency in many areas, though there
are deficiencies in some important areas which need to be
addressed. The position at the state government level is much
less satisfactory with most states being well behind the
standards achieved by the central government. However,
since at present the Code is expected to be applied only at
the national government level, non-compliance at the state
level does not amount to non-compliance with the Code.
Sarma Committee recommendations
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Recommended improvements in fiscal reporting in order to take care
of the quasi-fiscal operations and ensuring better fiscal transparency.
The Government should place before Parliament a statement of
current accounting standards, principles and practices. Thereafter,
significant changes in the accounting standards, principles and
practices, especially the affecting the reckoning of debt, deficit or
other fiscal indicators prescribed under the proposed FRA, should be
clearly disclosed in the Union Budget.
The Union Budget should progressively move towards greater
disclosure on accrual basis of all outstanding contractual liabilities,
explicit contingent liabilities, revenue demands raised but not
realised, committed liability in respect of major works and supply
contracts in progress and hidden subsidies by way of below cost
supply of goods and services etc.
Sarma Committee recommendations (Contd.)
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The existing cash-based Government accounting system does
not bring out accrual aspects of accounting such as liabilities
arising from unpaid bills, unrealized revenues, depreciation
etc.). As most external loans have a long repayment period,
considerable distortions arise if we overlook the valuation of
these liabilities at current rates of exchange.
It was felt by some that the cash accounting system should be
progressively supplemented by accrual accounting and
wherever necessary, general accounting norms should be
aligned with internationally accepted best practices.
No consensus could emerge on the need to introduce accrual
accounting immediately as part of fiscal responsibility
legislation. The Committee said while introduction of accrual
system of accounting may be separately examined, greater
disclosure of accrual-based information in the budget
documents should be meanwhile set as a target in the
proposed FRA. The information may be extracted from
departmental management information systems (MIS) and
gradually integrated into the main accounts.
Requirements under FRBM Act
1.
The Central Government shall take suitable
measures to ensure greater transparency in its
fiscal operations in public interest and minimize, as
far as practicable, secrecy in the preparation of the
AFS and Demands for Grants.
2.
In particular, and without prejudice to the
generality of the foregoing provision, the Central
Government shall, at the time of presentation of
AFS and Demands for Grants, make such
disclosures and in such form, as may be prescribed.
Disclosure Requirements under FRBM Rules
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6.
Disclosures .– (1) In order to ensure greater transparency in its fiscal
operation in the public interest, the Central Government shall, at the time of
presenting the annual financial statement and demands for grants, make
disclosures of the following:(a) any significant change in accounting standards, policies and
practices affecting or likely to affect the computation of prescribed
fiscal
indicators.
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(b) statements of receivables and guarantees in Forms D-1 to D-3.
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(c) a statement of assets in Form D-4.
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(2) The provisions of sub-rule (1) shall be complied with not later than with
the presentation of the annual financial statement and demands for grants for
the financial year 2006-2007.
FRBM marks move towards greater
fiscal transparency
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2.
3.
4.
Any change in accounting standards, policies and
practices, to be disclosed at the time of Budget
Mandatory Disclosure in the Budget
Tax revenue raised but not realized
Arrears of non-tax revenue
Guarantees given by Government
Asset Register
Additional disclosures added
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Tax expenditures (revenue foregone on account of tax
exemptions/concessions)
Beneficiary orientation of Budget
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Gender Budgeting Statement of budget provisions for the benefit of women and
children
Budget provisions for the benefit of SC/ST/OBC
Asset Register
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Status as on 31st March, 2005 to be included in Budget 2006-07.
It covers, at present, only the assets directly owned by the Central
Government. ( exclude the assets of autonomous bodies and public sector
undertakings even though funded from Govt. grants).
Financial assets ( loans and equity) included.
The information included based on the book value. No assessment of
current market value without adjustment for depreciation
The Departmental Estates Officers may provide the information in respect
of government lands and buildings under their charge. For others, the
information to be centrally collected from CPWD.
Better to have an exhaustive inventory of assets with full reconciliation of
physical balances with the financial accounts. Pending this, financial
opening balances, as on 1st April, 2004 or before may be taken and
subsequent acquisition/disposals fully accounted for both physically and
financially.
Asset Register
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Maintenance of stock register and stock verification in the
administrative responsibility of Head of offices. Hence, the Finance
Wings should collect information from administrative units.
In respect of assets acquired out of capital expenditure, loans &
advances, the Pay & Accounts offices can provide accounts data to
the Finance Wings for matching with the reports from administration.
The Finance Wings should collect the information from the PAOs and
the administrative authorities; test check and consolidate for
Department as a whole for furnishing to Ministry of Finance.
Why is fiscal transparency important for a
credible FRBM legislation? Window dressing
non-compliance
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Without fiscal transparency, it is possible for the government to meet the
FRBM targets without actually going through fiscal consolidation.
Without an obligation for the government to disclose level of tax refunds, it
may be easier for the government to resort to advance collection of taxes to
show FRBM compliance
Without an obligation disclose the liabilities incurred by the government, it
may be easier for the government to pile up unpaid bills
Postponement of payment and advance tax collection can defeat the basic
objective of FRBM in the absence of observance of norms of fiscal
transparency.
Similarly, the present requirement to disclose significant changes in
accounting policies and procedures and future requirements of disclosure on
“Non-Performing Assets” may deter the government from resorting to
routine substitution of grants with loans, knowing fully well that the loans
are not going to be repaid.
Why is fiscal transparency important for a
credible FRBM legislation? Fiscal risks and preemption of future budgets
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Concerns on possible window dressing of non-compliance is just one
aspect of fiscal transparency. Another more substantive reason is
public information of fiscal risks affecting the actual budgetary
outcomes and pre-emption of future budgets
Tracking of commitments on on-going works, contingent liabilities,
unpaid bills and bringing them into open will highlight the pressures
on future year’s budgets.
Transparency about arrears of revenue is just the other side of this
to complement the fiscal risks with potential gains in the pipeline.
Expert Group on Review of the Classification
System for Government Transactions
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Regarding improvements in the current system for
harmonizing budgetary, accounting and economic
classification, the Group has recommended adoption of a
multidimensional classification structure with linkages
between the accounting classification and standard
international classification systems such as Government
Finance Statistics (GFS) and System of National Accounts
(SNA).
The multidimensional structure may be tested on a pilot-cumparallel-run basis in the Ministries of Education and Health
in the Union Government for its suitability to Government
information requirement.
Sundermurti Committee report on comprehensive revision of
List of Major/minor heads of accounts under consideration
Way forward
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Present system is not fully ready for
disclosure of all aspects expected now and
future expectations
Use of Information Technology to evolve a
comprehensive fiscal management system
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Integration of expanded MIS and accounts
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Multidimensional classification structure
Integration of MIS and accounts
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A receipt challan, a supply order, a payment sanction /
voucher contains or may easily include more standardized,
coded information.
Presently, the accounts staff only picks the document ID,
head of account and the amount
But the same data entry operator handling the same source
document may capture additional information such as the
office code, commodity code, payee code etc and expand
accounts reports with other useful reports.
Some of these additional reports are generated by reprocessing the same documents elsewhere – parallel
processing and duplicate processing
Problem Areas
Technical issues
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Evolving standard coding patterns, an extended Multi-modal
Chart of Accounts
Organizational issues
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Who will do integrated processing of data?
Stage of data capture? At source? Consolidation of compiled
data
Administrative Boundary, Control, Ownership and
accountability issues
Looking beyond present FRBM Rules
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The FRBM Act adopts a gradual approach. It gives a direction
and leaves actual pace of implementation to Government. As
required under the Act, greater disclosures were expected to
follow.
Beginning has been made by introducing disclosure on
revenue arrears, guarantees and Book Value based Asset
Register. Eventually, as the system gears itself, we may move
towards proper accounting of assets and liabilities to judge
whether the liabilities are adequately covered by good quality
assets.
Future refinements may include disclosure on aspects like
committed liability on ongoing works/projects, tracking of
unpaid bills, unsettled book claims, “Non-Performing Financial
Assets”, transactions awaiting accountal, liability on account
of pensions accrued over the service span of government
employees and other disclosures keeping pace with the best
international practices in vogue.
Disclosures on ‘TA EXPENDITURES’ have been added even
without amending the FRBM Rules.
Implications of the recent crisis for fiscal transparency?
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In a recent paper on fiscal transparency, accountability, and risk, the
IMF reviewed the state of fiscal transparency in light of the
experience of the crisis. While considerable progress has been made
in enhancing the coverage, quality, and timeliness of public fiscal
reporting since the late 1990s, the review found continued
weaknesses in governments’ understanding of their underlying
financial positions.
These shortcomings in transparency are due to a combination of
gaps and inconsistencies in existing fiscal reporting standards, delays
and discrepancies in countries’ adherence to those standards, and a
lack of effective multilateral monitoring of compliance with those
standards.
2012 review by IMF calls for
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Improvements in fiscal reporting standards, including the IMF
Code, to broaden the institutional coverage of fiscal reports;
recognize a wider range of flows, assets, and liabilities; and
incorporate new standards for fiscal forecasting and risk
management;
A more concerted effort to promote implementation of
those standards. This requires action at the national level to
strengthen support for transparency via legislatures, supreme audit
institutions, and fiscal councils. At the international level, the IMF
and other multilateral institutions need to provide more practical
guidance on issues such as the implementation of accrual accounting
and fiscal oversight of public corporations; and
Enhanced international monitoring of country compliance
with those standards. In particular, the IMF needs to replace the
existing fiscal transparency Report on Observance of Standards and
Codes with a more analytical, modular, and graduated approach to
evaluating countries’ fiscal reporting practices and outputs.
Key resources from IMF website
2012 Paper on “Fiscal Transparency, Accountability, and Risk”
 Factsheet
The Code of Good Practices
 The Code of Good Practices on Fiscal Transparency helps
governments provide a clear picture of the structure and finances of
government.
The Manual on Fiscal Transparency
 The Manual on Fiscal Transparency provides guidance on
implementing the Code, by detailing good practices and drawing on
experience in a range of countries.
The Guide on Resource Revenue Transparency
 The Guide on Resource Revenue Transparency applies the Code’s
principles to the unique set of issues faced by countries with
substantial oil and mineral resources.
Reports on the Observance of Standards and Codes (ROSCs)
 A Country Report on Fiscal Transparency (Report on Observance of
Standards and Codes) assesses a country’s current practices relative
to the Code and suggests a schedule of reforms.
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What to look forward from IMF?
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IMF encourages all member countries to undertake an assessment of
fiscal transparency (called a fiscal transparency module of
the Reports on the Observance of Standards and Codes, or fiscal
transparency ROSC)
As of March 2013, 93 countries from all regions and levels of
economic development had posted their fiscal ROSCs on the
IMF's Standards and Codes web page. Updates can be undertaken at
any time at the request of the authorities. Countries can also opt for
a full ROSC reassessment. As of March 2013, 29 countries had
undertaken updates or complete reassessments.
Based on a round of public consultations, IMF is preparing a revised
draft of the Code of Good Practices and Manual on Fiscal
Transparency. The drafts will be subjected to another round of public
consultations and final versions submitted to its Executive Board for
approval and publication by late 2013.
Measures of indebtedness and other
imbalances in government accounts
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Total outstanding liabilities is the simplest measure of indebtedness. Then Debt/
GDP ratio indicates size of debt relative to the size of economy. But measuring just
size is not enough. We have to look at structural composition, maturity profile,
cost of borrowing profile of debt.
No single measure is sufficient for all purposes of analysis of the general
government sector. In GFS 1986, emphasis was placed on the overall
deficit/surplus, which essentially measured cash deficit/surplus in the bank account
requiring overdraft from the banker.
Since then new deficit measures have come into practice, viz. revenue, fiscal and
primary deficits, of which the first two have dominated public discourse.
“Monetised Deficit” was also used for some time but given up. It indicated Central
bank financing of government deficit, which in popular perception meant ‘printing
money’ to meet the deficit.
Finance Act 2012 has introduced a new concept “Effective Revenue Deficit”
Definitions of key deficit
indicators
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‘Gross Fiscal Deficit’, commonly referred simply as ‘Fiscal
Deficit’, measures net borrowing required to finance all
expenditures excluding debt repayment. [Debt repayments
netted against debt receipts). It should be equal to net
increase in liabilities minus accretion to cash balances.
‘Revenue Deficit’ is the gap between revenue receipts and
Revenue Expenditure.
‘Effective Revenue Deficit’ is the Revenue Deficit minus
grants-in-aid to finance capital expenditure of grantee
entities.
‘Primary Deficit’ is the ‘Gross Fiscal Deficit’ minus Interest
Payment.
Government Borrowing is
deferred taxation
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How does an individual householder repays debts?
– Paying some installments of principal/interest every month out of regular
income
– Using some windfall receipts, say from asset sale or lottery, to retire
debts
– Seldom, seeking debt waiver.
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Governments behave differently. General trend is for
governments to keep accumulating debt stocks by
refinancing/rolling over their liabilities – repayments made out
of fresh borrowings from the same or some other lender.
– If there is no dearth of gullible lenders, this game can go on endlessly.
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Even if they have some windfall receipts, governments
splurge on expenses rather than repaying debts as if they
would never be called upon to pay debts.
Risks in endless rollover
of debt
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Governments seldom go bankrupt but their continued debt
addiction can make all other economic agents within their
country bankrupt! Let us see how.
If the government is indebted to its own citizens, banks and
companies, it can legally meet debt repayment obligations by
printing money or by extortionate taxation.
Postponing debt repayments by constant rollover,
governments keep shifting the liability to repay debts to
future governments/ generations while themselves enjoying
the benefits of borrowed funds.
Let us review linkages of government borrowings with key
macro-economic variables of inflation, foreign currency
exchange rates and interest rates.
Demand and supply of funds
Demand
General Government
Household
Corporate sector

Supply
Commercial banks
Non-bank financial market
Central bank
Rest of the world

Implications of deficit financing options
Financing of deficit: External debt
 Balance of Payments scenario, Exchange rate, Level of
forex reserves, Exports, imports, trade balance,
Invisibles, Trade and Investment links with the rest of
the world
Financing of deficit Central bank financing
 Inflation risk from deficit monetization, Reduces the
financial strength of the Central bank – cost of
financing, Increases money supply
Financing of deficit : Pre-emption of investible funds
 Investment controls – Banks, FIs, CPSUs, Parastatal,
SLR/CRR, Insurance, Long term contractual savings pension and provident funds
Implications of deficit financing options
Financing of deficit: Market borrowings
 Crowding out effect
 Impact on interest rates
 Availability of bank finance
Financing of deficit: Treasury banking
 Financial sector distortions
 Tax benefits and returns offered
Overall impact of fiscal deficit
 Different ways of financing fiscal deficit seem to affect the
economy differently but ultimate impact is the same:
 reducing cost competitiveness and growth prospects of the
economy
International Standards
of
Public Financial Reporting
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Lack of universal standardization of public financial reporting
Inadequate coverage of all Entities in the public financial system
Fair international comparison of ‘General Government’ or ‘Extended
Public Sector’ - aggregated fiscal statements for “Central Government
+ All State Governments + non-commercial government business
enterprises + substantially financed autonomous bodies”.
Trend to extend ideas applicable to business entities to General
Government, with appropriate adaptation. Also, to improve
surveillance on ‘quasi-fiscal activities’
Evolution of SNA-93, GFS-2001 and IPSAS and emerging trend to
harmonize standards and converge to the IFRS inspired IPSAS
Worldwide trend toward greater
accountability and transparency in
government finances

1993 SNA/ ESA 95 is the umbrella standard for macroeconomic statistics, of
which Government Finance Statistics 2001 (GFSM 2001). Statistical standards are
being updated.
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As there are no authoritative accounting sector for the public sector, the
International Federation of Accountants Public Sector Committee (IFAC PSC) has
issued as of September 2003 21 standards for public accounting.
In response to rising concerns by users who are experiencing difficulties in
understanding and reconciling the macro (statistical) and micro (public
accounting), an international project was launched in 2003 for the greater
harmonization between statistical and public accounting systems at this critical
juncture of both systems being under review.
Accounting Framework
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Constitution mandates that the form of accounts of the Union and
State Governments shall be prescribed by the President of India on
the advice of the C&AG.
The Budget [or more appropriately ‘Annual Financial Statement’] has
historically evolved from the accounting framework so prescribed.
There is an elaborate Chart of Accounts developed on function-cumprogramme basis way back in early 70s, replacing a line-item
budgeting/accounting based on the recommendation of the 1st
Administrative Reforms Commission.
To tone up the mechanism of setting accounting standards, a
Government Accounting Standards Board has been established under
the aegis of the C&AG of India
–
series of Standards have been formally notified by the Government on the Board’s
recommendation.
PFRS Issues in Indian
context
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Budget templates have historically evolved from the accounting framework, as
value addition around ‘Annual Financial Statement’, the statement of ‘major headwise’ budgeted receipts and expenditures. Supposed to be based on IMF’s GFS2001.
Form of Accounts historically evolved – Art 150 of the Constitution
Appropriation / Finance Accounts are rule/legacy based, not fully complaint to any
declared Standards, no formal gap analysis. Supposedly based on SNA-93.
Statutory notifications based on GASAB recommendations cover a few areas.
Need of standardizing parastatal accounting formats and framework in line with
the framework applicable for Central Autonomous Bodies.
International Financial Reporting
Standards (IFRS)
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In Budget Speech 2014-15, the FM said
– There is an urgent need to converge the current Indian accounting
–
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–
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standards with the International Financial Reporting Standards (IFRS).
We have called upon the Indian companies to voluntarily adopt the new
Indian Accounting Standards (Ind AS) from the financial year 2015-16.
From the financial year 2016-17 this would be mandatory.
Based on the international consensus, the regulators will separately notify
the date of implementation of AS Ind for the Banks, Insurance
companies etc.
Standards for the computation of tax would be notified separately.
Outstanding issues in PFRS
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Lack of standardization across government and parastatal and inadequate
coverage of Entities is the central issue in Public Financial Reporting.
Existing Major/Minor Heads have deviated from the original function-cumprogramme basis
Standardization below Minor head level across States prevents meaningful
aggregation and inter-State comparison. At least at object head levels there
could be uniformity across the Centre and the States.
Standard setting exercise should extend beyond the Central and State
governments toa parastatal and even to PPP operators/concessionaire
The Accounting and Reporting Standards for parastatal, especially State and
District level societies, should be as close to the Standards adopted for
Central Autonomous Bodies as possible.
Existing classification of expenditure between Revenue and Capital should be
comprehensively reviewed/standardised across States.
Tracking commitments and liabilities of various orders – pre-emption of future
budgets
Hidden liabilities under PPP contracts
Thank you
for your
kind attention