Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
89023 v2
Government of Karnataka - Public Financial
Management Reform Action Plan – 2014 – Appendix
May 24, 2020
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
CONTENTS
Section 1. Theme One: Strengthening PFM Legal And Institutional Framework ................................ 8
1.1
Legal and Institutional Framework ..............................................................................................................8
1.2
Fiscal Responsibility Legislation In Karnataka .......................................................................................... 12
1.3
Updating PFM Manuals and Codes ........................................................................................................... 15
1.4
Strengthening Internal Financial Advisors ................................................................................................. 16
Section 2. Theme Two: Enhancing Credibility and Comprehensiveness of the Budget ...................... 18
2.1
Budget Process ........................................................................................................................................... 18
2.2
Passing Full Budget before start of the Year .............................................................................................. 19
2.3
Comprehensiveness of Budget Documentation.......................................................................................... 20
2.4
Credibility of Budget – Expenditure Outturn and Composition ................................................................. 22
2.5
Credibility of the Budget- Revenue Forecasting and Outturn .................................................................... 25
2.6
Supplementary budgets .............................................................................................................................. 29
2.7
In-year Adjustments to Budget Allocation – Rules of Re-Appropriation .................................................. 33
2.8
Predictability of Availability of Funds ....................................................................................................... 34
2.9
Estimation of Salaries ................................................................................................................................ 39
2.10
Managing Public Investment Funding ....................................................................................................... 40
2.11
Rationalization of Schemes ........................................................................................................................ 44
2.12
Departmental Medium Term Fiscal Plans .................................................................................................. 45
2.13
Strengthening Legislative Scrutiny of Budget ........................................................................................... 46
Section 3. Theme Three: Strengthening Accounting, Reporting, Controls, and Transparency .......... 50
3.1
Accounting and Reporting ......................................................................................................................... 50
3.2
Treasury Management ................................................................................................................................ 66
3.3
Cash Management ...................................................................................................................................... 73
3.4
Subsidies- Targeting, Accountability and Transparency ............................................................................ 75
3.5
Payroll Controls - HRMS ........................................................................................................................... 78
3.6
Procurement (KTTP and E-Procurement) .................................................................................................. 81
3.7
Public access to Key fiscal information ..................................................................................................... 85
Section 4. Theme Four: Improving Fiscal Assets and Liability Management System ......................... 90
4.1
Government Guarantees ............................................................................................................................. 90
4.2
Off Budget Borrowings .............................................................................................................................. 93
4.3
Investments in Government Companies ..................................................................................................... 96
4.4
Debt Management Recording and Reporting ........................................................................................... 100
4.5
Loans and Advances ................................................................................................................................ 105
4.6
Monitoring Arrears of Payments .............................................................................................................. 108
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
4.7
Unencashed Cheques ............................................................................................................................... 111
Section 5. Theme Five: Strengthening Audit and Legislative Oversight ............................................ 114
5.1
Effectiveness of Internal Audit ................................................................................................................ 114
5.2
External Auditing - Responsiveness ........................................................................................................ 118
5.3
Strengthening Karnataka State Accounts & Audit Department (KSAD) ................................................. 122
5.4
Legislative Review – External Audit ....................................................................................................... 129
Section 6. Theme Six: Improving PFM in Local Self Governments ................................................... 134
6.1
Local Self Governments - Overview ........................................................................................................ 134
6.2
Urban Local Bodies and PRIs – Common Issues and Recommendations ............................................... 138
6.3
Urban Local Bodies –Recommendations ................................................................................................. 139
6.4
Panchayat Raj Institutions –Recommendations ....................................................................................... 139
6.5
Accounting Reforms - Urban Local Bodies ............................................................................................. 140
6.6
Accounting Reforms – Gram Panchayats ................................................................................................ 141
Section 7. Theme Six: Improving PFM in State Owned Enterprises (SOE) ..................................... 143
Section 8. 2014 Reform Action Plan – Suggested Next Steps.............................................................. 150
Section 9. Annexures ............................................................................................................................ 162
9.1
Assessment of internal audit function in Karnataka – C&AG ................................................................. 162
9.2
Note On Internal Audit Practices in GOI and other States ....................................................................... 165
9.3
Note on Legislative committees ............................................................................................................... 167
9.4
Note on IFMIS ......................................................................................................................................... 169
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
LIST OF TABLES
Table 1: Legal Framework of Public Financial Management in Karnataka ..............................................................10
Table 2: Numerical Rules in Karnataka Fiscal Responsibility Act and status of compliance .....................................13
Table 3: Budget Documentation 2013-14 in GoK .......................................................................................................21
Table 4: Comprehensiveness of information included in Budget Documentation in GoK ..........................................21
Table 5: Budgeted vs. Actual expenditure of GoK, net of debt service ........................................................................23
Table 6: Primary and Compositional Expenditure Variance ......................................................................................23
Table 7: Compositional Expenditure Variance of > 5% in GoK Departments ...........................................................24
Table 8: Transactions in the Contingency Fund ..........................................................................................................25
Table 9: Budgeted and Actual Revenue of GoK ..........................................................................................................26
Table 10: Comparison of RE and Actuals with Original Budget.................................................................................27
Table 11: Revenue out turn of Own Resources compared to Original Budget ............................................................27
Table 12: Revenue Outturn for Commercial Tax Department.....................................................................................28
Table 13: Revenue Outturn for Excise Department .....................................................................................................28
Table 14: Supplementary Estimates as a percentage to Original Estimates in GoK...................................................30
Table 15: Karnataka - Original and Supplementary Estimates and Savings ..............................................................30
Table 16: Financing the Supplementary Estimates .....................................................................................................32
Table 17: Powers of Re-appropriation in GoK ..........................................................................................................33
Table 18: Trend of issue and quality of Re-appropriation Orders in GoK..................................................................33
Table 19: Delegation of Financial Powers presuming concurrence of Finance Department ....................................36
Table 20: Actual Expenditure as % of total for the quarter and cumulative ..............................................................37
Table 21: Decrease in Rush of Expenditure ...............................................................................................................38
Table 22: Pace of Expenditure in Government of India ..............................................................................................38
Table 23: Public Investment or Plan Expenditure in GoK ..........................................................................................41
Table 24: Status of IGAS and IGFRS ..........................................................................................................................51
Table 25: Progress of Reconciliation of Revenue and Expenditure ............................................................................53
Table 26: Personal Deposit Accounts not closed at end of financial year ..................................................................54
Table 27: Outstanding Utilization Certificates ............................................................................................................55
Table 28: Outstanding Utilization Certificates in Sample States ................................................................................56
Table 29: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Govt. of Karnataka .56
Table 30: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Sample States ..........56
Table 31: Key Recommendations made by XIII CFC for Disclosure in Budget/Finance Accounts ............................65
Table 32: Modules of KII.............................................................................................................................................70
Table 33: Cash balances of GOK ................................................................................................................................73
Table 34: Major Explicit Subsidies in Karnataka .......................................................................................................76
Table 35: Comparison of KTTP with Rajasthan Procurement Act..............................................................................82
Table 36: Details of progress in e-procurement ..........................................................................................................84
Table 37: Public availability of year-end financial statements ...................................................................................87
Table 38: Public availability of State External Audit Reports in Karnataka ...............................................................87
Table 39: Aggregate Guarantees Issued and Outstanding ..........................................................................................90
Table 40: Off Budget Borrowings in SOE/SPVs of Government of Karnataka ...........................................................94
Table 41: Provision of Debt Servicing in State Budget for Urban Local Bodies ........................................................95
Table 42: Book Value of Investments of Government of Karnataka ............................................................................96
Table 43: Reconciliation issues in Investments ...........................................................................................................97
Table 44: Borrowings or Public Debt of Government of Karnataka .........................................................................100
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Table 45: Public Debt level (Total Liabilities) prescribed by KFRA compared to actual (percent of GSDP) ..........100
Table 46: Debt Sustainability Analysis conducted by the C & AG for GoK ..............................................................102
Table 47: Institution-wise outstanding of Loans and Advances in GoK ....................................................................105
Table 48: Arrear of Expenditure Bills in Public Works Department, Karnataka ......................................................109
Table 49: Unencashed cheques under major head 8670 ...........................................................................................112
Table 50: Effectiveness of Internal Audit ..................................................................................................................116
Table 51: Status of Compliance of Inspection Reports – Revenue Sector .................................................................119
Table 52: Status of reply to Draft Audit Paras ..........................................................................................................119
Table 53: Status of pending Action Taken Reports ....................................................................................................119
Table 54: Status of Meetings of Audit Ad Hoc Committees .......................................................................................120
Table 55: Pendency of Revenue leakage reported by C&AG in Commercial Tax Department ................................120
Table 56: KSAD strengths and weakness ..................................................................................................................123
Table 57: Status of outstanding audits as on 31.03.2014 ..........................................................................................126
Table 58: Mandate of Legislative Committees for review of external audit reports .................................................130
Table 59: Financial assistance to ULBs & PRIs (Rs. in crores) ...............................................................................135
Table 60: Accounts and audit report – Current Status ..............................................................................................140
Table 61: GPs Accounts Current Status in Panchatantra .........................................................................................141
Table 62: Profile of SOEs in Government of Karnataka ...........................................................................................143
Table 63: PFM Issues in Karnataka PFM – Status of 2004 PFMA Recommendations ............................................145
Table 64: Action and suggested next steps for implementation .................................................................................150
Table 65: Year wise Number Reports issued by CoPA ..............................................................................................167
Table 66: Year wise Number of Hearings held by CoPA ..........................................................................................167
Table 67: Year wise Number of Hearings held by CoPU ..........................................................................................168
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
ACRONYMS
AFS
AG
(A&E)
AG
(Audit)
ALMC
Annual Financial Statements
Karnataka Accountant General (Accounts
and Entitlement)
IFA
Internal Financial Advisors
IFAC
Karnataka Accountant General (Audit)
Asset Liability Monitoring Cell
IFMIS
IGAS
AMS
Audit Monitoring System
IGFRS
ATR
BE
Action Taken Report
Budget Estimates
Comptroller and Auditor General (India's
Supreme Audit Institution)
Chief Controlling Officer
Comptroller General of Accounts
Committee on Local Bodies and Panchayati
Raj Institutions
Committee on Public Accounts
Committee on Public Undertakings
IPSAS
KBM
The International Federation of Accountants
Integrated
Financial
Management
Information System
Indian Government Accounting Standards
Indian Government Financial Reporting
Standards
International Public Sector Accounting
Standards
Karnataka Budget Manual
C&AG
CCO
CGA
CoLB
CoPA
CoPU
CSS
CTD
DCB
DDO
DEAS
DMA
DMTFP
DoFP
DOT
DPAR
DPE
DRSC
DSS
EIU
ERC
FC
FD
FMRC
FRBM
FRL
FY
GASAB
GDP
GFS
GIA
GoI
Centrally Sponsored Schemes
Commercial Taxes Department
Demand Collection Balance
Drawing and Disbursing Office
Double entry accrual based accounting
system
Directorate of Municipal Administration
Departmental Medium Term Fiscal Plan
Delegation of Financial Powers
Directorate of Treasuries
Department of Personnel & Administrative
Reforms
Department of Public Enterprises
Departmentally
Related
Committees
Directorate of Small Savings
KFC
KFRA
KII
Karnataka Financial Code 1958
Karnataka Fiscal Responsibility Act, 2002
Khajane II
KPR Act
KSAD
KTC
KTTP
Act
LOC
MCE
MIS
Karnataka Panchayat Raj Act, 1993
Karnataka State Accounts Department
Karnataka Treasury Code 1963
Karnataka
Transparency
in
Public
Procurement Act, 1999
Letter of Credit
Manual of Contingent Expenditure 1958
Management Information Systems
MTFP
NLTA
OBB
PAC
PD
Account
Medium Term Fiscal Plan
Non-Lending Technical Assistance
Off Budget Borrowings
Public Accounts Committee
PEFA
PFMA
Personal Deposit Account
Public
Expenditure
and
Financial
Accountability
Public
Financial
Management
and
Accountability
Standing
PMS
PPP
Economic Intelligence Unit
Expenditure Reforms Commission
Central Finance Commission
Finance Department of GoK
Fiscal Management Review Committee
Fiscal
Responsibility
and
Budget
Management Act, 2003
Fiscal Responsibility Legislation
Financial Year
Government Accounting Standards Advisory
Board
Gross Domestic Product
Government Finance Statistics
Grants in Aid
Government of India
RDPR
RE
RTI Act
Project Management Software
Public Private Partnership
Panchayat Raj Institutions (Rural Local
Governments)
Public Sector Enterprises
Public Sector Undertakings
Public Works Department
Reserve Bank of India
Department of Rural Development and
Panchayati Raj
Revised Estimates
Right to Information Act, 2005
SE
PFMA
SFC
SPV
TP
Supplementary Estimates
State Finance Accountability Assessment
State Finance Commission
Special Purpose Vehicles
Taluk Panchayats (Block level Rural Local
PRI
PSE
SOE
PWD
RBI
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
GoK
UC
GP
GSDP
Government of Karnataka
Gram Panchayats (Village level Rural Local
Government)
Gross State Domestic Product
HoD
HRMS
IAW
Head of Department
Human Resource Management System
Internal Audit Wing
ULB
VOA
WRD
IDF
Institutional Development Fund
ZP
UDD
UID
Page 7
Government)
Utilization Certificates
Urban Development Department
Unique Identification
Urban Local Bodies (Urban Local
Governments)
Vote on Account
Water Resources Department
Zilla Panchayats (District level Rural Local
Government)
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 1. THEME ONE: STRENGTHENING PFM LEGAL AND INSTITUTIONAL
FRAMEWORK
1.1
LEGAL AND INSTITUTIONAL FRAMEWORK
Framework of key PFM Institutions in Karnataka
1.
Karnataka follows a parliamentary system of governance, modeled on the Westminster system, with three
distinct branches of government namely the Legislature, the Judiciary and the Executive. Karnataka has a bi-cameral
Legislature consisting of two Houses: the Legislative Assembly comprising of members directly elected through adult
franchise, and the Legislative Council with members elected or appointed by various groups through an electoral college 1.
The Governor, who is the constitutional Head of State, is appointed by the President of India. The Council of Ministers,
headed by the Chief Minister, exercises all executive powers of the state. The Chief Secretary is the head of the
administrative service.
2.
The State Government is organized by departments primarily on functional lines. There are 37 departments
under 28 Administrative (or Secretariat) Departments dealing with subjects such as finance, planning, public works, health,
education, social welfare, and energy. These Administrative departments are responsible for policy formulation and also
oversee the “field” departments attached to them. Each Administrative department is headed by a Principal Secretary or
Secretary (an officer of the Indian Administrative Services – IAS), who reports to one or more ministers. Administratively,
Karnataka is divided into four revenue divisions (Bangalore, Mysore, Belgaum and Gulbarga), 49 sub-divisions, 30 districts
(headed by a Deputy Commissioner of a District Magistrate from the IAS), 176 Taluks (or blocks) and 5630 Gram
Panchayats. Other institutional agencies include the urban and rural local bodies, government companies, statutory
corporations, boards and authorities and societies.
3.
The key departments, positions and other internal and external institutions that influence PFM in the state are:
a.
The Finance Department has a Principal Secretary as head of the department. The Finance Department has
overall responsibility for fiscal and financial management, including fiscal policy, aggregate fiscal management,
budget formulation and administration, cash management, debt management (asset liability monitoring), and
financial reporting. The Finance Department also manages the Treasury (which is a big contributor to PFM)
which handles receipts and payments for the State Government. The Finance Department has several major
departments under its fold such as commercial taxes, excise, insurance, pension, and small savings.
b.
The Planning Department2 has a Principal Secretary as the head of the department that is divided into several
divisions (such as plan finance and resources, human development, plan monitoring and information and project
formulation) is involved in allocating and approving Plan expenditure, which represent about 40% of total
expenditure of the state. The Planning department produces the five-year and annual plans of the state and also
spearheads the preparation of the annual Economic Survey of the State.
c.
The Heads of the Departments - HoD (usually Principal Secretaries or Secretaries) are principal officers
responsible for their departments’ activities, for the proper use of funds, and for internal controls within their
departments. Departments are responsible for monitoring adherence to budgets, for performance, and for
1
25 elected by the Legislative Assembly members; 25 by the local authorities; 7 each by graduates and teachers; and 11 nominated by the
Governor of Karnataka
2 Full name of the department is Planning, Program Monitoring and Statistics Department
| Theme One: Strengthening PFM Legal And Institutional Framework
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
authorizing payment of expenditures. PFMA functions in the departments are looked after by an Internal
Financial Advisor (in some of the major departments) or financial advisors deputed from the Finance
Department/Karnataka State Accounts Department. The day to day PFM responsibilities are primarily with
Drawing and Disbursing Officers (DDO) at all levels of each department who is responsible for all expenditure
in the designated office and the main link between the department and the Treasury.
d.
The State Finance Commission (SFC) constituted under the Constitution of India (Article 243) every five
years recommends the principles for the distribution of the net proceeds of the taxes, duties and fees, and grants
to be provided by the State to the urban and rural local bodies. In Karnataka, three SFCs have submitted their
reports, and the recommendations influence PFM in urban and rural local bodies.
e.
The Comptroller and Auditor General of India (C&AG) through the offices of the Principal Accountant
General – Accounts and Entitlement (PAG – A&E) and Audit (PAG – Audit) play a major role in the PFM
environment in the state. The PAG (A&E) is vested with the accounting function of the state it compiles the
accounts of Karnataka, and prepares the monthly accounts, and annual accounts of the State Government – the
Finance Accounts and Appropriation Accounts – that are tabled in the State Legislature post audit. The AG
(Audit) is the external auditor of the government and audits all government departments and entities except the
ULBs and Gram Panchayats. The reports of the AG (Audit) provide an account of the working of PFM, and the
main reports (six such reports are issued every year) are tabled in the State Legislature. The external
independent audit of the local bodies (such as ULBs, Gram Panchayats, universities and funds) is vested in the
Controller, Karnataka State Accounts Department (KSAD).
f.
KSAD is one of the key departments of GoK which supports both accounting and auditing functions 3 for GoK.
KSAD functions under the direct control of the Finance Department and is headed by a Controller who is a
senior KSAS staff. It provides accounting support function to all departments across the State and auditing
services to those organizations which are not audited by C&AG.
g.
The audit reports of the C&AG and KSAD are subject to Legislative scrutiny by three committees of the
Legislature namely the Committee on Public Accounts (CoPA or the Public Accounts Committee – PAC),
Committee on Public Enterprises (CoPU) and Committee on Local Bodies (CoLB) and all these oversight
bodies have significant influence on PFM as they enforce follow-up of and compliance with audit reports.
Legal Framework for PFM
4.
The Constitution of India provides the guidance on several aspects of PFM in state governments in India
supplemented by the Government of India and the C&AG. The Constitution inter alia: (i) establishes a central role for the
State Legislature in authorizing and overseeing the use of public funds; (ii) requires annual budgets to be presented to the
State Legislature, and mandates reporting against these budgets; (iii) appoints the C&AG as the auditor for all states as well
as the central government; and (iv) regulates domestic borrowings by state governments (and bars external borrowing).
5.
The PFM structures in Karnataka are embodied in its Budget Manual, Financial Rules and Treasury Code and in the
Karnataka Fiscal Responsibility Act, 2002, the Ceiling on Guarantees Act, 1999 and Karnataka Transparency in Public
Procurement Act, 1999 that cumulatively contain principles covering budgeting, revenue and expenditure, delegation of
authority, accounting, procurement, pay, allowances & pensions, stores, works etc. and are supplemented through circulars
issued from time to time. These primary documents are supplemented by Government Orders, the Public Works Department
3
KSAD also functions as the treasurer for 309 charitable endowments. KSAD is the authorized agency for calculating and approving the
pensionary benefits to the municipal employees.
| Theme One: Strengthening PFM Legal And Institutional Framework
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Code, the departmental office procedures and other notifications/circulars issued. Table 1 tabulates the legislation, rules,
manuals and other key directions that influence PFM in the state.
Table 1: Legal Framework of Public Financial Management in Karnataka
PFM Legislation and Documents
A. Legislation
 The
Karnataka
Responsibility Act,
amended up to 2011
Issued under
Authority
Fiscal
2002 as
State Legislature
 The Karnataka Ceiling on
Government Guarantees Act,
1999
State Legislature
 The Karnataka Local Fund
Authorities Fiscal Responsibilities
Act, 2003
State Legislature
 The Karnataka Transparency in
Public Procurement, 1999
State Legislature
 The
Karnataka
Municipal
Corporations Act, 1964
 The Karnataka Municipalities
Act, 1976
 The Karnataka Panchayat Act,
1993
 The Karnataka State Civil
Services Act 1978
State Legislature
 The Karnataka Conduct of
Government Business in the State
Legislature Act, 2005
B. Rules and Manuals
 The Karnataka Budget Manual
State Legislature
 The Karnataka Financial Code
(1958)
Article 283 of the
Constitution
State Legislature
State Legislature
State Legislature
PFM Area
To provide inter alia for the responsibility of the State
Government to ensure fiscal stability and sustainability by
achieving sufficient revenue surplus, reducing fiscal deficit
and removing impediments to the effective conduct of fiscal
policy and prudent debt management through limits on State
Government borrowings, debt and deficits, greater
transparency in fiscal operations of the State Government and
use of a medium-term fiscal framework.
To provide for limits on Government Guarantees issued on
behalf of the government departments, public sector
undertakings, local authorities, statutory boards and
corporations and co-operative institutions etc., for promoting
fiscal discipline in the State.
To provide inter alia for the responsibility of Local Fund
Authorities to ensure best practice of PFM of local funds by
achieving sufficient revenue surplus, ensuring prudent
management of public fiscal operations of the Local Funds
and use of a medium term fiscal frame work. Provides a
framework for budgeting, accounting and auditing for the
Local Fund Authorities, mandates a Medium Term Fiscal
Plan for the Local Fund Authorities, lays down principles for
financial management, ensures transparency in Fiscal
Management at the local level, ensures proper procedure for
preparation, submission and audit of accounts and ensures
proper scrutiny and adherence to the audit reports.
To provide for ensuring transparency in public procurement
of goods and services by streamlining the procedure in
inviting, processing and acceptance of tenders by the
Procurement Entities.
Comprehensive legislation governing the working of
municipal corporations in Karnataka.
Comprehensive legislation governing the working of
municipalities in Karnataka
Comprehensive enactment governing the working of the
three-tier Panchayati Raj system (rural local bodies).
Act to provide for the recruitment and conditions of service
of civil servants and the secretarial staff of the Karnataka
State Legislature
To provide for a certain minimum number of days of conduct
of Government business in the State Legislature
Provides for all matters relating to the form and content of the
budget including preparation, amendments, approval etc.
Provides for all matters relating to accounts and controls
| Theme One: Strengthening PFM Legal And Institutional Framework
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
PFM Legislation and Documents
 The Karnataka Treasury Code
(1963)
 The Karnataka Public Works
Accounts Rules
 The Karnataka State Accounts
Services (Recruitment) Rules
(2011)
 Karnataka
Civil
Services
(Computer Literacy Test) Rules
(2012)
 Manual
of
Contingent
Expenditure (1958)
 The Government of Karnataka
(Consultation with Financial
Adviser) Rules 1982
 Rules of Procedure and Conduct
of
Business
in
Karnataka
Legislative Assembly (2011)
C. Other Documents
 Reports of the Expenditure
Reforms Commissions
 Reports of the State Finance
Commission
D. GOI Documents
 The C&AG (Duties, Powers
and Condition of Services) Act,
1971

Government Accounting Rules,
1990
Issued under
Authority
Article 283 of the
Constitution
Sections 3 and 8 of
the Karnataka State
Civil Services Act,
1978
Sections 3 and 8 of
the Karnataka State
Civil Services Act,
1978
Article 283 of the
Constitution
Article 208 of the
Constitution
Constituted under the
Fiscal Responsibility
Act
Article 243 of the
Constitution
Parliament of India
PFM Area
Deals primarily with the procedure to be followed and the
initial accounts to be kept at the State Treasuries, and with the
accounts returns to be rendered by the Treasuries to the
Accountant General. These rules are supplementary to the
Financial Code.
Provides for all matters relating to generation of bills,
payments and maintenance of accounts for PWD.
Provides the method of recruitment and minimum
qualifications for each category of posts of the State Accounts
Services along with scheme of examination and syllabus
Provides for compulsory computer literacy test for specified
officers of the State Civil Services
Rules for regulating Contingent Expenditure 4 in the state
departments
Defines the role and responsibilities of the Internal Financial
Advisor (IFA) and when the departments need to take
concurrence from IFA for carrying out financial transactions.
Defines the constitution, tenure, quorum and functions of the
Legislative Committees for examination of accounts and
audit reports of the state departments, public undertakings
and local bodies and PRIs supplemented by the internal rules
of the committees
To draw up recommendations aimed at improving the quality
of expenditure in order to obtain better outputs and outcomes
keeping with the Legislative mandate given under various
provisions of the KFRA
To review the financial positions of the urban and rural local
bodies and determine the principles for distribution of state
taxes to them, determination of taxes by these institutions;
recommend measures for improving their financial position,
best utilization of resources etc.
Establishes the duties and powers of the C&AG in respect of
auditing and accounting functions in the states. It provides for
the C&AG to compile the accounts of the states and be its
auditor by a combination of law and executive action. This
Act provides the duties, responsibilities and powers of the
C&AG.
A set of rules providing uniform form of financial reporting
and accounting standards.
6.
Besides the above, GoI also provides significant funds to the state on account of Centrally Sponsored Schemes
(CSS) and most of these schemes have prescribed their own set of rules and procedures including PFM which are followed
by the state and its agencies. The Central Finance Commissions (CFC) constituted under Article 280 of the Constitution of
4
All incidental and other expenses which are incurred for the management of an office as an office or for the technical working of a
department other than items such as works, tools and plant and stock
| Theme One: Strengthening PFM Legal And Institutional Framework
11
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
India also make recommendations on strengthening of PFM in the states – thirteen such commissions have been formed so
far and their reports are available – the 14th CFC has been formed and is presently functioning.
1.2
FISCAL RESPONSIBILITY LEGISLATION IN KARNATAKA
7.
A Fiscal Responsibility Legislation (FRL) requires governments to commit to fiscal policy objectives and
strategies that can be monitored. The objective is to improve fiscal
outcomes and/or reverse fiscal imbalances and to induce less biased and
Fiscal Responsibility Legislation
more sustainable and transparent fiscal policy and improve fiscal
A legal framework that embeds in law an
outcomes. This is one of the instruments of a robust fiscal policy
agreed-on set of policies, processes and
framework for aggregate fiscal management.
arrangements, encompassing the whole PFM
process, intended to improve fiscal
outcomes, discipline, transparency and
8.
Karnataka was the first state in India to enact a FRL – the
accountability.
Karnataka Fiscal Responsibility Act 2002 (the KFRA). The KFRA is a
law separate from the general budget or financial management law
and is a rule-based legislation i.e. it not only defines the fiscal
responsibility principles but also places limitations on key fiscal policy aggregates in the form of “numerical rules”. KFRA
sets the targets for revenue deficit, fiscal deficit, guarantees 5, and total liabilities and, in 2011 introduced a numerical limit for
outstanding debt. Definitions for revenue deficit, fiscal deficit and total liabilities have also been included in the Act. These
numerical rules have to be applied ex ante i.e. at the time of preparation of the original budget. Notably, off-budget
borrowings, by public sector undertakings and special purpose vehicles where liability for repayment is on the GoK is
considered for computing fiscal deficit and liabilities and the interest on such borrowings is considered as revenue
expenditure.
9.
Overall, the KFRA broadly meets the requirements of model fiscal responsibility legislation. The KFRA
provides the statutory back up for preparation of Medium Term Fiscal Plan (MTFP). It prescribes that the budget must be
consistent with the objectives and targets of the MTFP, that the fiscal impact of either shortfall in revenue or excess of
expenditure over pre-specified limits arising from any new policy should be fully offset, and that supplementary estimates
must be accompanied by corresponding curtailment of expenditure and/or augmentation of revenue. The legislation also
articulates an “Escape Clause” i.e. the circumstances under which the KFRA limits could be exceeded 6 and the authority to
approve such excesses. Disclosure requirements to be made in the state budget documents have been provided. There is also
a requirement of submitting a mid-term review report to the state Legislature by the Finance Minister and this has been done
up to September 2013 (published in November 2013).
10.
In 2011, the KFRA was amended to pave the way for setting up a Fiscal Management Review Committee
headed by the Chief Secretary of the State7. FMRC reviews the fiscal and debt position of the State and its progress on
fiscal correction path as required under the KFRA. The Committee deliberates in detail a mid-year fiscal and debt parameters
and thereafter advises the Finance Minister on the remedial measures to be adopted to ensure adherence to the parameters
stipulated in KFRA. The FMRC during the mid-term review of the fiscal 2013/14 focused broadly on the fiscal challenges in
the year, resource and expenditure, prudent fiscal management, deficit management and adherence to KFRA amongst others.
The committee provided recommendations for enhancing robustness of fiscal position, mobilizing more resources for capital
5
This is covered under the Karnataka Ceiling to Government Guarantees Act, 1999. The Act came into effect from April 1999 with the
objective to fix a limit on government guarantees, issued on behalf of the Government Departments, Public Sector undertakings, Local
Authorities, Statutory Boards and Corporations and Co-operative Institutions, for promoting fiscal discipline in the state.
6 An Escape Clause provides the numerical rules with the flexibility to deal with exceptional circumstances. In the KFRA, the escape clause
is on grounds of unforeseen demands on the state finances due to national security or natural calamity. Such excess need to be approved by
the State Legislature and the accompanying report should state the likely extent of the excess and the reasons.
7 Other members of the committee are: PS-Finance, PS-Planning, Economic advisor to the CM, NIPFP representative and Secretary
(B&R) who is the member secretary of the committee.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
formation and improving expenditure effectiveness during the MTFP period. The recommendations of FMRC are essentially
aimed at increasing the capital expenditure, minimizing lower priority revenue expenditure, increasing non-tax revenue,
ensuring fiscal sustainability and pursuing prudent planning and appraisal mechanisms to improve outcomes. Some of the
key recommendations of the FMRC which has bearing on the PFM for the state are:
a. Relook into the issue of subsidies.
b. Follow-up with departments for improving their non-tax revenues.
c. Avoid and moderate inclusion of large expenditure commitments in supplementary estimates.
d. Focus on consolidating existing institutions and improving their effectiveness.
e. Approve new initiatives and works requiring implementation over multiple years only after reviewing the fiscal
sustainability of the total expenditure rather than expenditure during the year of approval only and thereby avoid
buildup of fiscal stress due to unfunded expenditure commitments.
f. Move over to medium term (3 to 5 years) appraisal and approval cycle for the schemes from the currently
practiced annual cycle.
g. Revisit and control the preference for implementation of schemes and programmes through society and SPV
mode and managing funds through bank and personal deposit accounts outside the Consolidated Fund.
11.
GoK has achieved the limits set out in the Numerical Rules, but has to fully meet certain other provisions of
the KFRA. Table 2 summarizes the explicit numerical rules embedded in KFRA and the present status of compliance.
Numerical
Rule
Deficit
Rules
Debt Rules
Table 2: Numerical Rules in Karnataka Fiscal Responsibility Act and status of compliance
Target/Limit
Remarks
Reduce Revenue Deficit 8 as a percent of GSDP
between 2002 to 2006 and bring to nil by 2006
Reduce Fiscal Deficit9 as a percent of GSDP between
2002 to 2006 and bring it to no more than 3% of
GSDP by 2006
Not to give guarantees exceeding the limits stipulated
in the Karnataka Ceiling to Government Guarantees
Act, 1999 i. e. not to exceed 80% of Revenue Receipts
of second previous year
Reduce Total Liabilities 11 as a percentage of GSDP
between 2002 to 2015 and bring it to no more than
25% of GSDP by 2015
Revenue surplus achieved since 2004/05
Fiscal Deficit maintained below 3% except during
2009/10 (with Legislative approval), but reverted
back in 2010/1110
Limit achieved since enactment of the Guarantee Act
Achieved since 2010/11
12.
Overall, while GoK is in compliance with most of the statutory provisions of the KFRA there are some areas where
GoK has to be strictly in line with the KFRA provisions, for instance: (a) current liabilities are not being paid in timely
manner; (b) supplementary estimates are not fully “fiscally neutral”12; and (c) exceeding the numerical rule of deficit by
amending the Act for economic recession, which escape clause is presently not available in the Act.
8
Defined as difference between revenue expenditure and revenue receipts
Defined as total disbursements from the Consolidated Fund (excluding debt repayment) over total receipts into the Consolidated Fund
(excluding debt receipts)
10 The Legislature permitted the numerical rule in respect of fiscal deficit to be exceeded during three consecutive years 2008/09 to
2010/11 following amendments made to the KFRA. However, GoK actually exceeded the statutory rule only in one year 2009/10
11 Defined as the sum of liabilities under the Consolidated Fund and the Public Account of the state
12 The KFRA requires that “Whenever one or more supplementary estimates are presented to the Houses of Legislature, the State
Government shall also present an accompanying statement indicating the corresponding curtailment of expenditure and/or augmentation
of revenue to fully offset the fiscal impact of the supplementary estimates in relation to the budget targets of the current year and the
Medium Term Fiscal Plan objectives and targets for the future year”.
9
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
13.
GoK’s performance in terms of the statutory provisions and actual implementation is superior to the FRL at
GoI level in some instances. Primarily, the KFRA considers off-budget borrowings for computation of fiscal deficit and
total liabilities while the GoI FRL does not require this. While KFRA has an “Escape Clause”, all deviations at GoI require
the approval of the Parliament. Although GoK sought approval of the State Legislature to breach the limit on three occasions,
yet GoK actually exceeded the limit only once and reverted back within the limit the next year. At the central level, due to the
2007 international financial crisis, the deadlines for the implementation of the targets in the Act was initially postponed and
subsequently suspended in 2009. From 2009 to 2012, GoI was in continual non-compliance with FRBM targets and was
unable to eliminate revenue deficit or reduce fiscal deficit to 3 per cent of GDP. In 2011, Prime Minister’s Economic
Advisory Council publicly advised the Government of India to reconsider reinstating the provisions of the FRBMA starting
2011/12. In May 2013, the Act was amended to dilute and defer the deficit targets.
14.
GoK has yet to operationalize the Karnataka Local Fund Authorities Fiscal Responsibility Act 2003. GoK also
enacted the Karnataka Local Fund Authorities Fiscal Responsibility Act, 2003, which was the first act of such nature for local
fund authorities. Local fund Authorities mean bodies under the control of the state government and would include the urban
and rural local bodies (municipalities and panchayats) and the development authorities. The Act mandated preparation of a
MTFP13 and laid down the principles of prudent financial management, fiscal management, preparation of accounts and
auditing procedures, and emphasized on a process of public engagement through social audit. This Act also provides that the
State Government may withhold release of funds to any local fund authority, which fails to furnish accounts to the concerned
authority within 6 months from the end of the financial year. The Act though enacted in 2003 has not been operationalized,
which is an area of concern. The 2004 PFMA had also recommended that the Act be implemented. This Act if
operationalized and implemented at the local bodies would help in improving the fiscal and financial management framework
of these bodies.
15. Summary of Issues
a.
It is perceived that the onus of compliance with KFRA is only with the Finance Department. It needs to be
appreciated that KFRA as a legislation should be followed by all departments. In actual practice however, the onus
is on Finance Department to adhere to the statutory provisions of the KFRA.
b.
The Act could be reviewed from view point of actual experience gained over the last decade of
implementation.
 The KFRA allows limits for revenue deficit and fiscal deficit to exceed on grounds of national security or
natural calamity. In actual practice, GoK had exceeded the limits of fiscal deficit in times of extending an
“economic stimulus package” or “to counter recessionary conditions” for which it had to go for amendment in
the act for three consecutive years. Therefore, these situations could be considered for inclusion in the escape
clause.
 The escape clause as presently enacted does not provide the modality for re-establishing compliance i.e. a
specific path back to the rule and treatment of accumulated deviations.
c.
GoK needs to strengthen its systems to meet the requirements of the KFRA or provide clarity and strengthen
the provisions. These are:
 current liabilities are not being paid in timely manner (refer section on Monitoring Arrears of Payments);
 supplementary estimates not being fully fiscally neutral (refer section on Supplementary budgets );
 it is not clear whether Performance Guarantees fall within the purview of the ceiling on outstanding guarantees
(refer section on Government Guarantees );
 the Act does not prescribe sanctions for non-compliance; and
The Act had envisaged that “in furtherance to Medium Term Fiscal Plan, the State Government decided to disintegrate the MTFP on
departmental lines and prepare Departmental Medium Term Fiscal Plan for each department along with the MTFP for the entire State”.
13
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix

d.
does not provide time limit for submission of the mid-year report and presently is submitted half-yearly.
The Local Fund Authorities Fiscal Responsibility Act passed in 2003 has not yet been operationalized. This
means that local self-governments (ULBs and PRIs) and other GoK agencies that handle state funds (such as
development authorities) are presently not covered under the FRL.
16. The priorities identified for the 2014 PFM Reform Action Plan are:
a.
The provisions and requirements of the KFRA need to be disseminated so as to inculcate a sense of ownership
amongst all departments and agencies. This could be supported through capacity building measures, workshops,
and notes reiterating role of the departments in compliance to the KFRA.
b.
The Local Fund Authorities Fiscal Responsibility Act needs to be operationalized so that the urban and rural
local bodies in particular are also covered within the ambit of a FRL. This would also pave the way for preparation
of sectoral MTFP, as envisaged in the Act.
c.
Produce review report on a quarterly basis compared to the present half-yearly periodicity. This would be in
line with the central legislation.
d.
GoK may consider the need for broadening the scope of the escape clause so as to avoid frequent amendments
to the legislation as well as define the modality of reverting to status quo over a defined period of time.
(for action plan on fiscally neutral supplementary budgets, payment arrears and performance guarantees, please refer to
respective section)
1.3
UPDATING PFM MANUALS AND CODES
17.
Section 2 outlines the important manuals and rules which impact the PFM environment of the State. GoK has been
from time to time updating the manuals through circulars and amendments. However, most of these manuals were written at
a time when only government departments were spending all the amounts and creation of SPVs or other parastatals were not
envisaged. With the advent of several reforms in the IT especially Treasury computerization and changes in the business
process, GoK needs to review and update these manuals. The key manuals of (a) Karnataka Financial Code 1958 (KFC), (b)
Karnataka Treasury Code 1963 (KTC), (c) Manual of Contingent Expenditure 1958 (MCE), and (d) Karnataka Budget
Manual (KBM) needs to be updated to reflect changes due to KTTP Act and IT computerization in departments. While KFC
and MCE has not been revised, in case of KTC14 a revised Treasury Code was prepared along with the implementation of
Khajane I (computerized treasury system). However the same was not formally adopted and notified by the GoK. The KBM
was revised substantially in 2000 but would also require a detailed review on certain aspects as highlighted in the report.
This was a suggestion in the 2004 report and is relevant even as of today. With the imminent introduction of new IFMIS
(Khajane II) by GoK, all the manuals and codes, including certain Acts needs to be aligned with the revised business process
as planned in Khajane II. GoK has already constituted a panel of experts to review and update these manuals and codes.
18.
GoK should formalize and reactivate this committee constituted for revision of the manuals and code. It is
imperative that KII team is also represented on this committee to provide inputs on the changes in the treasury system. GoK
should provide all resources including technical and manpower, including external expertise to this committee. A time bound
action plan to be agreed with the committee. After the finalization and adoption of these manuals it is important that changes
14
Any payment above Rs. 10 crores are referred to the FD, however no such provision exist in the KTC and AG (A&E) has pointed this out
in the treasury inspection report.
| Theme One: Strengthening PFM Legal And Institutional Framework
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
are disseminated to all stakeholders through training and workshops. This is the priority action for the 2014 PFM Reform
Plan.
1.4
STRENGTHENING INTERNAL FINANCIAL ADVISORS
19.
The institution of Internal Financial Advisors (IFA) was envisaged ad a key person in the overall PFM
framework of GoK to play an important role in supporting the departments on financial matters. The IFA system in
GoK came into force in 198215. IFA is expected to work as the representative of the FD and is deputed to the departments to
render advice as well as ensure that all decisions are taken with financial prudence within the overall fiscal framework of the
state.
20.
The original rules read with the amendments and circulars, prescribe the duties and functions of IFA
comprehensively. The key PFM areas for which IFA is responsible are:
a.
b.
c.
d.
e.
f.
g.
h.
i.
Ensure that budget estimates are properly framed and time schedule as per budget calendar is followed;
Scrutinize budget proposals and assist Secretary in the formulation of budget proposals, advice on budgeting for
new schemes;
Maintain proper accounts as per rules;
Review from time to time progress of expenditure, follow up on supporting supplementary estimates savings
and surrenders, and monitor budget and treasury controls related to the department;
Review audit objections, Inspection reports, and support in settlement of the audit paras;
Ensure adherence to KFRA;
Advise in implementation of KTTP and carry out internal audit of procurements;
Prepare, update and implement Departmental Medium Term Fiscal Plan (DMTFP); and
Monitor Personal Deposits, PD accounts and releases to Boards and Corporations and GIAs.
21.
The rules provide sufficient scope and powers to the IFA to discharge the roles and responsibilities, yet
institutional mechanism has met with partial success. The rules provide that the IFA role would be advisory in nature; but
if his/her recommendations are not accepted, then the department needs to clearly articulate the reasons for not accepting
IFA’s views. The roles and responsibilities framed also demanded a high level of interaction by the IFA with the
departments. The partial success of this institutional mechanism is due to the following inter-related reasons: one, skill gaps
and low capacity in the IFAs16, which restricts their effectiveness in discharging their responsibilities; secondly the due to
the above reason there is differing level of IFA engagement in departments; and lastly due to multiple departments being
handled by IFAs they are not able to devote adequate time for supporting the departments.
22.
IFA skills differ depending on the department from where they are taken on deputation. IFAs are currently
recruited from three sources; namely from KSAD, Secretarial Services and deputation from C&AG. IFAs from KSAD17, are
able to comprehend the entire role and are also consulted by the Department to provide inputs. However, in case of IFAs
deputed from secretary services, their role is restricted to opinion on service matters, administrative and staffing issues and
very less on the PFM areas. This is an area of weakness which GoK needs to review and address. GoK should change the
rules to make it mandatory that staff from KSAD is posted as IFA in the departments.
15
GO NO. FD 24 BUD 31 dated 15th July 1982-Consultation with Financial Advisors Rules and updated by circular No. FD 16 BUD 2003
dated 9th July 2003.
16 Report on Strengthening Financial Management Systems (April 2009) points out that officers with sufficient training and experience in
modern financial management systems should be posted as financial advisors in the ministries / departments.
17 Only 3 IFAs currently are from KSAD.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
23.
IFAs work in a matrix structure where they have dual reporting lines - to the Administrative Department
and the Finance Department. Administrative Department need to ensure that due consultations are held with IFA on
matters of fiscal and financial importance as outlined in the Rules18. According to the rules, a proposal not reviewed by the
IFA should not be considered by the FD. Moreover, the FD is required to conduct regular monthly meetings of IFAs,
monitor their performance and provide them regular training programs to keep them up to date on the PFM reforms and
changes taking place at the state level. However, in reality this practice is not being followed. This practice needs to be
followed and strengthened so that IFAs can benefit from FD guidance on a time to time basis and deliver better advice for the
departments.
24.
GoK should carry out review of the IFA post as well as supporting structure in each of the departments based
on the work profile and work load. Currently most of the IFAs are not supported with adequate IT infrastructure and
qualified personnel to assist them. With the manifold increase in budgets, transactions and works, adequate number of IFA
posts needs to be created for the larger departments. Also, based on the analysis, FD and KSAD need to identify staff and
provide them training for this role. GoK MTFP for 2011-15 also states that “Institution of IFAs has to be strengthened by
identifying sufficient number of officers with requisite background and seniority and who have at least 5 years’ service left
for superannuation. They should be supported with required infrastructure, exposed to extensive training including computer
skills, to match the job chart of IFAs.”
25. Recognizing the above recommendations following are the priority actions identified in this area:
a.
b.
c.
d.
IFA roles and responsibilities should be included in the KFC and KBM so that all Departments recognize the
role of IFA as part of the top management and decision making process.
IFAs should be provided extensive training including computer skills, to match the job chart of IFAs.
IFA should be recruited from KSAD, and suitable officers need to be identified, trained and groomed. The IFA
recruitment rules for this purpose should be amended.
FD should review the work profile of the IFA in departments so that in departments with larger workload,
dedicated (full-time) IFA can be posted. The institutional structure, support staff requirements for IFA function
as well as the IT infrastructure, needs to be deliberated and developed. FD should take more proactive role in
assessing the performance of the IFAs.
18
The Expenditure Reforms Commission report has recommended that internal controls through the IFAs in the Departments need to be
strengthened and their participation in the day to day financial management ensured.
| Theme One: Strengthening PFM Legal And Institutional Framework
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 2. THEME TWO: ENHANCING CREDIBILITY AND COMPREHENSIVENESS OF THE
BUDGET
2.1
BUDGET PROCESS
26.
The Karnataka Budget Manual and the KFRA19 provide the legal framework for budget literature and Legislative
scrutiny and scope in Karnataka. These include requirements of presenting the budget to Legislature, process of scrutiny of
the budget and its discussion and voting by the Legislature. The Karnataka Budget Manual prescribes a five-stage process for
presentation of the budget and its approval by the Legislature (Figure 1). This is based on the provisions of the Constitution
of India (Articles 203 and 204).
Figure 1: Five Stage Process for passing of Budget in Karnataka Legislative Assembly
Presentation of the Budget
Presented (Feb/Mar) by the Finance Minister making a speech explaining the Salient features of the budget and Government policies
General Discussion (max 10 days)
Budget discussed either as a whole or on any question of principle or policy involved therein; no motion passed nor budget details
discussed; Finance Minister may makesa reply at the penultimate day
Discussion and Voting on Demand for Grants (min 15 days/max 20 days)
Demand moved by Minister in charge (or deputy); Motions can be moved to reduce any demand; If voting not completed by last day
or appointed hour, demand/s is "Guillitoned" i. e. voted without discussion
Appropriation Bill
After Voting, Appropriation Bill introduced to provide for the appropriation out of the Consolidated Fund of the State of all moneys
required to meet (a) the grants made by the Assembly and (b) the expenditure charged on tre Consolidated Fund
Governor's Assent
After Governor's assent to the Bill, the amounts shown in the Act and the Schedule thereto become the sanctioned grants for
expenditure under various demands
27.
The Karnataka Budget Manual provides the framework of Rules which guides the Budget preparation in the
state. The Budget Manual along with budget instructions provides detailed guidance on how the budgetary should be
prepared and presented to the Legislature. Every year the budget process starts in the month of October when a detailed
budget circular is issued by the FD to all departments. The budget circular issues instructions to the estimating officers to
provide the budget request duly scrutinized by the IFA of the department. The budget circular is divided into four circulars
covering specific areas: (i) General instructions; (ii) Appendix B- Estimates of salaries; (iii) Revenue and Capital Receipts
Estimates; and (iv) Non plan other than salaries. The budget manual and the budget circular also prescribes preparation of a
list of civil works to be executed in the FY, which should be estimated and submitted along with the budget in the form of
Appendix E.
19
read with Karnataka Conduct of Government Business in the State Legislature Act, 2005 and Chapter XX of the Rules of Procedure and
Conduct of Business in Karnataka Legislative Assembly (2011)
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
28.
As a precursor to the budgeting exercise, GoK carries out resource estimation in the month of August-September to
determine the plan outlay. The annual plan is finalized based on the resources available after meeting the requirements of
non-plan expenditure and subsidies. This amount is intimated to the Planning Commission and the final plan size is agreed
with the commission by January. Once the final plan size is determined the planning department does the resource allocation
among departments and ensures that the overall ceiling is not breached. FD also has discussions with the departments to
finalize the budget requirement department wise. FD then compiles20 both the plan and non-plan expenditure and finalizes the
budgetary numbers keeping in mind the fiscal indicators as outlined in the KFRA. Along with the budget, MTFP (Medium
Term Fiscal Plan) is prepared which provides rolling forecast for four financial years including the budget year. This
document provides Macro-economic assumptions in respect of revenue receipts and expenditure, capital receipts and
borrowing, inflation, compliance to fiscal indicators, GSDP growth rate, other assumptions and statements as required by
KFRA and XIII FC. This document is presented to the Legislature in compliance with Section 3 of the KFRA.
29.
The Karnataka Conduct of Government Business Act recommends a Budget Session ordinarily in the first week of
March and to be held for a minimum period of 20 days (Section 4) while the rules prescribe the maximum number of days for
general discussion and for voting. Besides, the Budget Manual also provides for constitution of a Committee on Estimates
“for the examination of such of the Estimates as it may deem fit to refer to the Committee or as are specifically referred to it
by the Assembly or the Speaker” (article 337). The Estimates Committee can examine the Estimates throughout the year and
may submit a report. However, the demand for grants can be voted irrespective of whether the Estimates Committee has
made any report or not (Rules 267 – 269)21.
2.2
PASSING FULL BUDGET BEFORE START OF THE Y EAR
30.
Every year GoK obtains a Vote on Account from the state Legislature in February or March. In actual
practice, while the entire budget is prepared and laid in the house, a Vote on Account is obtained for meeting the expenditure
for the first four months of the FY, and the full budget is passed only during June or July when the Legislature meets again.
The discussion and voting on the full budget takes place during the second phase when the session is held in June/July. The
situation is the same today as it was at the time of the 2004 PFMA report.
31.
Karnataka, like a few other states, prefers to use the mechanism of Vote on Account and postpones the
passing of the full demands. The Constitution of India permits Vote on Account (Article 20622) for making a grant in
advance pending completion of detailed procedure. This is reiterated in Article 81 of the Karnataka Budget Manual that
allows a Vote on Account when detailed procedure cannot be completed “relating to the Voting of grants and passing of the
Appropriation Bill before the commencement of the Budget year”. It is, therefore, envisaged that full budget is passed before
the commencement of the year, but an escape clause is available in situations such as elections are due shortly or when a new
government has been formed and time is needed to prepare the full budget.23
32.
GoKs Budget Manual describes the procedure for preparation of the budget and its presentation, discussion
and voting in the Legislature, but does not mandate passing of the budget within the fiscal year. The annual budget
20
Currently most of the budget data is sent over manually or in excel sheets which is then compiled and consolidated by computer cell in
FD. Budget Management Information software has been developed and implemented in the computer cell, which consolidates all the
budget data and prepares the budget documents in the prescribed formats.
21 There is a separate document called the Rules of Procedure (Internal Working) of the Committee on Estimates (June 2013) that is
supplemental to the main rules
22 Article 206(1)(a) of the Constitution - to make any grant in advance in respect of the estimated expenditure for a part of any financial
year pending the completion of the procedure prescribed in article 203 for the voting of such grant and the passing of the law in
accordance with the provisions of article 204 in relation to that expenditure
23 States that adopts Vote on Accounts are Tamil Nadu, West Bengal, Karnataka, Andhra Pradesh, Kerala, Manipur, Nagaland and Sikkim
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
circular (issued in October) contains a Calendar for regulating the budget work and this envisages finalizing the budget
estimates by December 20 – the calendar however does not provide a time plan for Legislative approval of the budget.
33.
Many states pass the entire budget before the start of the financial year like Gujarat and MP and this is also
one of the PEFA good practices. This was also the recommendation made in the
2004 PFMA report. Karnataka needs to meet this good practice of passing the
Full budget passed before FY
annual budget before the start of the fiscal year. The last three budgets for 2011/12,
GOI and 21 states like Gujarat, MP,
2012/13 and 2013/14 were passed on June 24, 2011, July 30, 2012 and July 30,
AP, UP, Bihar, Uttarakhand, HP,
2013, respectively which is 3-4 months from the start of the fiscal year.
Punjab, and Maharashtra pass full
budget every year.
Dimension/Good Practice
Timely budget approval by the Legislature
The Legislature has, during the last three years, approved
the budget before the start of the fiscal year
Current Status
Karnataka Legislature passes a Vote on Account by the close
of the financial year authorizing expenditure for April to
July. Full budget is discussed and full demands are voted
during the second phase of the budget session in June/July i.
e. well into the fiscal year.
34.
The 2004 PFMA recommended GoK to present budget in early February so that it can be passed by endMarch and this recommendation is relevant today and should be pursued by GoK. This mandate should be provided
through an amendment to the Budget Manual and also provide for exceptional use of Vote on Account under specified
circumstances. The budget legal document should mandate passing the annual budget before the start of the fiscal year. The
budget manual should have provisions, and the annual circular should contain the procedure that not only provides for
sufficient time for the departments to meaningfully prepare their detailed budget proposals as per guidance but also facilitate
passing of the budget before start of the fiscal year. The Annual Budget Calendar should also state the intent of passing the
budget before commencement of the fiscal year (the planned date of tabling of the budget in the Legislature and dates of
discussions and voting may be stated in the budget calendar or communicated separately, in consultation with the Karnataka
Legislative Secretariat). The priority identified for the 2014 PFM Reform Action Plan is to present and pass the full budget
before beginning of the financial year.
2.3
COMPREHENSIVENESS OF BUDGET DOCUMENTATION
35.
Annual budget documentation submitted to the Legislature for scrutiny and approval should allow a
complete picture of government fiscal forecasts, budget proposals and out-turn of previous years. The legal basis of
budget documentation (literature) to be presented before the Karnataka Legislature is embodied in the Karnataka Budget
Manual 24 supplemented by the Karnataka Fiscal Responsibility Act, 2002 (KFRA). The Budget Manual requires the
government to present the following to the Legislature: Finance Minister’s Speech, Annual Financial Statement, Detailed
Estimates, Detailed Estimates of Irrigation, Electricity and Public Works, Plan Budget and Budget Memorandum. The KFRA
requires the government to ensure greater fiscal transparency in public interest and, as far as practicable, minimize the
secrecy in preparation of the annual budget. The KFRA requires the government to place before the Legislature along with
the budget, a Medium Term Fiscal Plan (MTFP) and statements disclosing specified items 25.
Chapter IX – Presentation of the Budget and its disposal by the Legislature that prescribes the Budget to be presented in six volumes
Significant changes to accounting standards, policies and practices; contingent liabilities by way of guarantees; actual liabilities arising
out of borrowings by PSUs and SPVs and other equivalent instruments where liability for repayment is on GoK; all claims and
commitments made by the GoK having potential budgetary implications, including revenue demands raised but not realized; tax
expenditure; losses incurred in providing public goods and services through public utilities and undertakings; liability in respect of major
works and contracts; and subsidy payments and the impact of the same on the fiscal position of the State including in relation to the targets
set.
24
25
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
20
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
36.
The 2004 PFM Reform Action Plan recognized that the annual budget document contained substantial
information and was a useful document. The document contained the budget for that year, revised estimates for the
previous year, and actuals for the preceding year. The budget covered most major transactions of the State Government,
except off-budget borrowing from Special Purpose Vehicles and expenditures met from these borrowings. External agency
funds (including project-related funds) were integrated into the budget.
37.
The budget literature continues to contain and disclose significant information. The Budget for 2013/14
contained the documents listed in Table 3 below. GoK also prepares an annual Economic Survey Report that provides a
commentary on the economy as a whole and of the major sectors. This is presented to the Legislature prior to the submission
of the budget.











Table 3: Budget Documentation 2013-14 in GoK
Budget Speech separately for Agriculture
 Expenditure Volumes
Budget Highlights
 Public Works
Annual Financial Statement
 Irrigation
Budget at a Glance
 Zilla Parishad Plans (region wise)
Overview of the Budget
 Plan documents
Medium Term Fiscal Plan
 Budget Allocation for Urban Local Bodies
Demand for Grants
 Budget Memorandum
Agriculture Budget
 Action Taken Report
Gender Budget
 Motion for Demands
Vote on Account
 Appropriation Bill
Receipts Volume
 Supplementary Provisions
38.
GoK’s Budget Documentation is comprehensive. The comprehensiveness of information contained in the annual
budget of GoK was benchmarked with the 9 elements based on PEFA good practices (Table 4). The documentation for
2013/14 budget as presented to the State Legislature in February was considered for this purpose. The benchmarking
indicates that the budget documentation meets the 9 elements considered by PEFA.
Table 4: Comprehensiveness of information included in Budget Documentation in GoK
Framework Requirements
1.
Macro-economic
assumptions,
including at least estimates of aggregate
growth, inflation and exchange rate.
2. Fiscal deficit, defined according to GFS
or other internationally recognized
standard.
3. Deficit financing, describing
anticipated composition.
4. Debt stock, including details at least for
the beginning of the current year.
26
Element
included in
Budget
Documentation
Yes
Yes
Yes
Yes
Information Source
Macro-economic assumptions in respect of revenue receipts
and expenditure, capital receipts and borrowing, inflation
and GSDP growth rate are provided in the MTFP which is
placed before the Legislature along with the budget.
Budget Speech, Budget Highlights and Overview of the
Budget with a discussion in the MTFP26.
The Overview of the Budget that includes a statement titled
“Financing Deficit”
 Summary position is provided in Annual Financial
Statement and Overview of the Budget;
 Detailed disclosure in Receipts Volume and
Expenditure Volume 2 (detailed break up) giving actual
for the previous year and revised estimates of the
In India, the budget classification system is uniform for all stages of administration and is based on GFS/COFOG standards.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Framework Requirements
Element
included in
Budget
Documentation
Information Source
5. Financial Assets, including details at
least for the beginning of the current year.
Yes
6. Prior year’s budget outturn, presented
in the same format as the budget proposal.
7. Current year’s budget (either the
revised budget or the estimated outturn),
presented in the same format as the
budget proposal.
8. Summarized budget data for both
revenue and expenditure according to the
main heads of the classifications used,
including data for the current and
previous year.
9. Explanation of budget implications of
new policy initiatives, with estimates of
the budgetary impact of all major revenue
policy changes and/or some major
changes to expenditure programs.
Yes
current year;
Full details in Budget Memorandum.
Additionally, detailed breakup of debt is provided in
Statement No. 6 of the Finance Accounts which for the
previous year is available to the Legislature before the
budget is presented27.
 A discussion on debt is provided in the MTFP.
 Details of shares and securities held by the government
are provided in the Budget Memorandum.
 Details of other financial assets including cash balances
are not disclosed in the budget
 Detailed break up of financial assets is provided in the
Finance Accounts which for the previous year is
available to the Legislature before the budget is
presented.
Detailed Estimates
Yes
Detailed Estimates
Yes
Budget at a Glance, Overview of the Budget
Yes
Budget Speech, Budget Highlights


39.
The current disclosure of key fiscal information to public as described above matches all the 9 elements prescribed
by PEFA.
Dimension/Good Practice
Share of the 9 elements listed information in the budget
documentation most recently issued by the state
government
Recent budget documentation fulfils 7-9 of the 9 information
benchmarks
2.4
Current Status
The most recent budget documentation (2013/14) fulfills all
the 9 listed information and hence the budget literature is
comprehensive.
CREDIBILITY OF BUDGET – EXPENDITURE OUTTURN AND COMPOSITION
40.
The government should have the ability to deliver public services as expressed in policy statements, output
commitments and work plans. The composition of expenditure in a budget reflects the policy intent of the government.
27
Finance Accounts for 2010-11 were presented before the legislature on Dec 8, 2011 and for 2011-12 on Dec 10, 2012
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
External factors or poor revenue outturn may be behind the deviations, which needs to be recognized. There are two essential
aspects that impact budget credibility in execution:
 ability to maintain actual expenditures at the level approved in the original budget; and
 extent of variation of the composition of actual expenditure from the composition in the original budget arising on
account of reallocations between budget heads during execution.
To measure expenditure outturn and composition of expenditure outturn, the methodology provided in PEFA guidelines has
been followed.
Aggregate expenditure out-turn compared to original approved budget
41.
Actual expenditure is compared to original budget excluding debt service payments which to a large degree is
outside the control of the government 28. The data for budgeted and actual expenditure of GoK on administrative classification
is readily available in government documents – in the budget documents and the annual Appropriation Account audited by
the Supreme Audit Institution. The data for three years 2010/11, 2011/12 and 2012/13 are summarized in Table 5.
Table 5: Budgeted vs. Actual expenditure of GoK, net of debt service
(Rs. in crore)
2012-13
2011-12
2010-11
Budget Estimates
94,266
76,325
61,930
Actual Expenditure
88,345
77,448
64,467
Actual Expenditure Deviation (absolute)
(-) 5,921
1,123
2,537
Actual Expenditure Deviation (percent of budget estimates)
(-) 6.3%
1.5%
4.1%
Source: Budget estimates from the Annual Financial Statements; Actual expenditure from the Appropriation Accounts
Particulars/Year
42.
GoK’s record of implementing the budget has shown significant progress since the 2004 PFMA - the
deviation of actual expenditure and original budget was not being more than 5% in two of the last three years. The
buoyant revenue achievement was been a major contributory factor leading to this favorable position. At the time of the 2004
PFMA, Karnataka’s record in terms of implementing the budget as passed was not impressive as both revenues and
expenditures showed wide deviations from budget estimates.
Composition of expenditure out-turn compared to original approved budget
43.
The PEFA methodology for calculating composition of expenditure outturn requires adjusting the allocations from
the original budget for each of the twenty largest ministries by the aggregate variance and then calculating by how much the
actual out-turn for each ministry differed from the adjusted allocations and is calculated for the most recent three years. The
computation does not take into account the supplementary estimates (also approved by the Legislature) but takes the original
budget as the base. Table 6 shows variation on expenditure composition for the three years 2010/11, 2011/12, and 2012/13.
The high level of compositional variance tapered during 2011/12 (down from 12% to 10.4%) but significantly
increased in 2012/13 to 19.3% and is quite large compared to the primary variance.
Table 6: Primary and Compositional Expenditure Variance
Particulars
2012/13
2011/12
Total Primary Variance
6.3%
1.5%
Average
compositional
19.3%
10.4%
Variance
44.
2010/11
4.1%
12.0%
During the last three years, some departments with compositional variance exceeding 5% are listed in Table 7.
28
PEFA Guidelines also require that donor funded expenditure be excluded if beyond the control of the government. Such expenditure in
GoK is about 2% of total expenditure (excluding debt servicing) and not being material, has not been excluded from the calculations.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Table 7: Compositional Expenditure Variance of > 5% in GoK Departments29
Department
2012/13
2011/12
2010/11
Finance
-29.3%
11.7%
-17.72%
Urban Development
-19.5%
-5.9%
-4.12%
Water Resources
-14.7%
-14.3%
-8.63%
Rural Development and Panchayati Raj
-15.3%
18.2%
Energy
29.8%
16.0%
60.12%
Public Works
33.4%
18.1%
14.20%
Health & Family Welfare
-6.5%
Agriculture and Horticulture
-30.1%
-26.1%
-33.81%
Social Welfare
5.9%
Home & Transport
14.2%
-6.5%
-5.85%
Revenue
51.0%
14.8%
5.00%
Women and Child Development
8.7%
-7.92%
Commerce and Industries
11.9%
19.43%
Housing
9.8%
-10.1%
-20.73%
Animal Husbandry and Fish
-9.0%
-9.46%
Forest, Ecology and Environment
55.7%
-20.8%
67.87%
Food & Civil Supplies.
15.0%
-9.0%
Co-operation
160.0%
Infrastructure Development
-26.9%
-33.6%
-18.10%
Source: Budget estimates from the Annual Financial Statements; Actual expenditure from the Appropriation Accounts
45. An analysis in three departments exhibiting material deviations reveals the following 


The Cooperation Department sought Rs. 1,815 crore on account of Crop Loan Waiver Scheme 2012 through 2 nd
installment of supplementary estimates which was not envisaged at the time of presentation of 2012-13 budget
in March 2012 as the scheme was declared by GoK in August 2012 (This was to be funded entirely through
cash outflow, actual expenditure however was Rs. 930 crore only).
For the Energy Department, additional grants were sought through supplementary estimates for paying arrears
in subsidy for IP sets and making investments in power utilities (total Rs. 1,500 crore). Such expenses should
have been envisaged and provided in the original budget.
The budget composition also gets affected in view of natural calamities as for instance in the Revenue
Department which required additional grants for disaster relief (Rs. 2,359 crore). Part of these additional
demands was to be met from a specific fund (the National Disaster Relief Fund)
46.
This indicates that requirements do come up in-year necessitating inclusion in supplementary estimates resulting in
composition deviation, as evident from the above instances. While appreciating the genuine in-year requirements, an
increasing expenditure composition deviation indicates a weak coupling between budget formulation and budget
implementation. High level of supplementary estimates contributes to significant adjustments in the original budget
estimates in GoK. This clearly indicates that the need for more budgetary discipline and effective expenditure management
systems and anticipation of expenditure at the time of original budget formulation. This is an area of improvement in
budgeting which GoK needs to address in the coming years.
47.
An ancillary measure of budget credibility is the amount of expenditure charged to Contingency Vote. In
Karnataka, as in other Indian states, the Legislature by law30 has established a Contingency Fund placed at the disposal of the
29
(+) denotes actual expenditure more than original budget and (-) denotes actual expenditure less than original budget
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
24
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Governor to enable advances to be made for meeting unforeseen expenditure pending authorization of such expenditure by
the State Legislature. The appropriation for the Contingency Fund is made from the Consolidated Fund of the State and the
fund is recouped by debiting the expenditure to the concerned functional major head in the Consolidated Fund of the State.
The maximum balance in the Contingency Fund can be Rs. 80 Crore. Of this, the amount of expenditure initially met from
Contingency Fund could be much less. Table 8 provides a summary of the transactions in the Contingency Fund of GoK. The
conclusion is that the Contingency Fund is used to meet only a miniscule amount of expenditure that is finally recouped from
the Consolidated Fund and put to vote.
Table 8: Transactions in the Contingency Fund
Transaction
Opening
Receipts
Disbursements
Closing
Expenditure from Contingency Fund
Expenditure un-recouped at the close of the year
Source: Finance Accounts Statement No. 18
2012/13
79.49
0.51
0
80.00
0.46
--
2011/12
67.47
12.53
0.51
79.49
35.77
0.51
2010/11
80.00
(Rs. in crore)
2009/10
77.90
2.10
12.53
67.47
44.75
12.53
80.00
38.17
48.
The expenditure budget outturn and compositional variation when compared to the dimensions under PEFA
benchmarked to good practices indicates that expenditure composition variance needs to be addressed by GoK.
Dimension/Good Practice
The difference between actual primary expenditure and the
originally budgeted primary expenditure
In no more than one of last three years has actual expenditure
deviated from budgeted expenditure by amount equivalent to more
than 5% of budgeted expenditure
Extent of the variance in expenditure composition during the last
three years
Variance in expenditure composition exceeded 5% in no more than
one of the last three years
The average amount of expenditure actually charged to the
contingency vote over the last three years
Actual expenditure charged to the contingency vote was on average
less than 3% of the original budget
Current Status
In the last three years, actual expenditure has
deviated from original budget expenditure by more
than 5% in one year only.
Variance in expenditure composition has exceeded
10% in all the three most recent years. This is an
area for intervention.
The actual expenditure actually charged was on an
average less than 3% of the original budget
49.
There is a need for GoK to reduce the expenditure composition variance, from the present high level, in
phases say over a two-year period and this is the priority action for the 2014 PFM Reform Action Plan. Budget
estimation is needed to be strengthened and reduction in in-year adjustments via supplementary needs to be achieved (also
refer discussions in the following sections).
2.5
CREDIBILITY OF THE BUDGET- REVENUE FORECASTING AND OUTTURN
50.
The major sources of income of the GoK are from own tax and non-tax revenue, devolution of central taxes
and Grants in Aid from GoI.
30
The Karnataka Contingency Fund Act, 1957 last amended in 1985 as provided in Article 267(2) of the Indian Constitution. The amount
for the fund has been steadily increased from Rs. 10 crore in 1976 to Rs. 80 crore at present.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
25
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix



The major own tax revenue (about 2/3rd of total state revenue) are from Commercial Taxes (comprising Value
Added Tax, Entertainment Tax, Luxury Tax, Professional Tax), State Excise, Stamps and Registration and Vehicle
Tax.
The major own non-tax revenue (about 6% of total state revenue) are Royalty and Interest Receipts and other
departmental revenue.
Central devolution of taxes and grants-in-aid as mandated in the Constitution of India (Articles 268 to 270,, 272 and
275). Besides, the state also receives grants for Plan Schemes (Central/State Plan Schemes, Centrally Sponsored
Plan Schemes and Special Plan Schemes). The share of central taxes in the state revenue is about 16% and grants-inaid is about 12%.
51.
The 2004 PFMA identified that Karnataka suffered from excessive revenue forecasts that were largely
generated bottom-up by the various tax departments. There was no central, specialized capacity in the Finance
Department to assess their reasonableness nor was there a model or a common format to facilitate analysis or to disaggregate
between revenue increases due to economic growth and those due to policy changes. As was evident from the data at that
time, there was a bias towards optimism in these forecasts which led to increasing the total expenditure outlay of the budget.
52.
An accurate revenue forecast is a key input to the preparation of a credible budget. Optimistic revenue
forecasts can lead to unjustifiably large expenditure allocations and to larger fiscal deficits, should spending not be reduced in
response to an under-realization of revenue. On the other hand, pessimism in the forecast can result in the proceeds of an
over-realization being used for spending that has not been subjected to the scrutiny of the budget process. Accurate
forecasting of domestic revenue is a critical factor in determining budget performance, since budgeted expenditure
allocations are based upon that forecast 31.
53.
In GoK, data on budgeted and actual tax and non-tax revenue are readily available in government documents
and disaggregated by major revenue heads. Revenue is normally deposited with the government Treasury and hence the
data is available electronically in the Treasury’s Khajane application and is also available in the accounting application of the
AG (A&E). The latter publishes monthly revenue data along with Civil Accounts.
54.
In all the last three years, the budget estimates for own tax revenue had been revised upwards vis-à-vis the
original estimates during in-year budget adjustments indicating buoyancy in tax collections. The budgeted and actual
revenue over the last three years of the GoK are summarized in Table 9 below.
Table 9: Budgeted and Actual Revenue of GoK
(Rs. in crore)
Year
2012/13
2011/12
2010/11
2009/10
Tax Revenue
BE
51821
43817
36228
32721
RE
53493
45775
38049
29339
Actual
53754
46476
38473
30579
Non Tax Revenue
BE
3193
3675
2820
2130
RE
3796
3189
3519
2495
Actual
3966
4087
3358
3334
State Share in Central
Taxes
BE
13094
10419
9060
7645
RE
12500
11075
9310
7000
Actual
12647
11075
9506
7360
Central Grant In Aid
BE
13354
8402
5530
5893
RE
15095
8359
6906
7573
Actual
7809
8168
6869
7883
Total
BE
81461
66313
53639
48389
RE
84884
68398
57785
46406
Source: (a) BE and RE: GoK Annual Financial Statement (Budget), Statement 1, Consolidated Fund of India - Revenue
Account – Receipts; (b) Actuals GoK Finance Accounts, Volume 1, Statement No. 2
Table 10Error! Reference source not found. provides the revised revenue estimate and actual as percentage of the original
estimates. The data indicates the unpredictability of central grant in aid and also indicates a need of better estimation of nontax revenue.
31
PEFA Jan 2011
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
26
Actual
78176
69806
58206
49156
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Year
2012/13
2011/12
2010/11
2009/10
Table 10: Comparison of RE and Actuals with Original Budget
Non Tax Revenue
State Share in
Central Grant In
Central Taxes
Aid
Actual
RE
Actual
RE
Actual
RE
Actual
4%
19%
24%
-5%
-6%
13%
-42%
6%
-13%
11%
6%
6%
-1%
-3%
6%
25%
19%
3%
5%
25%
24%
-7%
17%
57%
-8%
-4%
29%
34%
Tax Revenue
RE
3%
4%
5%
-10%
Total
RE
4%
3%
8%
-4%
Actual
-4%
5%
9%
2%
55.
A comparison of budgeted and actual revenue (the Revenue Outturn) provides an overall indication of the
quality of revenue forecasting. For computing the aggregate outturn, the methodology suggested in the PEFA guidelines
has been followed. For computation, only own tax and non-tax revenue has been taken. GoK has little control over share of
central taxes and grants-in-aid and hence, as recommended in the PEFA Guidelines32, these two revenue sources have not
been considered while computing revenue outturn. In all the last three years, actual revenue has exceeded the budgeted. This
is an improvement since the 2004 PFMA – at that time on average, only 90% of budgeted revenues were raised during the
year and no sustained improvement in this ratio was evident.
Table 11: Revenue out turn of Own Resources compared to Original Budget
Particulars/ Year
Original Budget Estimates (own tax and non-tax revenue)
Actual
Actual Revenue as a percent of budget estimates
Source: Table10 above
2012/13
55,014
57,720
105%
2011/12
47,492
50,563
106%
(Rs. in crore)
2010/11
39,048
41,831
107%
56. The Revenue Outturn compares favorably with the good practices when benchmarked to PEFA.
Dimension/Good Practice
Actual domestic revenue compared to domestic revenue in the
originally approved budget.
Actual domestic revenue was between 96% and 106% of
budgeted revenue in at least 2 of the last three years
Current Status
Actual domestic revenue was between 96% and 106% in
two of the last three years.
57.
Commercial Taxes Department (CTD) and Excise Department (ED) are the major contributors to the state’s revenue
and nearly 80% of the state revenue is budgeted and collected by these departments. Major administration reforms and
rationalization efforts (besides tax reforms) were undertaken by CTD and ED, and these have contributed to the
robust revenue outturn.
58.
Commercial Tax Department has developed and implemented e-initiatives for all its core functionalities.
Commercial Taxes constitute more than 60% of the States own tax revenue and is an important department both from fiscal
and financial management point of view of the state. CTD has a very important role in providing revenue forecasts for the
MTFP. Table 12 provides the revenue outturn (actual compared to the original budget) – and this is positive in the last three
years. Currently the forecasts are based on external economic data including inflation, GDP Growth and buoyancy of taxes;
however commodity wise tax forecast is not made presently. The CTD has restructured the tax administration regime and has
introduced e-governance as a key tool to improve efficiency in the department that has resulted in improved tax collection
and its buoyancy. The following prominent initiatives have been carried out by CTD to promote electronic administration of
the various Acts:
32
Share of the state in central taxes is dependent upon the sophistication of the revenue forecasting capabilities of the central government
and the actual budget performance based on realization of the projected revenue. Grants in Aid from central government are also
dependent upon many factors.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
a.
b.
c.
d.
e.
Online Registration for dealers
Online tax payments and mandatory e-payments for assesse with tax dues of more than Rs. 10,000, through 20
banks
Online filing of tax returns (achievement is nearly 100%)
Online generation of statutory forms such as delivery notes (e-Sugam), transit passes (e-Suvega)
IT and risk based audit systems, the e-Comprehensive Audit System.
Table 12: Revenue Outturn for Commercial Tax Department
Particulars/
Year
2012/13
Original Budget Estimates
RE
Actual
Actual Revenue as a percent of original budget estimates
Source: Commercial Tax Department
31,100
32,250
31,875
102%
2011/12
(Rs. in crore)
2010/11
26,700
27,930
27,611
103%
22,500
22,500
22,803
101%
59.
Excise Department has planned for total computerization of its activities including e-payment mechanism
covering 90% of the total revenue. ED contributes nearly 20% to the state’s tax revenue. The e-payment system, for
payment of excise duty by 36 distilleries, is being linked to Treasury Network Management Center and later on planned for
integration with Khajane II. Implementation of e-payment system and the application Online Allotment of Spirit and
Molasses (both developed by the National Informatics Center - NIC) will be a significant step in e-governance and contribute
to improving revenue collections. This initiative has also come at the right time in view of the significant rise in revenue from
excise over the years – almost doubling from Rs. 5,792 crore in 2008-09 to Rs. 11,070 crore in 2012-13. Revenue outturn of
the Excise Department over the last three years is briefed Table 13. Like commercial taxes, excise duty revenue outturn has
also been positive.
Table 13: Revenue Outturn for Excise Department
Particulars/
Year
Original Budget Estimates
RE
Actual
Actual Revenue as a percent of budget estimates
2012/13
10,775
11,300
11,070
103%
2011/12
9,115
9,500
9,828
108%
2010/11
(Rs. in crore)
2009/10
7,500
8,200
8,345
111%
6,565
6,800
7,001
107%
60.
The quality of revenue forecasting, particularly from own taxes, done by GoK has been realistic. In case of
both CTD and Excise Department, the revenue collections have exceeded the original budget estimates which augur well for
the state. This was helped by the IT and governance initiatives taken by these departments to improve collections. This can be
reinforced through adoption of the following which are suggested to be included in the 2014 Reform Action Plan.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
28
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
61.
CTD is in the process of setting up an Economic
Intelligence Unit. In line with the 2004 PFMA recommendations,
a consultancy tender has been floated for creating an Economic
Intelligence Unit within CTD for forecasting and economic
intelligence. The purpose is to improve the dealer transaction
analytical capabilities of the CTD including benchmarking the tax
performance with relevant economic and tax data available on the
public domain and with other tax authorities to help detect tax
evasion, increase tax compliance in the State, resulting in State
revenue enhancement.
Benefits of Economic Intelligence Unit
 Maharashtra was the first state to implement the EIU
(2009) to minimize physical monitoring of dealers,
enhanced use of data analytics and identification of
fraud and tax evasion cases and creation of e-evidence.
In 2012, the EIU unearthed VAT evasion of Rs. 1000
crore in hawala dealing
 Kerala has also established an EIU in 2013 for
collecting effective market intelligence to study, identify
and detect tax evasion practiced in the state. Special
posts were created for the EIU.
62.
GoK could implement a Revenue Forecasting Tool.
The budget circular on preparation of capital and revenue receipts estimates (issued in October-November) provides some
guidance on tax and non-tax revenue estimation33. A formal revenue forecasting model has presently not been implemented
in GoK, but is under consideration. A modern revenue forecasting model is based on statistical analysis of relevant data. CTD
is already working on developing such model which is a part of the TOR for EIU. The Income Tax Department of the GoI
has also recognized such need and is working on developing a model.
2.6
SUPPLEMENTARY BUDGETS
63.
The legal basis for supplementary budget emanates from Article 205 of the Constitution of India and these
are replicated in the Karnataka Budget Manual (clauses 282 to 292). Supplementary demands (also called Supplementary
Budget or Estimates – SE) can be made in the following circumstances,:
a. where the amount authorized to be expended for the current FY is
Supplementary
Budget
or
found to be insufficient for the purposes of that year;
Estimate
b. when a need has arisen during the current FY for supplementary or
A grant, approved by the
additional expenditure upon some new service not contemplated in
Legislature, being an estimated
amount of further expenditure that
the original budget for that year
may be necessary in a FY over and
c. advances obtained from the Contingency Fund can be recouped by
above the expenditure authorized by
presentation in the SEs and obtaining Legislative approval
the Legislature in the original
d. Expenditure allowed by Finance Department by way of
budget and which cannot be met
“additionalities” during the year which needs ratification by the
through Re-appropriation
Legislature
64.
GoK presents three Supplementary Budgets to the State Legislature
every year: This is normally done during June/July, December/January and
February/March. The first SE (called the 1st Installment) is presented along with
the original budget itself, as initially a Vote on Account is obtained from the
State Legislature in February/March. While part of the supplementary
expenditures are met from anticipated savings of various departments, there are
substantial amount of net cash outgo in these supplementary proposals. This
No. of SEs passed by other states
 Madhya Pradesh, Chhattisgarh,
Assam, Jharkhand – 3
 Bihar and Kerala – 2
 Gujarat, Odisha, Uttar Pradesh,
Uttarakhand, Himachal Pradesh
and most North Eastern States- 1
(between Dec and March)
33
Relevant factors such as the target fixed, the progress of actuals and the anticipated additional yield from the measurers of enhancement
of existing taxes, the estimated loss of revenue on account of abolition or reduction of taxes consequent to the implementation of such
taxation laws passed by the State Legislature after the Budget Estimates were finalized and presented, tax arrears to be collected, the
demand for the coming year and assumption of a reasonable higher growth rate in respect of tax revenue and also the performance in the
previous years, the progress / trend of actuals of the current year and the impact of the new measures of taxation
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
29
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
practice has raised questions relating to the sanctity of annual budget as a policy instrument and the concept of hard budget
constraint in observing fiscal discipline. The 2004 PFMA recommended reducing the number of SEs to 1 – a decision in
this regard is yet to be taken by GoK34. At the central government level, three supplementary demands are introduced, first
in July, second November and the third in March – before the budget for ensuing year is presented.
65.
The percentage of aggregate SE to original estimates is high in GoK when compared to other states. As shown
in Table 14, in GoK, aggregate SEs reduced from 18% in 2010/11 to 14% in 2011/12, but increased to 17% in the last FY
2012/13 and this is still high as compared to other states. The SEs passed by most other Indian states is 10% or less than the
original budget (exceptions include Madhya Pradesh 29%, Bihar 18%, Tamil Nadu 14% and West Bengal 13% and some
North Eastern states)35. Within the departments, the SEs are significantly higher (and showing an increasing trend) such as in
the case of Cooperation Department (284%, 66% and 52%) and Public Works Department (46%, 44% and 40%), respectively
for the last three years (2012/13. 2011/12 and 2010/11), as percent of original budget. Generally, 5-6 departments account for
about 60% of the total SE that include Public Works, Rural Development and Panchayati Raj and Energy
Table 14: Supplementary Estimates as a percentage to Original Estimates in GoK
2012-13
2011-12
3.42%
2.24%
Supplementary 1
8.54%
4.40%
Supplementary 2
5.41%
7.04%
Supplementary 3
Total
17.35%
13.68%
Source: Compiled from Appropriation Accounts
2010-11
1.31%
7.02%
9.90%
18.23%
66.
Frequent in-year budget adjustments through reliance on supplementary budgets undermine the sanctity and
discipline of the budget preparation process. The departments get the “flexibility” to make significant in-year adjustments.
This also affects the composition of the budget vis-à-vis that approved by the Legislature (refer section on expenditure
outturns).
67.
The “savings” are more than the aggregate SEs undermining the “realism” of budgeting in GoK. Apparently,
actual expenditure falls short of even the original estimates, and the “savings” (budgeted less actual expenditure) is more than
the aggregate of the SEs, and an upward trend is seen over the last three years, as reflected in Table 15. For instance, in
2012/13, actual expenditure was less than the sum of original and SEs in all departments except one and the aggregate
savings are more than the SEs. Similarly, in 2011-12, actual expenditure in over two-thirds of the departments was less than
the original estimates and the aggregate savings almost equaled the SEs. Savings are more than SEs is a phenomenon in most
states of India. But West Bengal, Himachal Pradesh and J & K are amongst the few states who exhibit marginal savings of 12%.
Table 15: Karnataka - Original and Supplementary Estimates and Savings
Particulars
Original Budget
Supplementary Estimates
Revised
(Original
Supplementary)
Actual Expenditure
Savings (net)
+
Revenue
83183
14203
97386
2012/13
Capital
24522
4487
29009
Total
107705
18690
126395
78614
18772
21341
7668
99955
26440
Revenue
66181
6867
73048
2011/12
Capital
21557
5140
26697
Total
87738
12007
99745
Revenue
54160
8028
62188
65510
7539
21320
5376
86830
12915
54372
7901
(Rs. in crore)
2010/11
Capital Total
17900 72060
5106 13134
23006 85194
18543
4463
34
72915
12364
For FY 2013/14, due to change in government, full budget was re-presented in July 2013 and hence for this year only two supplementary
budgets were presented in November 2013 and February 2014
35 Source: CAG Report on State Finances 2012/13 or 2011/12 of respective states
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Particulars
Revenue
132%
2012/13
Capital
171%
Total
141%
Net Savings as percent of Total
Supplementary Estimates
Actual Expenditure/ Original
95%
87%
93%
Budget
Source: Supplementary Estimates and Appropriation Accounts
Revenue
110%
2011/12
Capital
105%
Total
108%
Revenue
98%
2010/11
Capital
87%
Total
94%
99%
99%
99%
100%
103%
101%
68.
A brief analysis of some large ticket items in the SEs for 2012/13, as below, included in the SEs calls for a need of
making the budget process more efficient so that the expenditure can be anticipated and planned and included in the
original budget.
 Education Dept. – demand for PRIs including revised pay scale (SE 2)
 RDPR – provision for state share of central scheme; demand for PRIs; provision for road works; repairs and
maintenance (SE 2)
 Energy Dept. – provision for subsidy (SE 2 and 3); equity contribution to power utilities (SE 3)
 Public Works Dept. – provision for payment of pending bills
69.
The C&AG has pointed to cases of unnecessary SEs. For instance, in 2011/12, out of Rs. 4,766.66 crore of SEs,
the C&AG assessed that Rs. 1,615.27 remained unutilized (34%). While it is positive to note that in Karnataka the actual
expenditure is within the original budget, however the composition of the budget in terms of sectoral allocation significantly
changes due to the frequent in year budget adjustments. From the analysis that the original budget numbers is more aligned to
the actual expenditure, the need for 3 supplementary budgets could be reviewed and rationalized.
70.
Presentation in Supplementary Budgets does not provide the clear picture. Data on savings and surrenders are
not disclosed in the SE and hence a complete picture is not available in a single report. Again, this practice in Karnataka
follows other states who also do not disclose savings, surrenders and re-appropriations in their supplementary budgets.
Odisha discloses surrenders made in individual demands, but not in the aggregate.
71.
Supplementary Estimates are not Fiscally Neutral as required by KFRA. The KFRA requires that the fiscal
impact of the SE should be fully offset 36. The 2004 PFMA recommended presenting a “fiscal neutrality” table to be
shown per grant and that supplementary budgets should be allowed only if there are offsetting fiscal savings.
Presently, the SE documents provide a brief write up on the sources to meet the supplementary estimates (these are
summarized in Error! Reference source not found.), but do not provide the fiscal neutrality details or table. The earlier SEs
for instance, 2011/12 and 2012/13 SE1) did not provide any strategy for meeting the cash outgo part of the SE. Thereafter,
the SEs stated that cash outgo was to be funded from “from general buoyancy in tax and non ‐tax revenue and savings in
provision for other schemes” or through “suitable expenditure prioritization” without providing any details. In SE2 of 201314, GoK stated that “actual releases of the amounts included in the Supplementary Estimates….would be made based on the
fiscal position and in compliance with provisions of the Karnataka Fiscal Responsibility Act”. This implies that at the point
in time, GoK passed the SE, it had not assessed the sources of funding the additional demands. As discussed above, the data
on savings, surrenders and re-appropriation are not disclosed in the supplementary budgets and also the impact on the fiscal
deficit is not stated in the SE. This practice is not strictly in line with the disclosure requirements of the KFRA Act. Table 16
indicates net cash outgo (additional commitments) equaled 52%, 67% and 77%, respectively for the three years (2012/13,
2011/12 and 2010/11), of the total SE and this remained “unfunded”. Moreover, actual expenditure and savings/surrenders
are not disclosed in the SE even in the 2nd and 3rd installments.
The KFRA requires that “Whenever one or more supplementary estimates are presented to the Houses of Legislature, the State
Government shall also present an accompanying statement indicating the corresponding curtailment of expenditure and/or augmentation
of revenue to fully offset the fiscal impact of the supplementary estimates in relation to the budget targets of the current year and the
Medium Term Fiscal Plan objectives and targets for the future year”.
36
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Table 16: Financing the Supplementary Estimates
Year
Central
Adjustments
Other Receipts
Assistance
1,225
2,918
-2013-14
2,608
149
20
2012-13
798
32
998
2011-12
532
392
126
2010-11
Source: Government of Karnataka, Supplementary Estimates
Recoveries
2,882
6,250
2,095
2,018
Cash Outgo
(Rs. in crore)
Total
5,173
9,663
8,084
10,067
12,198
18,690
12,007
13,135
72. Summary of Issues
 GoK presents three Supplementary Budgets to the State Legislature every year. Therefore, frequent in-year
budget adjustments through reliance on supplementary budgets undermine the sanctity and discipline of the
budget preparation process
 The percentage of aggregate SE to original estimates is high in GoK when compared to other states
 The “savings” are more than the aggregate SEs undermining the “realism” of budgeting in GoK and the budget
process can be made more efficient so that the expenditure can be anticipated and planned and included in the
original budget
 The C&AG has pointed to cases of unnecessary SEs
 Presentation in Supplementary Budgets does not provide the clear picture – data on surrenders and actual
expenditure is not included in the SE document
 Supplementary Estimates are not Fiscally Neutral as required by KFRA – a significant part of the additional
expenditure remains “unfunded”
73.
The issues identified in this area can be addressed by including the following priorities in the 2014 PFM
Reform Action Plan. Recommendations on SEs made in the 2004 PFMA report are still relevant.
a.
Reduce the number of SEs presented to GoK every year from 3 to 2 (and to 1 in the long term). The primary
recommendation of this study is that GoK passes the full budget before the start of the FY (refer section 2.2).
While this transition takes place GoK also needs to strengthen its budgetary estimation process, so that the need
for in-year amendments as early as in June-July should be avoided. The first SE would therefore ideally be
presented and passed in November/December coinciding with the tabling of the Mid-Year Report in the
Legislature.
b.
Supplementary Budgets should be Fiscally Neutral in accordance with the KFRA. The KFRA mandates that
the fiscal impact of the SEs should be fully offset by curtailment of expenditure and/or augmentation of revenue
(i.e. should be fiscally neutral) and this should be presented in an accompanying statement (i.e. a Fiscal Neutrality
table). This presently has not been fully achieved as SEs remains “unfunded” by significant amounts and this
need to be brought in line with the KFRA. The FMRC has recommended avoiding and moderating inclusion of
large expenditure commitments in supplementary budgets. Full scrutiny of proposals/expenditure proposed in SE
should be carried out before including them in the SE. In respect of additional plan commitments for which
approval is obtained through SEs, MTFP of GoK recognizes the need for mobilizing additional resources along
with identifying savings in other plan schemes to meet the enhanced requirement. GoK needs to implement these
recommendations.
c.
Actual expenditure and surrenders should be disclosed in the SE so that it provides clear picture to the
readers on the fiscal impact of the additional demand. Presently, actual expenditure for the first half year is being
presented in the Mid-Year Review Report under KFRA. Therefore it is desirable that actual expenditure should
also be included in SE2 and SE3.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
32
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
2.7
IN-YEAR ADJUSTMENTS TO BUDGET ALLOCATION – RULES OF RE-APPROPRIATION
74.
One important element of budget execution is a set of clear and transparent rules for in-year amendments to
the budget without ex-ante approval of the Legislature. One of the instruments available is through the mechanism of Reappropriation. The Karnataka Budget Manual and the Karnataka Financial
Code (Articles 308 to 314) contain the rules of re-appropriation. These
Re-appropriation
powers are exercised at the levels of the Finance Department,
The transfer, by a competent authority, of
Administrative Department and the Head of Department. Re-appropriation
savings from one unit of appropriation to
mechanism cannot be used to meet expenditure that increases the outlay,
meet excess expenditure under another unit
within the same grant or charged
or from a grant for non-recurring expenditure to provide for additional
appropriation … Karnataka Budget Manual
recurring expenditure, or from one grant to another, or from a revenue
head to a capital head, or from charged to voted expenditure and vice
versa, or re-appropriation to a new service. Subject to these restrictions, or
heads under which no provision exists at all, the powers of re-appropriation in GoK are briefed in Table 17.
Table 17: Powers of Re-appropriation in GoK
Level
Power of Re-appropriation
Finance Department
Power to sanction any re-appropriation within a grant from one Major, Minor, or
Subordinate head to another
Departments
other
than Power to sanction re-appropriation within a grant between heads subordinate to Major head
Finance Department
not exceeding Rs. 5,00,000 (provided it does not incur in a recurring liability)
Power to sanction re-appropriation within a Major head provided each re-appropriation
does not exceed Rs. 20,000
Head of Departments
Power to sanction re-appropriation from one unit of appropriation (detailed head) to
(HoD)
another within the same Major head not exceeding Rs. 1,00,000 per annum per detailed
head provided funds for plan items are not transferred to non-plan and a recurring liability
is not created.
This power has been enhanced by GoK in April 201037 – now HoDs can re-appropriate up
to Rs. 5,00,000 between two units of appropriation under same major head and within
same demand subject to specified restrictions.
Source: Karnataka Financial Code and GoK orders
75.
There is an overall rising trend in the amount of Re-appropriations including injudicious or defective orders
in GoK. Significant re-appropriations undermine the sanctity of the original budget. Re-appropriations are made through ReAppropriation Orders issued by the concerned delegated authority38. The amount of re-appropriation doubled during 2011/12
as compared to the previous year and has further increased during 2012/13. The amount of injudicious orders (i.e. even after
issue of Re-appropriation Orders, either the full unutilized budget provision was not re-appropriated or there was excess over
budget provision even after re-appropriation) have increased. There are also defective orders (i.e. re-appropriation orders
issued beyond the sanction powers or not self-balanced or not signed by the competent authority) and there is a two-fold
increase in the last two-years. The trend of Re-appropriation Orders is detailed in Table 18, the reasons for this trend need to
be ascertained.
Table 18: Trend of issue and quality of Re-appropriation Orders in GoK
Re-appropriation Orders
2012/13
No.
Amt.
461
5,631
2011/12
No.
Amt.
476
5,277
2010/11
No.
Amt.
366
2,635
(Amount in Rs. crore)
2009/10
No.
Amt.
350
2,305
37
GO No. FD 2 TFP 2010 dated April 30, 2010
All Re-appropriation Orders have to be sent to the AG latest by April 30 from the close of the FY and coordinated in the Finance
Department by a Deputy Secretary level officer. These orders are required by the AG for the purpose of preparing the State’s
Appropriation Accounts.
38
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Of which
Injudicious Orders
57
Defective Orders
37
Source: C &AG, Report on State Finances
1,145
612
60
35
1,970
205
60
30
647
343
62
31
786
45
76.
GoK matches well with good practice under PEFA in respect of existence of a set of clear and transparent
rules for in-year budget amendments through re-appropriation.
Dimension/Good Practice
Rules for in-year amendments to the budget without exante approval by the Legislature
Clear rules exist for in-year budget amendments by the
executive, set strict limits on extent and nature of
amendments and are consistently respected
Current Status
Clear rules for in-year budget amendments at the level of the
Finance Department, Administrative Departments and Head
of Department exist in the Karnataka Financial Code. There
is a need for minimizing injudicious or defective reappropriation orders.
77.
The mechanism of Re-appropriation needs to be strengthened. This is a better option vis-a-vis seeking
additional funds through Supplementary Budget from the Legislature as it provides flexibility to the departments to transfer
savings in one scheme to another that need additional funds, and is a much faster process. Re-appropriations are carried out
with the belief that the re-appropriated amount would be fully utilized, but due to various reasons such as slow pace of
implementation of schemes and treasury processes, the sums re-appropriated lapse without being utilized. Though this
situation is inevitable, large-scale “injudicious orders” need to be corrected through better assessment techniques. On the
other hand, defective re-appropriations can be effectively checked through systems control and firming up controls at the
Treasury level. Large surrenders should be dis-incentivized and Departments should ensure prudence in effecting reappropriations. Under Khajane-II, Re-appropriation Orders are proposed to be automated i.e. system generated and the
number of defective orders is expected to reduce drastically.
78.
The following priority action points are recommended for inclusion in the 2014 PFM Reform Action Plan.
a.
Revise the financial limit of delegation for re-appropriation: The delegation of re-appropriation at the level of
the Head of Department contained in the Karnataka Financial Code was last revised in April 2010. GoK may
consider reviewing and revising these limits to a more contemporary level.
b.
Identify the reasons for high level of Re-appropriation Orders and develop strategy to control the rising trend:
Reasons for the current increasing trend of issue of Re-appropriation Orders including injudicious and defective
orders need to be ascertained so as to develop and implement a strategy for arresting this trend and controlling the
issue of Re-appropriation Orders. Interpretation and lack of awareness could be a reason for incorrect application
of the re-appropriation procedures in the departments.
c.
Following the above study workshops to be held to disseminate the rules and procedures around Reappropriations. This would help in a better understanding of the rules of re-appropriation with the objective of
reducing the quantum of re-appropriation including injudicious and defective orders.
2.8
PREDICTABILITY OF AVAILABILITY OF FUNDS
79.
Effective execution of the budget, in accordance with the work plans, requires that the spending departments
receive reliable information on availability of funds within which they can commit expenditure. The Finance
Department is required to provide reliable information on the availability of funds for a reasonable time horizon to entities
that manage administrative (or program) budget heads in the government budget. To be reliable, the amount of funds made
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
34
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
available to an entity for a specific period should not be reduced during that period. This also ensures that spending during
the year will be a uniform pace avoiding rush of expenditure at the year end
80.
Technically, with the passing of the budget, full authority to spend is available to the departments, subject to
some restrictions. In Karnataka, the State Legislature initially passes a Vote on Account (VOA), an interim budget for the
first four months of the financial year i. e. April-July in the month of March of the previous year. This is followed by passing
of the full budget generally in June/July. Once the VOA or budget is passed, an Appropriation Act is passed and the Finance
Department then issues an authorization to the departments to incur expenditure. In practice, the Finance Department issues
instructions on measures to enforce economy in expenditure and Delegation of Financial Powers that restricts departments to
incur new commitments and making related payments or that which affects the timing of payment. These delegations relates
to - (a) financial powers to sanction expenditure (called the general delegation of common financial powers); and (b) powers
to release funds for making payments.
81.
The 2004 PFMA estimated that, excluding for salaries, pensions and interest which typically cannot be cut in
the course of the year, there was about a 20% chance that any budgeted expenditure will not be expensed. “Rationing
of expenditure” at that time included budget cuts, economy drives, payments delay by the Treasury and ban on reappropriation. The 2004 PFMA Report assessed the reasons for this situation - unrealistic budgets especially revenue
estimates; unfunded supplementary expenditure estimates; inadequate control over departmental commitments, especially on
the capital side; the process for making adjustments to unforeseen events during the year was insufficiently institutionalized
and untimely; lack of timely and reliable information on within-year budget performance; lumpy fund flows especially from
GoI; limited cash-flow smoothing options. Consequently, unpredictable funding resulted in delays, lobbying, and poor
expenditure effectiveness; suppliers, wary of late payment, increased their prices to compensate; cash rationing led to arrears.
GoK has taken measures as suggested in the 2004 PFMA to further enhance individual clearance limits for release of
funds without recourse to the Finance Department and delegation to HoDs.
Delegation for sanction of expenditure
82.
Resources available to the departments for capital works are known through the sectoral allocations made at the time
of preparation of the budget and conveyed by the Planning Department in the Plan document. This allows the departments to
prepare their annual plans based on the expected sectoral allocation. Provision for a work can be made in the budget only if
the administrative approval and technical sanction has been obtained. The delegation of common financial powers was
enhanced in 2001 and most recently in 2010 and provides delegation at the level of heads of departments and officers at the
division, district, sub-division and Taluk levels, with special powers provided to some departments. These delegations cover
approvals for all kinds of transactions - from administrative approval to advances, re-appropriation and recruitment. For
instance, the power to accord administrative approval up to the level of the head of departments was enhanced to Rs. 100 lacs
for one work and further enhanced to Rs. 500 lacs presuming concurrence of the Finance Department. These powers are
further sub-delegated to the subordinate offices with defined limits.
83.
The effect of liberalization of financial powers should reflect in faster approvals of schemes and works, including
timely preparation of Appendix E (list of approved works) in Public Works and Irrigation Departments for submission to
Legislature along with the budget documentation – the situation however has yet to exhibit significant improvement and there
are delays obtaining/providing administrative approvals and preparation of Appendix E.
Delegation for Release of Funds
84.
Once the expenditure is incurred, actual drawl of funds from the government Treasury is subject to certain
restrictions defined in the Delegation of Financial Powers (DoFP) that are vested in the Principal Secretaries/ Secretaries of
the Administrative Departments. The extent to which the DoFP are increased and streamlined at the level of the departments,
with less recourse to the Finance Department, provides the level of flexibility available to the departments for planning and
executing various works and also determines the timing of the expenditure.
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
85.
At the time of the 2004 PFMA Report, the delegated authority was Rs. 0.5 million in each case with a cap of Rs. 30
million in a month. By 2006, DoFP limit to the administrative departments was enhanced to Rs. 10 million subject to overall
Rs. 50 million in a month39. These restrictions were essential due to the fiscal position of GoK at that time and to ensure that
sufficient cash was available to back budget releases. As GoKs fiscal position improved, and recognizing the need for “timely
availability of funds at various levels of government for implementation of government programs” and also “ensuring that the
expenditure is not crowded or bunched towards the end of the financial year” with an aim to “improve the quality of
expenditure”, GoK significantly revised its DoFP in 200840 and –
a.
b.
c.
d.
segregation was made between “release of funds” for revenue expenditure and capital expenditure
concept of items for which funds could be released “assuming concurrence of the Finance Department” and
items for which “prior concurrence of Finance Department” was required was introduced
thresholds were prescribed for release of funds during the first three quarters of the financial year
items were specified for which prior concurrence of Finance Department was required and items that were
exempted from such requirement.
86.
DoFP for release funds introduced in 2008 were periodically revised and the applicable DoFP were documented in
an omnibus circular of May 201341 and of April 201442. The DoFP scheme now defines the quantum of funds that could be
released each quarter/month for different categories of expenditure and distinction between revenue and capital expenditure
made in 2008 was discontinued. The release of funds without concurrence of the Finance Department since financial year
2012/13 is summarized in Table 19. Funds for the first two quarters (Q1 and Q2) can be released as specified presuming
concurrence of the Finance Department and during the last two financial years, this was extended to the third quarter (Q3) as
well. For the ongoing financial year, the latter relaxation was made in November 2013 that could be made earlier (preferably
at the start of the quarter).
Table 19: Delegation of Financial Powers presuming concurrence of Finance Department
Item
Release of Funds presuming concurrence of Finance Department
Since FY 2012/13
Q1 & Q2
Q3
Annexure II items43
Full release can be made up to budget provision
State Schemes with budget provision more than Rs. 1/12th of budget provision each
500 lacs for specified subsidy, share capital, plan/non- month
plan schemes of Public Works Department and major,
medium and minor Irrigation
State schemes with budget provision more than Rs. 500 Up to 50% of budget provision in up to 75% of budget
lacs other than above
two installments of 25% each
provision provided 75%
utilization
of
previous
tranche/s or approval of
Finance Department
State schemes with budget provision less than Rs. 500 In two tranches – 50% and then balance after utilization of 75% of
lacs
first tranche
Debt Servicing
As per terms and conditions of the debt subject to availability of
budget provision
Rural local bodies - central plan schemes and CSS
On receipt of central share except lump sum provisions under
object head 300
Urban local bodies - non-Plan Grants
Up to 50% of budget provision in two
installments of 25% each
39
Other than employee payments and higher limit for drought relief
Government Order No. FD 1 TFP 2008 dated May 16, 2008
41 Government Order No. FD 12 TAR 2013 dated May 20, 2013
42 Government Order No. FD 03 TFP 2014 dated April 4, 2014
43 Includes salary and wages and other employee payments, scholarship, pension and medicines
40
| Theme Two: Enhancing Credibility and Comprehensiveness of the Budget
36
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Item
Externally Aided Schemes
CSS routed through the state budget (from FY 2014/15)
Release of Funds presuming concurrence of Finance Department
For Q1, Q2 and Q3: 25% each provided 75% utilization of
previous tranche/s
Can be released on receipt of central share conveyed through the
credit confirmation slip from Finance Department obtained from
the Reserve Bank of India
Source: Compiled from Circulars of the GoK
Enhancement of Delegation of Financial Powers and its impact:
87.
It is expected that the simplification and enhancement of the DoFP should get reflected in an increase in the pace of
expenditure during the year and decrease in “rush of expenditure” during the last quarter/month of the financial year. Such a
phenomenon was prevalent at the time of the 2004 PFMA44. The effect of enhancement and simplification of DoFP was
broadly assessed based on the monthly/quarterly expenditure for FY 2007/08 (pre enhancement year), FY 2009/10 (post
enhancement year) and the last three financial years up to FY 2013/14, summarized in Table 20. Data indicates
improvement in the pace of expenditure during Q2 and Q3, but expenditure during the last month in still high at
more than 1/3rd of total annual.
Table 20: Actual Expenditure as % of total for the quarter and cumulative
Q1
Q2/ (cumulative)
Q3/ (cumulative)
Year
17%
22% (39%)
21% (60%)
2007/08
17%
19% (36%)
23% (59%)
2009/10
15%
19% (34%)
18% (52%)
2011/12
13%
26% (39%)
23% (62%)
2012/13
17%
25% (42%)
23% (65%)
2013/14
Source: Monthly Civil Accounts and Finance Department
Q4
39%
39%
36%
39%
36%
Figure 2: Trend of expenditure in each quarter
100%
80%
Q4
60%
Q3
40%
Q2
20%
Q1
0%
2007/08
2009/10
2012/13
2013/14
88.
There has been a significant decline in rush of expenditure during the last month of the financial year from
26% to 19%, and in case of Plan expenditure from 42% to 30% between 2002 and 2013, though as stated above,
expenditure during the last quarter remains high (Table 21) that provides a comparison of the extent of “rush of
expenditure” over the years.
44
In 2000/01, 29% of total expenditures and 37% of capital expenditures were incurred in the final month of the fiscal year; similarly in
2001-02, 26% of total expenditures and 42% of capital expenditures were incurred in the final month. Accounting problems were identified
as responsible for this concentration. There was also a “carryover period” in which spending in the first days, or even weeks, of the new
fiscal year, was counted against the budget of the previous year. With the implementation of Khajane, this practice has been discontinued.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Table 21: Decrease in Rush of Expenditure
Month Total Expenditure as % of Total Year
Plan Expenditure as % of Total Year
Expenditure
Expenditure
2002
26%
42%
2008
23%
NA
2010
24%
NA
2012
21%
31%
2013
23%
30%
2014
19%
Source: 2004 PFMA Report, Monthly Civil Accounts and Finance Department
Month of March
89.
Under the Cash Management system of the Government of India, the expenditure during the last quarter is
restricted at 33% and 15% during the month of March (both in terms of scheme and demand) – GoK needs to take
measures to moderate its spending during the month of March according to the benchmark of 15% in GoI. Table 22
summarizes the pace of expenditure in GoI over 2011/12 and 2012/13 – it indicates uniform pace of expenditure and
curtailment of example in fourth quarter to the benchmark of 33%. This could be attributed to the cash management system at
GoI based on the modified exchequer control expenditure management system and the economy measures which the GoI
Finance Department takes. Another example is Odisha that fixes the last date up to which certain types of Treasury bills can
be submitted for payment such as for instance bills for purchase of machinery, equipment or vehicle, share capital investment
can be presented only up to March 11th and there is a ban on budgetary funds being transferred to civil deposit accounts 45.
Quarter
Q1
Q2
Q3
Q4
Table 22: Pace of Expenditure in Government of India
Quarterly expenditure as %
Quarterly expenditure as %
of Total Expenditure
of Plan Expenditure
22%
20%
21%
27%
26%
28%
21%
23%
22%
30%
31%
29%
Source: cga.nic.in
20%
23%
24%
33%
90.
Overall, liberalizing the DoFP in Karnataka has facilitated some improvement in the pace of expenditure and
a decline in rush of expenditure at end of the year. This is a positive trend and would need to be continued and sustained
in the coming years. This could be further improved if the impediments caused by some factors are mitigated such as time
taken to obtain administrative approvals, delay in grounding of works on time, and higher spending during the first 2-3
quarters (front-loading) so that corrective measures can be taken timely. Maintaining uniform pace of expenditure (alternately
avoiding rush at the year-end) is a sound principle of PFM. It helps to avoid fiscal imbalance or temporary cash mismatches
and quality of expenditure incurred in a rush could be compromised.
91. The following priority action points for the 2014 Reform Action Plan are suggested:
a.
It is suggested that the circular authorizing release of funds for any quarter should be issued before the start
of the quarter so that the departments can plan in advance.46
45
Despite these measures, the C&AG continue to cite instances of breach of this PFM principle. Governments should therefore seek to
minimize this phenomenon of rush of expenditure and avoid recurrence on a case to case basis
46 The circular for authorization of release of funds in respect of schemes with budget provision of Rs. 50 million and above for the third
quarter has been issued after the commencement of the quarter e. g. for 2011/12, the circular was issued on October 13, 2011 and for
2013/14 on November 16, 2013.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
b.
In 2001, the Finance Department published a Compendium of Delegation of Financial Powers including delegation
of various departments. The Finance Department could consider collating all the circulars on this topic and
publishing an updated Compendium.
c.
In some states (e. g. Punjab, Assam, Odisha) and the Government of India, Delegation of Financial Powers Rules
has been made and any change is issued as an Amendment to these financial rules. GoK may adopt this
mechanism.
d.
Finance Department can organize workshops to disseminate the DoFP for better understanding and explaining
the rationale for enhancement and simplification including the linkage with the pace of expenditure.
e.
The Government Financial Rules, 2005 of the GoI considers rush of expenditure in the closing months of the
financial year as a breach of financial propriety and recommends that it should be avoided. A similar provision is
made in the Budget Manual of Government of Odisha (for instance). The KFC makes a reference to rush of
expenditure in respect of grant in aid and suggests that there should be no occasion for a rush of expenditure for
payment of these grants in the month of March. It is suggested that GoK may consider rush of expenditure as a
breach of financial propriety or regularity and accordingly include a provision similar to GoI it in the KFC.
2.9
ESTIMATION OF SALARIES
92.
Appendix- B is the appendix used by GoK to estimate the budget requirement of salaries for the entire state.
The budget circular clearly articulates the methodology for estimation of salaries and this is carried out on bottom up
approach i.e. the actual data starts from the field, consolidated at the head of department, which is then verified by
IFA/estimating officer and submitted to the FD for compilation. Based on the data, the FD computer cell inputs all the data in
the software and estimation of salaries is done for the state. While this process is robust the following issues need to be
addressed as a part of the action plan.
93.
Appendix B is presently prepared independent of Human Resource Management System (HRMS) by the FD
and the process takes about 2 ½ to 3 months. If HRMS captures sanctioned and vacant posts, then Appendix B can be
generated through HRMS and the full HR data would reside in one application. Significant human resource and time will be
freed if this is done (20% expenditure but 80% effort). There is a plan to dovetail Appendix B software with HRMS and
discussions are going on this regard. This will also validate the data residing in HRMS as only those staff entered in HRMS
would be taken for estimation of salaries in future. The FD needs to work with HRMS team to ensure that suitable
formats are designed for generating Appendix B from HRMS and in future it should be a part of the overall design of
HRMS II.
94.
Budgets for salaries, include substantial provision for vacant posts which is provided under the head 2070 under
Demand 3 – Finance Department. At the time of budget preparation not all of these posts would have been planned for being
recruited during the year. Such provision can be used only when the amount is transferred to other heads during
supplementary budgets. The same issue was also highlighted in the 2004 report. During FY 12-13 the amount provided for
vacant posts was Rs.999 crores 47 which was not utilized. During the last eight years the C&AG in its Report on State
Finances has raised the issue of excess provision for vacant posts resulting in subsequent savings on account of the following
:
a. Estimates for salaries was not made with reference to the staff to be likely on duty, but was based on full sanctioned
strength which is not in accordance with the Budget manual;
b. Lump sum Provision was made under one demand which was inappropriate.
47
There was additional Rs.2500 crores provided for payment of 6 th Pay commission recommendations which was never used .
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
95.
The need for such provisioning is not clear especially when most of the amount is not utilized. In case of Tamil
Nadu budget provision is made only for posts which are actually filled up. GoK with the implementation of HRMS has the
capability to estimate the actual salary expenditure in a scientific manner and should provide budget only for actual filled
posts and an estimate for the posts planned to be filled during the FY. Similar issue was identified in the provisioning of
salaries for ULB, which GoK has withdrawn from this FY.
Figure 3: Trend of budget provision for vacant posts
Vacant post - Provision
Amount in Rs. Crores
1200
1000
800
600
400
200
0
Amount in Crores
2008-09
2009-10
2010-11
2011-12
2012-13
450
400
850
849.97
999.98
96.
In view of the above and the recurring objection made by the auditor, it is suggested that policy of providing for
vacant posts should not be pursued as it distorts the revenue expenditure and fiscal indicators.
97. The following priorities have been identified for 2014 PFM Reform Action Plan.
a.
b.
Going forward, GoK needs to integrate Appendix B with HRMS/HRMS II and ensure uniform database for
salary estimation as well as payments.
GoK should not pursue the policy of provision for full sanctioned posts as a part of the budget preparation
process and can adopt the Tamil Nadu model of providing budget for only filled up posts.
2.10 MANAGING PUBLIC INVESTMENT FUNDING
98.
An essential function of any government is strategic management and funding of public investments. These
are public goods generally in the form of civil works and in the Indian context called Plan expenditure. Such a strategy would
provide a framework to fund a new project or continue funding of on-going projects (including decision on abandonment or
suspension) and providing for maintenance costs post-completion48. Governments have to create fiscal space for public
investment spending through the budgetary processes but within certain constraints: These primarily include - (a)
budget envelope available for public investment is residual after budgetary provision has been made for committed liabilities
(i. e. non-discretionary often recurrent spending on salaries, devolution, debt servicing collectively called as Non-plan
expenditure); (b) limits to fiscal deficits mandated by the fiscal responsibility legislation; and (c) restrictions on gross public
This section does not discusses the management of investment projects from inception to post-evaluation – it rather covers how the
government plans for and takes a decision on funding public works.
48
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
debt which more often is the main source of funding public projects. GoK too faces these constraints and has to budget taking
these into consideration.
99.
In Karnataka, capital spending has been about 40% of total government spending, and as compared to other states is
relatively higher (Table 23).
Table 23: Public Investment or Plan Expenditure in GoK
Year
2013/14 (up to Feb 2014)
2012/13
2011/12
Plan (Capital)
Spending
33,010
36,691
34,073
Non-Plan (Revenue) Spending
(incl. debt servicing)
51,050
58,809
49,868
Total
Spending
84,060
95,500
83,941
(Rs. in crore)
Proportion of Plan to
Non-Plan Spending
39%
38%
41%
100.
In Karnataka, the fiscal management principles on investment spending are provided in the KFRA and the
framework is described in the Budget Manual supplemented with Budget Circulars. The major public works are carried out
by two departments – Public Works (PWD) and Irrigation Departments, and in case of the latter mainly by the public sector
undertakings (SOE) within its administrative control. The process of budgeting major works is as follows:

Funds for works can be proposed for inclusion in the budget only after administrative approval and technical
sanction had been accorded by the competent authority and the works have been prioritized “in order of urgency”
and stating the “grounds on which a particular work is considered necessary”. A list of new major works (including
Deposit Works or works to be executed through contributions from other departments/agencies) is required to be
prepared and forwarded by each HoD to the Chief Engineer who consolidated these around major heads and
forwards to the Finance Department. (Rules 132 to 134 of Karnataka Budget Manual).

A list of ongoing works as well as fresh works proposed showing detailed estimates of expenditure in respect of
works costing over Rupees one lakh each is required to be prepared and submitted to the Legislature along with the
budget for discussion – this is commonly known as Appendix E and is considered part of the budget literature (Rule
195 of the Budget Manual). Appendix E, after sanction of budget, is required to be circulated amongst the
implementing officers not later than April of the relevant financial year.
101.
The guiding principle is to ensure that sufficient amounts are set apart for ongoing works in order to
complete them early, and thereafter propose provisions for new works. The annual budget circulars provide further
guidance on provision of funds for works. The minimum quantum of provision is based on the following criteria –



for on-going works and new works with estimates of less than Rs. 5.00 crore, a minimum allocation of 40% and
60% is to be provided for the budget year and the next year, respectively;
for works with estimates of more than Rs. 5.00 crore, a minimum 30% should be made during the first year and the
balance cost of 70% provided in the next two years as per the implementation schedule;
for maintenance and repairs of roads, bulk grants are allotted by GoK for further distribution to executing divisions
based on length and category of road under its jurisdiction. The works are taken up after obtaining approval from
SE, who is the competent authority for approval of program of works of a division under his control.
102.
GoK has attempted to integrate investment spending with the rest of the budget and put in place an
investment spending strategic framework - yet in practice it suffers from inadequate compliance including sequencing
and prioritization of projects as the following discussion indicates.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
103.
The objective of preparing Appendix E and having it approved by the Legislature was to instill fiscal
discipline so that only those works which are listed in the Appendix are taken up and completed, instead of new works
being added during the course of the year, at the cost ongoing works and funds diverted to them. In practice, Appendix E is
not prepared and submitted along with the budget and Legislative approval not obtained. In the last 3-4 years,
appendix E has not been prepared and submitted on a timely basis (particularly PWD) and it has mostly been submitted at the
end of the financial year, which undermines the usefulness of this document, the relevance of the data is diminished and
moreover this is not presented to the Legislature. Moreover, Appendix E that is prepared is incomplete as not all major
heads are included. There is also a mismatch between budget provision and the grant provided in the Appendix.

For instance, due to delayed preparation of Appendix E for 2011/12, the Finance Department was able to approve it
on March 26th, 2012 after a lapse of about one year of passing the budget and that too for only three major heads
4059, 4216 and 5054. Moreover, printing further delayed it by more than 5 months and the Appendix E was
available to the departments in September, 2012.

For Demand for Grants of the Public Works Department, during the year 2011-12 as against the total expenditure of
Rs. 3,596 crore under capital major heads - 4059, 4216 and 5054, the estimated value of the list of works provided in
Appendix E was only for Rs. 1,767 crore - therefore expenditure of Rs. 1,828 crore was without Legislative
approval (Source: C&AG Audit Report on Economic Sector 2011/12).
104.
The Public Accounts Committee (PAC) of Karnataka Legislature has expressed serious concerns over the
abnormal delay in preparing Appendix E despite it being an integral part of the budget and therefore should be submitted
to the Legislature along with the budget. The Legislative committee also recommended prioritizing budget provision for
completing ongoing works before considering provision for new works. The PAC also opined that any expenditure on works
not included in the approved Appendix E is devoid of Legislative sanction and hence unauthorized (see Box).
105.
A serious concern which emerges from non-preparation of Appendix E is over commitment and backlog of
unpaid bills, especially in case of PWD. During the past two years, PWD has reported more than Rs.,1000 crore49 (~$200
million) of pending bills and it is expected to rise as per projections
particularly under roads as according to the department the budget
provision is insufficient to allow for completion of ongoing works. As of
Unauthorized Expenditure if not included
in Appendix E
now a lump sum provision is made for these heads in the state budget
Works included in Appendix-E should be
based on which the Appendix E is drawn up. (also refer Monitoring
regarded as list of works approved by the
Arrears of Payments). The C&AG also reported that lack of budgetary
State Legislature and expenditure on works
control (non-preparation of Appendix E) resulted in creation of clear
not included in Appendix-E should be
liability of Rs. 1,509 crore on Government towards pending work bills as
treated as unauthorized.
of March 2012. There are also instances of short release of grants
Public Accounts Committee, 6th Report
(2009/10) Jan 2011
though provided in the Appendix E. This adversely affects timely
completion of works besides leading to accumulation of pending bills.
PWD has identified procedural bottlenecks for preparation of appendix E,
like plan size not known in advance and all schemes proposed in Appendix E requiring prior administrative and other
approval and this process is time-consuming
106.
The Irrigation Department50 has three major SOEs under its administrative control that executes several
large projects, but these are not included in Appendix E. These SOEs are Karnataka Bhagya Jal Nigam Limited
(KBJNL), Karnataka Neeravari Nigam Limited (KNNL), and Cauvery Niraavari Nigama Limited (CNNL) to whom GoK
49As
of March 2012 Rs.1,486 crore, March 2013, Rs. 1,044 crore and October 2013, Rs. 1,221 crore.
In case of PWD, KRDCL is a PSU which carries out roads and bridges works. Apart from them there are EAP projects which are
handled by PIUs in the department which are not reflected as part of appendix E.
50
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
provides significant budgetary support and guarantee support for capital works. 51 The Budget Manual requires preparation of
Appendix of works by the Irrigation and PWD departments. However, the manual is not explicit whether works to be
executed out of budgetary funds transferred to SOEs is to be included in Appendix E. Perhaps the situation where such
companies would be created by the departments and most of the work would be carried out by these companies was not
envisaged in the budget manual. This needs to be factored by GoK through clarification/amendment to the budget manual so
as to include works executed by these SOEs in Appendix E.
107.
There is need to assess the utility of Appendix E in terms of presentation, as it exhibits only schemes which
are being proposed to be paid under the current budget, leaving scope for committed liabilities and ongoing schemes not
being included in the Appendix. Accumulation of such committed liabilities could be an area of concern that could put
pressure on budget funds directed for payments of old liabilities and in effect could prevent new works to be taken.
108.
The 2004 PFMA report made two recommendations – (a) give priority in budgeting to payment of arrears, then for
completion of ongoing works and lastly for adding new works (Tamil Nadu follows similar system for budgeting civil works)
-The situation as of now is by and large the same as prevailing at the time of the 2004 assessment and the
recommendations remain relevant even today and (b) computerization of such works and tracking committed liabilities.
109.
Computerization of PWD Civil works: PWD has developed contract management software in Oracle platform
which is known as Project Monitoring System (PMS). This software has been developed and implemented in 2013 and most
of the works data has been populated in the system. PWD uses this software which provides a good MIS on the
commitments, the outstanding bills and list of all works. With this software PWD can track commitments, work progress, and
balance of works to be carried out in the contracts. This software has capability to provide reports at different levels namely
State level, District level, Division level and work wise details as well as generate financial projections based on milestones
for the contracts already issued by PWD. This feature can be used for resource scheduling for the next 2-3 years which can
give information for the GoK on the committed capital expenditure for PWD and the resources required for the new works.
110.
To sum up, PAC and the C&AG have expressed serious concern over undue delay in preparation and finalization of
Appendix E and the uncontrolled growth of pending bills. The PAC recommended that it is necessary for Finance
Department to take strict measures to release grants so that works are completed as per time schedule shown in
Appendix E, besides discouraging the tendency of taking up works not provided in the Appendix. GoK is yet to fully
implement these recommendations. The C&AG has reported that funds aggregating Rs. 773 crore were locked up in
incomplete projects as at the end of 2012-13 (Rs. 1,047 crore as of the close of 2011/12).
111.
The Fiscal Management Review Committee suggested that all approvals for new initiatives and works requiring
implementation over multiple years should be based on fiscal sustainability of the total expenditure and that GOK should
ideally move to medium-term (3 to 5 years) appraisal and approval cycle for the schemes. The GOK needs to prioritize the
capital expenditure requirements of the state and ensure that the capital expenditure proposals are reviewed and approved
with a view on their overall impact on the fiscal position of the state.
112. The following priorities have been identified for 2014 PFM Reform Action Plan.
a.
51
PWD and Irrigation Departments to work with the Finance Department to analyze the bottlenecks in the timely and
adequate preparation of Appendix E as per the budget calendar. This is to ensure that Appendix E is submitted to the
Legislature along with the budget for discussion and Legislative approval. It should be re-emphasized that no
payment for works should be allowed unless the work is included in Appendix E.
Nearly Rs.8000 crores were provided as equity and grant support in the last two financial years
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
b.
PMS software can generate financial reports based on milestones for the contracts already issued by PWD and this
feature can be used for resource scheduling for the next 2-3 years. GoK can consider preparing Appendix E on rolling
forecast model for 3 years and introducing MTEF in PWD.
c.
The PMS software could be further developed to prepare Appendix E.
d.
GoK needs to review if the works carried out by the SOEs and Externally Aided Projects should be included in the
Appendix E. If such a decision is taken, then GoK would need to include this requirement specifically in the budget
manual.
e.
The PMS software in PWD should be mainstreamed and interlinked with Khajane II having the functionality of entering
all bills in PMS and linked to Khajane II for payment. This will also facilitate PWD (and Irrigation Department who may
also adopt this application) and Finance Department monitor open commitments on a concurrent basis.
f.
Last but not the least, GoK could consider adopting the Tamil Nadu model for estimating civil works.
2.11 RATIONALIZATION OF SCHEMES
113.
Government of Karnataka follows a six-tier classification structure. (see section 3.1 for further details). In the
6-tier classification system, a Scheme is the fourth tier called the Sub-Head and is considered as a unit of appropriation. Since
each activity is denoted by a Scheme, this led to multitude of schemes and many budget line items. GoK made several
attempts at reducing the number of schemes was. For instance, in the year 2002/03 departments such as Health, Commerce
and Industry, Agriculture and Animal Husbandry reduced the number of schemes they operated. This continued for the next
years and schemes were further reduced or clubbed on the lines of programs with the number declining from 3000 to 2500 –
still a very large number. With the introduction of performance budgeting, the need for a multitude of schemes was re-visited.
It was acknowledged that several schemes had common objectives and often the same target beneficiaries and moreover, a
large number of schemes complicate monitoring and implementation and also compromises focused approach. Program
budgeting was expected to consolidate the schemes into programs. The 2004 PFMA suggested further reduction in the
number of line items or schemes in the budget.
114.
In Karnataka, the total number of active schemes presently is 1874 schemes besides having nearly 15000
schemes which are not used on a regular basis (Source Planning and Finance Department). 274 schemes were added in
last financial year 2013/14. GoK itself assessed that there were 351 plan and 311 non-plan schemes with provision of less
than Rs. 10 million each 52. GoK therefore formulated the following rules with the objective of reducing the number of
schemes or budget line items to avoid re-appropriations and supplementary: (a) Budget estimating officers will undertake a
review of all the schemes coming under their control and merge non-plan and State Plan schemes with similar objectives into
one scheme; (b) no line item with a provision of less than Rs. 10 million will normally be allowed in the budget estimates 53.
A large number of schemes creates difficulty in budget process and thinly spreads the available budget across into
various heads. Therefore, GoK needs to review the procedure for creating new schemes as well as the scheme hierarchy
followed in the state. It would be advisable to put in place a mechanism for a periodic (say once in 3 years) comprehensive
review of the schemes by the departments to weed out the schemes no longer required and to rationalize existing schemes.
GoK should review these schemes and should identify opportunity for rationalizing and merging schemes with similar nature
of objective and expenditure. This is suggested as a priority action for the 2014 PFM Reform Action Plan.
52
Government of Karnataka, Budget Estimates 2014/15, Office Memorandum No FD 09 BPE 2013 dated October 8, 2013
Except Centrally Sponsored Schemes and Central Plan Schemes may be shown separately even if the total scheme provision is less than
Rs. 10 million based on the scheme guidelines issued by Government of India.
53
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
115.
The Sundaramurthi Committee appointed by the GoI has suggested radical changes for classification of
government transactions and the manner in which the information would be available for decision-making54. The
Committee has suggested rationalization and reorganization of the information content of the existing six-tier hierarchical
structure into separate logical dimensions. The system proposed comprises of seven mutually exclusive segments with their
own individual hierarchical structure. One of the segments of classification pertains to programs and schemes. This requires
development of a standard list of programs along with suitable schemes and sub-schemes mapped to them (program
classification system). GoI, with the support of the World Bank, is piloting this classification system in select central
government departments. Since GoK had in the early 2000s piloted performance based system55, it can benefit by adopting
the classification system suggested by the Sundaramurthi Committee (post piloting and mandated for implementation by
GoI). Implementation of Khajane II would facilitate the adoption of the new system.
2.12 DEPARTMENTAL MEDIUM TERM FISCAL PLANS
116.
Budgeting in state governments in India involves preparing a single year annual plan for revenue and
expenditure based on “line budgeting” emphasizing on inputs rather than outputs, objectives and results. This broadly
follows the time horizon for appropriation of expenditure by the Legislature on an annual basis. To understand fiscal
developments and understand the implications of policies beyond one year, a medium term perspective is required. Therefore,
instead of preparing budget for a single year, a rolling (typically) 3-year budget is prepared taking into account the policy
priorities and resource envelope – this is the Medium Term Budget Framework or Fiscal Plan (MTFP). MTFP at the state
level was introduced in GoK in 2000-01.
117.
Karnataka was the first state to introduce MTFP at the departmental level in 2002/03. GoK introduced multiyear budgets and performance targets at the departmental level, called the Departmental Medium Term Fiscal Plans
(DMTFP). The objective was to promote departmental planning and accountability by disaggregating the state MTFP into
DMTFPs and replacing the input based budgets. The DMTFP included performance targets, strategies, resources and major
programs to be undertaken over the period of the MTFP. Emphasis was on programs and sub-programs indicating the
forward estimates at the program level providing the predictability of fund flow to enable better expenditure management.
Preparation of DMTFP was piloted across five departments and later on introduced in another 15 in 2003/04 with all
DMTFPs tabled in the State Legislature. The 2004 PFMA assessed that “the DMTFPs have helped in establishing a better
link between departmental performance targets and costs”. It suggested that departmental budgets should be based on the
DMTFP, should be the focus of Legislative discussions and the targets should be cascaded downwards to the filed units
within a department. In the MTFP of 2005/06 to 2009/10, GoK also introduced DMTFP Allocation Tables.
118.
The initiative of multi-year budgeting at departmental level could not be sustained and it was discontinued by
2007/08. The following could be attributed to this situation:
a. DMTFPs were not dovetailed with the demand-wise annual budget (Source: MTFP 2005/06 to 2008/09);
b. lack of staff capacity to prepare MTFP;
c. departments not having own revenue resources could not get the full allocations as projected in the MTFPs;
d. A realistic resource envelope was not provided to the departments so as to help them to plan their departmental
MTFP;
e. Any planning by the department is made in the form of a scheme. The scheme continues as long as it has funds
and the role of the department is only to administer these schemes subject to fund availability. Most of the times
these schemes where an outfall of the government policy which the department ends up in implementing.
f. The MTFPs prepared were rather a long wish list of the departments without priority which could not be funded
by the GoK.
Controller General of Accounts, Ministry of Finance, Govt. of India – Report of the Committee to Review the List of Major and Minor
Heads of Accounts of Union and States
55 Under the USAID supported India Fiscal Management Reform Project (REFORM)
54
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
119.
The Finance Department prepares a MTFP for the entire state which is presented along with the budget every year.
However, this MTFP is not supported by the DMTFPs as envisaged earlier. The Urban Development Department is the
sole department in GoK that continues to develop a MTFP. Greater Bangalore City Corporation (BBMP) introduced
MTFP from 2009/10 providing anticipated scenario over the next 5 years. This was part of the mandatory reform under
JNNURM. However, it appears that this was discontinued in later years.
120.
A pre-requisite for development of DMTFP is communication of indicative ceilings to each department and
the departments respecting these ceilings to develop their budget proposals. The expectation is that each department
would take the resource ceiling as given and allocate spending among its activities to achieve its objectives. At this stage,
departments are expected to think strategically and evaluate their existing programs (effectiveness, usefulness etc.) and
determine inputs or policy that will best help them attain the objective by maximizing the effectiveness and efficiency of
spending. When the over-all funding is known in advance, framing policy discussion, objectives, programs or means of
delivery may be explored. An important issue here is for the line departments to develop capacity for policy and program
evaluation skills, assess effectiveness and cost and develop options - these skills can be developed through training. The
budget requests from the departments to the Finance Department must, apart from numbers, contain text explaining the
policy, changes in policy from the past, reallocation decisions, new objectives, output and outcome targets associated with
the resource levels and allocations. A formal process to critically review ongoing programs as part of the budget process will
also help ensure efficiency of ongoing policies and programs. The GOK has introduced RFD for the departments and going
forward should dovetail the DMTFP based on the results and outcomes agreed in the RFD.
121.
The recommendations of the 2004 PFMA are still relevant. The 2004 PFMA suggested providing departments
with more flexible budgets would enable them to perform better. This would require: (a) a fundamental shift away from the
current system of overly detailed line-item budgeting; and (b) greater re-appropriation powers for departments. Implementing
such changes would involve some important conceptual changes: budget line-items would be prepared at an aggregate level
instead of the detailed level used for accounting. A common code structure would apply to budgeting and accounting, but the
more detailed codes would be used for accounting, and only the aggregate codes would be used for budgeting. GoK could
consider this shift along with the implementation of KII across the state. The accounting code can be detailed in the KII while
the budget head can be prepared and maintained at a higher
level which can be approved in the Legislature. ReMedium Term Expenditure Framework (MTEF) in
appropriation rules would need to be amended to allow
Government of Chhattisgarh
unlimited departmental re-appropriation between schemes
 MTEF (similar to MTFP) has been implemented in two
within programs and between object heads.
most important departments – Health and Education –
supported by the State Partnership Program funded by
122.
The priority action plan for GoK would be to
the European Union. For implementation, external
consultants were engaged to develop the framework,
develop a framework including design of the DMTFP
prepare a manual and spearhead the actual development
and a roadmap for implementation, particularly in the
in the two departments.
larger departments. UDD and also BBMP should
continue to prepare the MTFP. Being the largest ULB in
the state, BBMP can provide a demonstration of the
usefulness of the MTFP to other ULBs who can also over the medium term, adopt this multi-year budgeting tool. This would
also meet one of the requirements of the Local Bodies FRL – preparing a sectoral MTFP and ultimately extending it to the
rural local bodies (the Panchayats). Full DMTFP should be made available in public domain.
2.13 STRENGTHENING LEGISLATIVE SCRUTINY OF BUDGET
123.
The annual budget, as passed by the Legislature, provides the power to spend to the government authorities.
This requires the Legislature to rigorously examine and debate the budget, and if this power is not effectively exercised it
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undermines the accountability of the government to the electorate. The factors to be assessed include the scope of the
Legislative scrutiny, whether internal procedures for scrutiny are well-established and followed, and that adequate debate and
time is allowed for that process.
124.
The Karnataka Budget Manual and the KFRA 56 provide the legal framework for budget literature and
Legislative scrutiny and scope in Karnataka. These include requirements of presenting the budget to Legislature, process
of scrutiny of the budget and its discussion and voting by
the Legislature. The process of preparation of the budget
is described in section 4.1 ibid. The minimum budget
Working of GoK Committee on Estimates (2013/14)
 Constituted on Aug 1, 2013 with 18 members
documentation that is required to be presented to
 Has held 29 meetings till date
Legislature is provided in the Budget Manual57 – in actual
 Subjects selected: (a) Estimates and projects undertaken
practice, the executive produces documents beyond the
by Public Works, Energy, Water Resources, Minor
minimum contained in the law (as discussed in section
Irrigation Departments and (b) Budget estimates,
4.3).
administration expenditure and buildings works at
Karnataka Bhawan
125.
The Karnataka Budget Manual prescribes a five No bills referred to the Committee
 I report on PWD submitted in Nov 2013
stage process for presentation of the budget and its
approval by the Legislature. This is based on the
provisions of the Constitution of India (Articles 203 and
204). The Karnataka Conduct of Government Business Act recommends a Budget Session ordinarily in the first week of
March and to be held for a minimum period of 20 days (section 4) while the rules prescribe the maximum number of days for
general discussion and for voting. Besides, the Budget Manual also provides for constitution of a Committee on Estimates
“for the examination of such of the Estimates as it may deem fit to refer to the Committee or as are specifically referred to it
by the Assembly or the Speaker” (article 337). The Estimates Committee can have maximum of 18 members selected on
proportional representation basis but no Minister can become a member. The Committee can examine the Estimates
throughout the year and may submit a report. However, the demand for grants can be voted irrespective of whether the
Estimates Committee has made any report or not (Rules 267 – 269)58.
126.
In actual practice, the Karnataka Legislature passes a Vote on Account each year in Feb/Mar followed by
passing of the full budget in Jun/Jul. After the budget is presented in the Legislature and the Finance Minister’s speech is
over, the Legislature passes the Vote on Account authorizing expenditure for the first four months of the financial year. No
discussion or voting takes place at this stage. The discussion and voting on the full budget takes place during the session held
in July. For 2012/13 budget, 6 days were allotted for this purpose and, for 2013/14, 11 days were available to the Legislature
for in-house deliberations – this is not strictly in line with the Budget Manual that prescribes a minimum of 15 days for
discussions and voting.. Moreover, between the session in February and the one in July (recess for three months), the
procedure for review of budget, if any, is not documented. The sole Committee on Estimates too does not examine any
demand for grants for the purpose of informing the Legislature. The Karnataka Legislature spends much less time in the
review of the budget proposals.
127.
In respect of Legislative scrutiny of budget, the 2004 PFMA recorded situation similar to the one prevalent
today i. e. not much progress has been made. At that time, the Legislature’s Rules provided for a Committee on Estimates
to examine any estimates, but this was not a requirement for consideration or approval of the Demands for Grants by the
Legislature. In practice, this Committee system had not been functioning. This gap continues even to this day. Subject
56
read with Karnataka Conduct of Government Business in the State Legislature Act, 2005 and Chapter XX of the Rules of Procedure and
Conduct of Business in Karnataka Legislative Assembly (2011)
57 These include the Finance Minister’s Speech, The Annual Financial Statement, Detailed Estimates and separately for public works and
irrigation, Plan Budget, Budget Memorandum.
58 There is a separate document called the Rules of Procedure (Internal Working) of the Committee on Estimates (June 2013) that is
supplemental to the main rules
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Committees of the Legislature constituted at that time to examine budget demands of individual departments after the Voteon-account had been passed, is no longer in existence now.
GoI - Departmentally Related Standing Committees




Constituted in 1993, presently there are 24 DRSCs each with 21 members from Lok Sabha and 10 from Rajya Sabha
(but no Minister)
DRSCs consider demand for grants, annual reports and long term policy documents, and examine bills (subject to
some restrictions)
Examination of demands is done by DRSCs during the recess after general discussion is completed in Feb/Mar and
the next session (Jun/Jul)
During 2011/12, DRSCs submitted 4 reports on demand for grants and GoI accepted 68% of the recommendations
made by the DRSCs
Andhra Pradesh

The provision of the DRSCs are embedded in the Budget Manual and during 2013, 12 DRSCs presented 33 reports
on the demand for grants for 2013/14 to the Legislature on June 11, 2013 (second phase of budget session started on
Jun 10, 2013)
West Bengal

There are 22 DRSCs covering all government departments, to carry out what is known as a “Pre-Budget Voting Scrutiny” and
present their report to the state legislature
Himachal Pradesh
 Himachal Pradesh DRSC’s considered the demand for grants for 2013/14 for 5 days and submitted its report on
March 28, 2013 in time for voting on the demands in the State Legislature
Kerala

Kerala has 14 Subject Committees who submit their reports on the scrutiny of the demand for grants, follows up
issue of Action Taken Reports. A Handbook on Subject Committees (May 2011) guides the functioning of these
committees.
128.
Departmentally Related Standing Committees (DRSC) have been constituted with the primary function of
examination of the demand for grants at the GoI (see box) and some states such as Andhra Pradesh, West Bengal and
Himachal Pradesh, while Kerala has constituted Subject Committees. The process of Legislative scrutiny in Karnataka
when benchmarked to good practices in PEFA framework indicates that this important function can further be strengthened
by (a) establishing DRSCs covering at least the major departments; (b) providing more time for Legislative debate on the
budget.
Dimension/Good Practice
Scope of the Legislature’s scrutiny
The Legislature’s review covers fiscal policies, medium term
fiscal framework and medium term priorities as well as
details of expenditure and revenue
Extent to which the Legislature’s procedures are wellestablished and respected
The Legislature’s procedures for budget review are firmly
established and respected. They include internal
organizational arrangements, such as specialized review
committees, and negotiation procedures
Adequacy of time for the Legislature to provide a
response to budget proposals (time allowed in practice
for all stages combined)
Current Status
The Karnataka Legislature’s review covers fiscal policies
and aggregates, medium term fiscal plan (under KFRA) and
details of expenditure and revenue.
The Legislature’s procedures for budget review are firmly
established in the Karnataka Budget Manual and the Rules of
Procedure and Conduct of Business in Karnataka Legislative
Assembly and include internal organizations arrangements
include review committees and negotiation procedures.
The budget is presented in Legislature in February and the
Finance Minister makes his/her speech and the Appropriation
Bill for the Vote on Account is passed without any
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The Legislature has at least two months to review the budget
proposals
discussion on the budget. The full budget is discussed in
Legislature during July. The procedure of review of budget
during the intervening three months is not documented.
Summary of Issues
129.
The Karnataka Legislative Assembly presently devotes relatively less time on discussions and voting the demand for
grants. The time available between the presentation of the budget and its subsequent discussion is not effectively used.
130.
There is only one Legislative committee for examination of the demands and this too is not effectively active in
supporting the Legislature. The Karnataka Legislative Assembly rules and the Budget Manual prescribe only one committee
for examination of the demands (the Committee on Estimates) and this committee itself is not very active and is unable to
complete its examination and make a report prior to the second phase of the budget session. Some other states have
constituted DRSCs to support the Legislature to scrutinize the demands prior to discussion and voting.
131.
a)
The following reforms would enhance the contribution of the Legislature to PFM and improve its oversight.
The Karnataka Legislature could devote more time on discussions and voting the demand for grants. The time
available between the presentation of the budget and its subsequent discussion could be more effectively used to
examine the demand for grants.
b) The Karnataka Legislative Committee could consider the DRSC mechanism implemented at the central level
and by some states. This would deepen the scrutiny of the demands and provide inputs to the Legislature for a wellinformed discussion on the budget. DRSCs could be made the sub-committees of the main Committee on Estimates.
This may need amendment to the Budget Manual and the Rules of Procedure and Conduct of Business in Karnataka
Legislative Assembly.
c)
The Legislative committee/s should be provided with adequate technical support and capacity building
programs held so that the Legislative skills to examine the budget are enhanced. Some headway has been made in
this area as for instance newly elected members underwent a 2-day training in budget by a professor from the Indian
Institute of Management. More such skill-building measures need to be taken.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 3. THEME THREE: STRENGTHENING ACCOUNTING, REPORTING , CONTROLS,
AND TRANSPARENCY
3.1
ACCOUNTING AND REPORTING
132.
The primary unit for state accounting is the Treasuries and the compilation of accounts and preparation of
the annual statements is done by the State Accountant General (Accounts & Establishment). The Treasuries maintain
the initial and subsidiary accounts as all payment bills are presented by the DDOs to their designated Treasury and on the
other hand, all receipts are deposited in the government account. The Treasuries
render monthly accounts to the AG (A&E) for compilation and preparation of the
Basis of Accounting
Annual Financial Statements (AFS) of the state. Information for the purposes of
Governments in India follow the cash
the AFS is also obtained from the Reserve Bank of India and other state
basis of accounting (other than some
government agencies.
periodical book adjustments) on
historical cost basis
133.
The AFS comprise of the Finance Accounts and the Appropriation
Accounts and are prepared in accordance with Article 149 to 151 of the Constitution of India and the format is decided by
the Comptroller General of India (CGA) in consultation with the C&AG. In Karnataka, the Finance Accounts is prepared in
two volumes – volume I contains the consolidated position of the state finances are the accounts and volume II contain
detailed accounts and supporting schedules. The disclosures have improved over the years primarily guided by the
recommendations of the Central Finance Commissions. Most of the 2004 report recommendations on disclosures have been
addressed in the current Finance Accounts. Appropriation Accounts are in a single volume and presents the expenditure in
the year compared with the budget allotment adjusted for re-appropriations, surrenders and supplementary and information is
provided for each demand for grants.
Accounts maintained in the state
134. Accounts are maintained in three parts:
a. Consolidated Fund. Receipts of the State Government from taxes and duties, non-tax revenues, grants and
loans received, and repayments of loans/advances due to the State Government are deposited into the
Consolidated Fund. State Government expenditures, debt repayments, and loans given are paid from the
Consolidated Fund. Fiscal indicators e.g., fiscal and revenue deficits and debt stock are determined with
reference to transactions in the Consolidated Fund. Receipts are accounted for under four main categories: (a)
Revenue Receipts; (b) Capital Receipts (usually negligible); (iii) Borrowings; and (iv) Recovery of loans and
advances. Similarly, payments are accounted under four main categories: (a) Revenue Expenditure; (ii) Capital
Expenditures; (iii) Repayment of borrowings; and (iv) Loans and Advances.
b. Public Account. The Public Account was established to account for all other public monies received by the
State Government i.e., those that are received by the Government as a banker or trustee, and are not credited to
the Consolidated Fund e.g., employees’ Provident and Insurance Funds; repayable deposits received from the
public, contractors, etc.
c. Contingency Fund. This is a relatively small “imprest” (maximum Rs. 80 crore) periodically drawn from the
Consolidated Fund to meet unforeseen expenditure which arise during the course of a year pending
authorization of the expenditure by the State Legislature. Expenditures incurred from the Contingency Fund are
finally accounted for in the Consolidated Fund.
Classification of accounts
135. A six-tier classification structure is used for accounting purpose:
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
a. Tier 1: Major heads (four digits): The first digit classifies items into revenue receipts, capital receipts, revenue
expenditures, revenue expenditures or capital expenditures, borrowings, and loans given. The next three digits
classify items into sectors/functions.
b. Tier 2: Sub-major heads (two digits): These further break down the sectors/functions into sub-functions.
c. Tiers 3- 5: Minor heads (three digits), Sub-heads (one digit) and Detailed heads (two digits): These are used for
programs/program groups sub-divided into schemes or sub-schemes.
d. Tier 6: Object heads (three digits): These indicate the type of expenditure e.g., salaries, rent, etc.
136.
Expenditure data can be generated by sectors, programs/schemes, and type. The combination of this six-tier
structure or a 15-digit code is an account head. The first three tiers (up to the minor head level) use a standard list of codes
that is common to GoI and all state governments. The state has flexibility to adopt its own coding scheme for the last three
tiers (including the object heads).
Accounting and Reporting Standards
137.
The C&AG constituted the Government Accounting Standards Advisory Board (GASAB) 59 with the broad mandate
to develop standards for government accounting and reporting against “the backdrop of the new priorities emerging in the
Public Finance Management and to keep pace with International trends...the new priorities focus on good governance, fiscal
prudence, efficiency & transparency in public spending”. The accounting and reporting standards developed by GASAB are
called the “Indian Government Accounting Standards” (IGAS) which is based on cash based accounting and the “Indian
Government Financial Reporting Standards” (IGFRS) based on the accrual concept. While IGAS are mandatory, IGFRS are
recommendatory till piloting the standards are successfully completed. The standards developed by GASAB and notified
by the GoI are mandatorily applicable to the Union and State Governments from the date of notification in the
Gazette. Table 24 briefs the standards notified by GoI, approved by GASAB pending notification and exposure drafts. GoK
meets all the disclosure requirements as outlined in IGAS 1 to 3.
Standard
IGAS
(cash based
accounting
standards)
Table 24: Status of IGAS and IGFRS
Notified by GoI
Approved by GASAB, pending
notification
 Guarantees
given
by  Foreign Currency transactions
Governments:
Disclosure
and loss or gain by Exchange
Requirements (IGAS1) -2010
Rate variations (IGAS 7)
 Accounting and Classification of  Public Debt and Other Liabilities
Grants-in-aid (IGAS2) -2010
of Governments: Disclosure
Requirements (IGAS 10)
 Loans and Advances made by
Governments (IGAS 3)-2012
IGFRS
(accrual
based
accounting
standards)
59
 IGFRS 1 : Presentation of
Financial Statements
 IGFRS 2: Property, Plant &
Equipment
 IGFRS 3: Revenue from
Government
Exchange
Transactions
 IGFRS 4: Inventories
 IGFRS 5: Contingent Liabilities
(other than guarantees) and
Contingent Assets: Disclosure
Requirements
Exposure drafts
 Accrual Exposure Draft (AED) 6
(Accounting Policies, Changes
in Accounting Estimates and
Errors)
 Exposure Draft (ED) 4 (General
Purpose Financial Statements of
Government)

www.gasab.org
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
138.
The accounts are compiled by the AG (A&E) and then presented for audit to the AG (Audit). Based on the audit by
AG, the C&AG issue a certificate on the “true and fair view” of the financial position and the receipts and disbursements.
The Finance Accounts and Appropriation Accounts are tabled in the state Legislature and then made available in the public
domain. Full accounts are available on the website of the C&AG and also the state AG. Once tabled, the accounts are referred
to the Legislative oversight committees for examination. The dates of submission of the accounts for audit, issue of audit
report and tabling in the state Legislature are summarized in Table 38: Public availability of State External Audit Reports in
Karnataka.
139.
Ownership over State Accounts: One point of interest is that the GoK, like other states in India, does not sign
the annual accounts compiled by the AG. This implies that the state governments do
GoI accounts are signed by the
not take direct ownership over the annual accounts. GoK with the implementation of
Controller
General
of
KII would be in a position to generate and prepare the accounts and financial
Accounts who certifies that the
statements from KII. So GoK can work with AG (A&E) gradually to establish
accounts
are
the
correct
ownership as a gradual process. This suggestion was made in 2004 report and is
statements of the receipts and
relevant in current context also. In case of GoI, the accounts are signed by the CGA on
disbursements of the GoI.
behalf of the GOI.
140.
The 2004 PFMA brought out several areas of shortcomings and made recommendations in accounting and financial
reporting that were prevalent at that time. For one, the report identified several issues relating to the Public Account. For
instance, book/accounting adjustments between the Consolidated Fund and the Public Account causing distortions in the
GoK’s financial performance and position; Revenue and Expenditure being accounted for in the Public Account rather than
in the Consolidated Fund; less rigorous internal controls in transactions through the Public Account; no Legislative control
over expenditure made from the Public Account. Recommendations included discontinuing (or at least minimizing) book
transfers particularly for overcoming any legal compliance 60 or for carry-forward of balances (such as Personal Deposit
Accounts) and introducing automatic rules for end-of year lapsing and writing back balances in the accounts. Other steps
suggested were one-time clean-up of long-outstanding balances, considering some items as cash balance of the state and
improving transparency in presentation of the Public Account. Some of these recommendations are still relevant, not
because GoK did not take steps to implement them but because these items build up over time.
141.
Arrears in reconciliation, non-adherence to accounting controls, weaknesses in systems for recording,
reporting and monitoring of fiscal and assets and liabilities, and reporting if transfers to other public sector entities
were areas that were identified for strengthening. Un-reconciled items included bank balances, intra public sector
transfers, sub-accounts, employee fund accounts. Inadequate systems included those around off-budget borrowings,
guarantees, payables, debt, investments and loans and advances. Many of these issues have been addressed, including
recommendations made by the Finance Commissions. Implementation of the Treasury computerization has been completed,
better controls over guarantees have been achieved, debt database has been created, cleaning up of suspense accounts have
been carried out, disclosures in financial statements have improved and off-budget borrowings have been reduced. Yet, many
of the areas continue to exhibit weaknesses dealt with in the 2004 PFMA including weak controls over investments and loans
and advances; un-reconciled or long-outstanding balances such as unencashed cheques or personal deposit accounts. These
issues are covered in Section 6.
142.
This report takes stock of the steps taken by GoK to address the key findings from the 2004 PFMA, including in
light of recent developments such as introduction of mandatory government accounting standards or developments at the
central level affecting the state governments. In some areas, performance of GoK has been compared with other states.
Reconciliation of Revenue and Expenditure
60
Such as where earmarked revenues are not used for any specified purpose
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143.
The Karnataka Financial Code (KFC) prescribes monthly reconciliation between the AG (A&E) and the
departments for both receipts and expenditure. Overall, the Chief Controlling Officer is responsible for final reconciliation
and forwarding certificates of reconciliation to the AG (A&E) “in order to ensure credibility of accounts and avoid probable
fraud and embezzlement of money” 61.
a.
In case of receipts, Controlling Officers reconcile departmental figures of revenue with those of actual credits
into the Treasuries and accounted in the books of Accountant General (rule 34 of KFC).
b.
On the expenditure side – (a) all DDOs reconcile figures of expenditure with those booked in their designated
Treasury and forward reconciled figure to their Controlling Officers (CO); (b) the COs forward these to the
Chief Controlling Officer (CCO); (b) AG (A&E) forwards the monthly statement of receipt and expenditure to
the CCO once monthly Civil Accounts are rendered to GoK; (c) the CCO reconciles the receipts and
expenditure figures as furnished by AG (A&E) with those compiled by him/her on the basis of the figures
furnished by DDOs and Controlling Officers (rule 187-A and 199 of KFC) and submits an annual certificate of
reconciliation to the AG.
144.
While GoK has achieved more than 90% in terms of reconciliation of revenue figures, achievement in terms
of reconciliation of expenditure is only 58% and there is slippage over the last few years (see Table 25). States such as
Gujarat and Uttar Pradesh have achieved nearly 100% reconciliation on both revenue and expenditure. The matter of concern
appears to be continuous slippage over the last four years - marked decline on the expenditure side - and this need to be
addressed. Significant non-reconciliation of revenue and expenditure could adversely impact the assurance on completeness
and correctness of the accounts.
Table 25: Progress of Reconciliation of Revenue and Expenditure
Financial Year
Receipts
Expenditure
94.26%
2012-13
98.00%
2011-12
98.20%
2010-11
99.00%
2009-10
Source: Government of Karnataka, Finance Accounts and C&AG Report of State Finances
58.11%
66.44%
67.08%
71.33%
145.
Reconciliation is normally done post year-end and GoK gives time up to May 31st to the HoDs to finalize. As at
close of March 2014, tentative data indicates that - (a) revenue reconciliation had been fully done by 4 CCOs, partially by 51
and 24 had yet to carry out the exercise; and (b) expenditure reconciliation had been fully done by 6 CCOs, partially by 98
and 90 had yet to do so62. This problem is expected to be resolved once Khajane II is operational, as there would be one
database and DDO would be actually entering the details in KII– but till that time, past reconciliation has to be completed.
Personal Deposit Accounts
146.
Personal Deposit (or PD) Accounts are deposit accounts maintained in the Treasury in the nature of a banking
deposit account. PD Accounts can be opened only with the specific permission of the Government after consultation with the
AG. PD Accounts are allowed to be opened “in cases where the ordinary system of accounting is found not suitable for the
transaction” (clause 286 of the KFC). PD accounts are often created by “transferring funds from the Consolidated Fund for
61
62
GoK Circular No. FD 49 TAR 2012 dated November 27, 2012
PAG (A&E)
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discharging liabilities of the GoK arising out of special enactments” (clause 286-A of KFC)63. Each PD has an Administrator
who maintains detailed accounting of the transactions. The KFC has detailed provisions for the operation of the PD
Accounts. The balance in the PD account is shown in the Public Account in state’s financial statements.
147.
In case of PD accounts created out of funds transferred from the Consolidated Fund, unspent balances as at the close
of each financial year need to be transferred back to the Consolidated Fund (as minus debit to the original head of account but
if the reversal is done in subsequent year, by credit to revenue head). In other words, the PD accounts will lapse and can be
re-opened next year 64 . This rule is not strictly being followed in Karnataka and significant balances are carried
forward to the subsequent year/s. Nearly, half of the PD accounts are inoperative, some have adverse balances and
none of the Administrators have reconciled the balances with the Treasury and the AG (A&E). Majority of the funds
are released to the Deputy Commissioners from the State Disaster Response Fund and keeping such funds in the Personal
Deposit Accounts is not in accordance with the rules. The Public Accounts Committee had also expressed concern over the
outstanding in the PD accounts (Jan 2012).
Table 26: Personal Deposit Accounts not closed at end of financial year
Financial Year
Amount transferred to PD Account during
the year
(Rs. in crore)
Closing Balance at end of FY not
transferred to Consolidated Fund
3,582
2012-13
2,737
2011-12
2,201
2010-11
3,491
2009-10
Source: Government of Karnataka, Finance Accounts and C&AG Report of State Finances
2,086
1,478
1473
1,214
Abstract Contingent Bills
148.
Abstract Contingent (AC) Bills are bills without details of the contingent or travelling expenditure and allowed to be
drawn from the Treasury without scrutiny – therefore the payment is of the nature of an advance. Once the expenditure has
been incurred, the AC Bill has to be settled through submission of a corresponding Detailed Contingent (DC) Bill submitted
to the AG. The provisions for AC Bills are contained in the Karnataka Manual of Contingent Expenditure, 1958 (clause 36)
including time limit for submission of the DC Bills 65.
149.
AC Bills needs to be followed scrupulously, so they don’t accumulate
for non-settlement. When the amount is drawn it is accounted as expenditure
AC Bills - Practices in other states
 Madhya Pradesh has banned drawl of
which is a key accounting policy issue in all states. Treasuries keep a watch
funds against AC Bills (in 1999)
over outstanding AC Bills and drawers of AC Bills are required to submit a
except in one case
certificate with their salary bills to the effect that DC Bills have been
 In Uttar Pradesh, details of individual
forwarded to the AG for all outstanding AC Bills. The Public Accounts
AC Bills (Treasury and DDO wise)
Committee had expressed concern over the high level of AC Bills and has
are in public domain on the website of
recommended action against the DDOs for not rendering accounts (Jan 2012).
the State AG
In Karnataka, the quantum of outstanding AC Bills are contained at a
reasonable level and showing a decreasing trend over the years in both outstanding as well as fresh drawls during the
year - as at March 2013, the outstanding AC Bills were Rs. 122 crore of which Rs. 45 crore were drawn in March 2013
63
PD accounts can also be created with funds other than from the Consolidated Fund of the state such as earnest money deposits or money
belonging to prisoners in jails.
64 This rule is similar to other states with the exception of some states such as Odisha (PD account to be closed if remaining inoperative for
three FY after the last transaction) and Bihar (PD account to be closed if balance lying unspent for two consecutive FY).
65 The Manual of Contingent Expenditure requires submission of DC Bills to the countersigning officers before close of first week on the
month succeeding the month in which the AC Bill was drawn and forwarded to the AG before 15th of the succeeding month
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itself66. AC Bills aggregating Rs. 67 crore are outstanding prior to FY 2012-13 (i. e. more than 1 year) for want of submission
of DC Bills. Normally, the previous AC Bill should be settled prior to drawl of another AC Bill and Treasury system ensures
that this control is exercised.
Reserve Funds
150.
Reserve Funds are created by the state government to meet specific liabilities or for specific and well-defined
purposes, including those that may arise in the future. The source of funding could be the Consolidated Fund of the state or
from other agencies or governments or public subscriptions. The balances in some of these reserve funds are invested in
longer term securities called “Investments from Earmarked Funds” and the balances in reserve funds and earmarked
investments are shown respectively in statements 18 and 19 of the state Finance Accounts. In case of funds created out of the
Consolidated Fund contribution, initially expenses are made from the Consolidated Fund and then transferred to the
respective fund. Similarly, receipts from other than the Consolidated Fund are taken as revenue of the state and then
transferred to the fund account after charging of to the functional head of account. This procedure has been prescribed so that
there is Legislative control over the expenditure.
151.
As of the close of March 2013, GoK had 44 reserve funds with a balance of Rs. 15,760 crore of which only 9
are active and the remaining 33 are lying dormant for over 30 years with balances aggregating Rs. 49 crore. There are
instances of two other issues in accounting of Reserve Funds - (a) partial/full expenditure not transferred to the Fund despite
having credit balance (e. g. Port Development Fund; Failed Well Compensation Fund); and (b) amount not transferred to the
Fund due to absence of budget provision (Depreciation Reserve – Commercial; Consumer Welfare Fund; Karnataka Silk
Worm.... Stabilization Fund). GoK needs to review these funds and take a policy decision on closing these unused funds.
Utilization Certificates
Utilization Certificates - Practices in other
states
 In Uttar Pradesh, details of individual
outstanding UCs (Treasury and DDO wise)
are in public domain on the website of the
State AG
152.
GoK provides grants to various state agencies. At the time of
release of these grants, the expenditure is charged off to the functional
head of account. The terms of the grant require the recipient agencies to
submit Utilization Certificates (UC) as a confirmation of utilization of
the funds provided. The UCs are submitted to the parent department
and also forwarded to the AG (A&E) within the time stipulated in the grant letter. UCs outstanding beyond a specified
period indicates absence of assurance on utilization of grants for intended purposes.
153.
GoK has over the years significantly reduced the backlog and delay in submission of UCs by the grantee
institutions (Table 27). About 86% of the outstanding UCs as of March 2013 pertains to one department – Health & Family
Welfare (Rs. 521 crore) out of which 80% is for the FY 2012-13 due only in the next FY 2013-14.
Table 27: Outstanding Utilization Certificates
Financial Year
2012-13
2011-12
2010-11
UCs outstanding pertaining to
prior FY
164
566
1,149
UCs outstanding pertaining to
reported FY
(Rs. in crore)
Total UCs outstanding
451
738
497
615
1,304
1,646
66
Government of Karnataka, Finance Accounts 2012-03. The average amount per AC Bill in Karnataka is Rs. 125,000 as compared to Rs.
277,000 in Gujarat and Rs. 40.82 lacs in Bihar.
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1,061
130
2009-10
Source: Government of Karnataka, Finance Accounts and C&AG Report of State Finances
1,191
154. In terms of submission of UCs, Karnataka fares well over other states where the level of outstanding UCs is extremely
high including huge backlogs (Table 28).
Table 28: Outstanding Utilization Certificates in Sample States
State
Financial Year
Karnataka
2012-13
Gujarat
2011-12
Madhya Pradesh
2012-13
Uttar Pradesh
2012-13
Odisha
2012-13
Kerala
2012-13
Bihar
2012-13
Maharashtra
2011-12
Source: Finance Accounts of respective state
UCs outstanding
pertaining to prior FY
164
7,964
46,546
59,087
18,719
146
17,233
62,565
UCs outstanding
pertaining to reported
FY
451
1102
28,241
7,538
3,502
342
17,454
25,677
(Rs. in crore)
Total UCs
outstanding
615
9,066
74,787
66,625
22,221
488
34,687
88,242
Accounting of Revenue and Expenditure under Minor Head 800 – Other Revenue/Expenditure
155.
Revenue and expenditure are accounted for under specified head of account and corresponds to that approved by the
state Legislature. In the eventuality of either non-availability of the specific head of account or due to incorrect identification
of expenditure under the available heads of account at the budget stage or appropriate minor head has not been provided in
the accounts, the Minor Head 800-Other Expenditure / Other Receipts are to be operated. Routine operation of minor head
800 is to be discouraged, since it renders the accounts opaque.
156.
Table 29 briefs the percentage of total receipts and total expenditure that was accounted for under the account head
800. There is a sudden spurt in booking transactions under the miscellaneous head of account in the last FY 2012-13 vis-à-vis
earlier years. This is also significantly higher when compared with a sample of seven states (Table 30).
Table 29: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Govt. of Karnataka
Financial Year
Percentage of Receipts under Head 800 to
Percentage of Expenditure under Head 800
Total Receipts
to Total Receipts
28%
31%
2012-13
2%
11%
2011-12
6%
14%
2010-11
6%
13%
2009-10
Source: Government of Karnataka, Finance Accounts and C&AG Report of State Finances
Table 30: Percentage of Receipts and Expenditure accounted for under Account Head 800 in Sample States
State
Financial Year
Percentage of Receipts under
Percentage of Expenditure under
Head 800 to
Head 800 to
Total Receipts
Total Expenditure
Karnataka
Gujarat
2012-13
2011-12
28%
6%
31%
16%
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2012-13
Madhya Pradesh
2012-13
Uttar Pradesh
2012-13
Odisha
2012-13
Kerala
2012-13
Bihar
2011-12
Maharashtra
Source: Finance Accounts of respective state
21%
12%
2%
2%
9%
1%
14%
13%
10%
7%
2%
10%
157.
The Public Accounts Committee during examination of the C&AG Report for 2010 had commented on the
significant amount accounted for under miscellaneous head. A Committee comprising representatives of the State
Government, Office of the Principal Accountant General (G&SSA and Principal Accountant General (A&E) has been
constituted to scrutinize the existing classification in accordance with the List of Major and Minor Heads. Every year, this
committee identifies the correct head of account and shifts the amounts from Minor Head 800 to appropriate Minor Heads.
158.
Several departmental entities are in arrears in submission of Accounts: Many of the departments dealing in
stores and stocks and departmental commercial/quasi commercial undertakings default in preparation of accounts. In case of
autonomous units (comprising mainly of boards, commissions and authorities) accounts are in arrears by one year and audit
reports of earlier years have yet to be placed before the state Legislature.
159.
In respect of accounting and reporting benchmarks set under PEFA, GoK fares well though there are some
areas that could be strengthened.
Dimension/Good Practice
Current Status
All bank accounts of the GoK linked to the Treasuries are
Regularity of Bank Reconciliation
Bank reconciliation for all government bank accounts reconciled monthly at all levels.
take place at least monthly at aggregate & detailed
levels, usually within 4 weeks of end of period.
Regularity of reconciliation and clearance of Reconciliation and clearance of suspense accounts and advances
taken place annually and outstanding balances are carried
suspense accounts and advances
Reconciliation and clearance of suspense accounts and forward. Details of Suspense accounts are provided in Statement
advances take place at least quarterly, within a month No. 18 of the State’s Finance Accounts and form part of the
from end of period and with few balances brought Public Account. Outstanding in Suspense Accounts (excluding
forward.
items like unencashed cheques or Cash Balance Investment
Account) as at the close of FY 2013 was only Rs. 8 crore
(previously Rs. 55 crore).
The Finance Accounts and Appropriation Accounts are the
Completeness of Financial Statements
A consolidated government statement is prepared government consolidated accounts and are prepared annually on
annually and includes full information on revenue, cash basis of accounting. They include full information on
expenditure and financial assets/liabilities.
revenue, expenditure and financial assets/liabilities but do not
include the local government expenditure.
The AFS, compiled by the AG (A&E), have been submitted for
Timeliness in submission of Financial Statements
The statement is submitted for external audit within 6
audit within 6 months of the close of the FY, in the last three
months of the end of the fiscal year
years.
All statements are prepared under the Indian Government
Accounting Standards used
IPSAS or corresponding national standards are applied Accounting Standards, IGAS. However, these are not fully
for all statements
aligned with Cash IPSAS developed by IFAC.
160.
The rules governing the areas discussed in this section in respect of accounting and reporting are adequately
mandated in the PFM documents; the issue lies in their application and compliance that needs to be enforced. An
across the board action plan for these areas would not address the problem as the issues are of disparate nature and needs to
different ways of resolving them. Not only this, GoK would need to ensure that the achievement made in the past is
sustained, for instance in submission of DC Bills, reconciliation of expenditure. It is also important to recognize that most
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of these issues are being addressed in Khajane II – but the pre-requisites for successful migration are availability of
legacy data and up to date reconciliation. The following broad strategy is suggested and a particular area could be
addressed by applying one or more of these action points.
a.
b.
c.
d.
e.
The provisions of the KFC in respect of the areas discussed above need to be reiterated through workshops,
GOs, and capacity building measure.
FD should designate a nodal office with adequate staff to collect and collate the information on these key areas
and monitor their resolution with the concerned IFAs/CCOs/DDOs. Presently, this information is not available
centrally and is provided by the AG in the Finance Accounts.
A one-time exercise to clear and clean up the backlog such as in the case of reconciliation of expenditure, and
UCs needs to be undertaken. Clearance of UCs can be attempted faster as the bulk of the outstanding pertains to
only one department.
The periodicity of certain actions could be reduced as for instance submission of UCs (presently 1 year) or
unencashed cheques. This would require the concerned CCOs or DDOs to initiate action much earlier than
mandated presently and hence backlog would be prevented to a large extent.
Accounting issues such classification under miscellaneous heads, operation of reserve funds and issue of
Alteration Memos for lapsed cheques should be resolved in consultation with the AG.
(Accounting and reporting issues in cases of investments, guarantees, unencashed cheques, SOEs and local self-governments
are covered under the respective sections).
Disclosure of CSS funds and expenditure
161.
A recent development that could affect GoK as well is that all funds under Centrally Sponsored Schemes will be
released through state budgets, as compared to direct transfers to implementing agencies hitherto. Funds under many
Centrally Sponsored Schemes (CSS) traditionally flowed to implementation agencies (mainly societies) outside of the state
budget under PFM structures mandated by the GoI with little accountability by the state governments. The Chaturvedi
Committee recommended that “procedure for transfer of funds to the states should be reformed to ensure full accountability
and efforts must be made to gradually move over transfers through the state budgets and it is not possible to in the current
system to monitor the actual flow of funds.” 67 Based on these recommendations, the Planning Commission decided
(December 2013), that with effect from 2014/15, all funds under CSS will be released as central assistance to the state plan
through the state budgets only. This has the implication that state governments would need to make provisions for receipts
under CSS in their budget and for the releases and that the size of the state plan would increase considerably. According to
this changed fund flow mechanism, GoK has budgeted for CSS funds under Major Head 1601 for 2014/15. Therefore, the
state plan has increased to Rs. 15,745 crore in 2014/15 as compared to Rs. 3,958 crore during the year 2013/14. Break-up of
receipts under the various CSS are also available in the budget (in the budget document Detailed Estimates of Revenue and
other Receipts). The provision however has been made under the Minor Head 800.
162.
The CSS funds from the state budget would be released to the implementing agencies and at this point, the release
would be accounted for as expenditure in the state accounts. Utilization of these funds would be monitored through
prescribed scheme specific fiduciary guidelines including submission of utilization certifications. In the traditional
mechanism, details of funds released directly to the implementing agencies were disclosed in the Finance Accounts
(Appendix 7) – however, the corresponding expenditure was not disclosed and the information was obtained from the
Comptroller General of Accounts. With the funds being routed through the state budget, this appendix is no longer needed.
67
Planning Commission, Report on the Committee on Restructuring of Centrally Sponsored Schemes, B. K. Chaturvedi (September 2011)
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163.
The transfer of funds mechanism through state budget is evolving and on certain aspects presently there is less
clarity such as the reporting mechanism between GoK and GOI, and between implementing agency and GoK,
submission of UCs and audit reports. As and when this clarity emerges GoK needs to issue a circular in this regard. The
role of Central Plan Scheme Monitoring System (CPSMS) in tracking these transfers and expenditure also need to be
explored by the GoK. Going forward, actual expenditure incurred by the implementing agencies through CSS funding
should be disclosed in the Finance Accounts so as to provide a complete picture of funds released by GoK and the
related expenditure.
Transfers to be shown as per IGAS 2
164.
All transfers from the state to implementing agencies under CSS, ULBs, PRIs for devolution and other schemes are
treated as expenditure in the state accounts at the time of release. This is as per the current accounting policy followed in the
states. IGAS-2 recommends that any transfer made to ULBs/PRIs and any other public sector enterprise irrespective of the
nature of expenditure should be treated as revenue expenditure in the State accounts. FD is already following this
requirement in the previous budgets and should continue to follow this accounting standard as it has become effective from
2010.
165.
In terms of disclosure of state accounts towards transfers to ULBs and PRIs, currently the state accounts exhibit only
the transfers made to the ULBs and PRIs. The state accounts don’t exhibit the actual expenditure incurred by the ULBs and
PRIs. Going forward the DMA and RDPR needs to collect details on the actual transfers, actual expenditure and balances
which should be exhibited as a separate schedule in the Finance Accounts. This was a recommendation in 2004 report
also. An MIS cell needs to be established in DMA and RDPR which would exclusively work on monitoring and
collecting these financial data from the field.
Issue of fund II in Zilla Panchayat (ZP)/Taluk Panchayat (TP)
166.
ZP and TP have three types of fund accounts maintained in the public account 68: Fund 1: Grants from GOI and State
share of such schemes; Fund 2: State plan schemes and Fund 3: Own resources. While Funds 1 and 3 don’t lapse at the
financial year end, fund 2 lapses at the year end and any balance on the last date of the FY is nullified by the Treasury. As
per GO69, unutilized amount70 in this fund account is to be reversed to the Consolidated Fund in the next financial
year. However in practice this is not done, thus inflating the expenditure for the year of transfer. This is an issue which has
not been resolved for the past three to four years and the balances in this account have been increasing. The accounting
treatment also gets vitiated as the earlier year expenditure is offset by showing this reversal in the next financial year which
affects the fiscal indicators in which the reversal is carried out. This is an issue which has both policy and procedural gaps
and needs to be addressed by the GoK with AG. While ULBs, ZPs and TPs are all third tier of governments differential
treatment of fund accounts needs to be reviewed. ZP/TP reversal of fund II balance should be seen in light of the treatment
provided to ULB PD accounts which don’t lapse at the year end. GoK should review this policy and the GO issued in this
regard. If the reversal has to be done:
a.
68
69
It needs to be done within the FY, as on 31 st all the balances except for cheques issued needs to be reversed in the
Treasury and the same should be reflected as a reduction in the expenditure head. This could be achieved by having
a cutoff date for issue of cheques from the PD account. (or)
G.O. No. FD 07 ZPA dated 8th September 2004
G.O. No. FD 07 ZPA dated 8th September 2004 read with circular dated 14 July 2005
70
Unspent balances of Rs. 1,657.72 crore under ZP and TP fund account II were not withdrawn. Source CAG report on
Local Bodies – 2012.
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b.
It could be done as a part of the periodical adjustments carried out by the AG (A&E). GoK should intimate to the
AG (A&E) how much is the lapsable amount in the PD account and the amount to be written back for the year. This
option would provide time for the Treasuries to prepare the statements as well as reflect correct expenditure amounts
in the finance accounts.
167.
The other option is to follow the ULB model where the amounts don’t lapse at the end of the FY and it is adjusted
while budgeting for the next year requirements. GoK should consult with AG on the appropriate accounting treatment for this
issue and take a onetime clean up action in this regard.
168.
For ZP and TP nearly 90% of the payments are made through Treasury and accounts are available through Treasury
itself. In case of schemes which are funded directly by GOI to ZPs and TPs, project specific bank accounts are maintained
and control over such accounts are very minimal. GoK needs to exercise control on the way bank accounts are opened and
operated at the ZP/TP level71. The AG in its report has highlighted the issues of bank accounts not updated, not reconciled,
and also has listed some the bank accounts which have become in-operative due to closure of the schemes. KII is also is
trying to address this issue as a part of the PRI module. The advent of bank accounts and combining them into the monthly
accounts would require changes to the PRI accounting rules.
169.
From FY 14-15 funds for CSS handled by ZP and TP would pass through the state budget. GoK should consider,
transferring, and making payments through the Fund 1 in the public account instead of using Bank accounts for ZP
and TP. This will improve the expenditure controls and also the entire accounts of ZP and TP would be available in the
treasury system. One time review of bank accounts and closure of inactive accounts needs to be carried out. A
comprehensive review of the bank accounts needs to be conducted, and then GO needs to be issued for closure of
inactive accounts, and balances should be transferred to the Treasury. Only those bank accounts which are required by
the CSS schemes should be maintained.
ZP/TP link document
170.
At the state level the transfers to the ZP/TP are shown as single line item under the respective minor head. However
for each ZP and TP a detailed link document is prepared which bifurcates the budget into different object heads of
expenditure. From FY 13-14, both ZP and TP link documents are prepared using software and this file is shared with the
TNMC and Treasury uploads these link documents and provide budget for the ZP/TP. This is a considerable improvement to
the situation in 2004 when only ZP link documents where prepared and that to it took lot of efforts to be updated in the
Treasury. One of the key issues in the link document is that the object codes used in the link document cannot be easily
matched with the object code used in the State budget. Hence it becomes difficult for the state to consolidate the expenditure
and provide an overall view of expenditure for the state including the PRIs into various object heads. Object codes in the
link documents should be aligned with the state object heads so that it could be used for reporting consolidation and
analysis.
Proposed change to classification of accounts
171.
Government of India constituted a committee under the chairmanship of Sh. C.R. Sundramurti, Controller General
of Accounts to review the present classification system and to develop a system better suited to display the nature and
objective of Government expenditure. On review of the existing classification system it was felt that there are some
inadequacies in the system which poses limitation on its effectiveness in capturing relevant budgeting and accounting data. A
new chart of accounts with seven dimensional mutually exclusive classifications (Administrative, Functional, Program,
Recipient, Target, Economic and Geographic) has been proposed to the GOI. However the acceptance and the
71
Detailed circulars in this regard has been issued by FD, however the implementation in this regard is not effective.
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implementation of this new chart of accounts is yet to take place. If this classification system is approved and mandated by
GoI then it would apply to the state and also would affect the accounting classification being designed in KII.
Comprehensiveness of Accounting and Reporting - Transition from Cash to Accrual basis of Accounting
172. The XII CFC recommended, and this was reiterated by the XIII CFC, transition from cash accounting to accrual
based accounting. Governments in India follow the cash
system of accounting which records the physical movement
Drawbacks of Cash based system of accounting
of cash to and from the government treasury. However, not
 Lacks adequate framework for accounting of assets
all government transactions involve an immediate inflow or
and liabilities, depicting consumption of resources
outflow of cash such as for instance goods or services
and presenting the full picture of the government's
received but not paid for. Cash accounting can be used by
financial position at any point of time
governments to “manage” their deficits by deferring outflow
 No effective way of tracking assets created out of
of cash. On the other hand, accrual basis of accounting
public money diluting accountability of departments
for management of government assets
entails recording of government transactions when the

Lacks transparency, and impaired ability to
economic event happens and not when there is an actual cash
accurately predict the future cost of a current
transaction. For instance, the transaction would be recorded
financial commitment.
when the goods have been consumed or services rendered or,
in case of revenue, such as when the tax assessment is
finalized, or pension liabilities on the public exchequer will be reflected with the help of actuarial valuation. Moreover,
accrual basis of accounting requires accounting for all assets and liabilities captures the full cost of services provided by
the government. Governments across the world have recognized the value of reporting on accrual basis with the financial
statements prepared on accrual basis72.
173. Government of India is pursuing the transition from cash basis of accounting to accrual. An Apex Committee for
implementation and transition to accrual based accounting in governments was constituted in September 2011.
Operational guidelines for accrual based
financial reporting were issued in June 2011. And, 21 state
governments have agreed in principle to implement accrual accounting. Some of the reporting formats suggested by the
Central Finance Commissions are prerequisites for accrual based accounting.
174. The Government Accounting Standards Advisory Board (GASAB) has now issued accrual based accounting
standards – Indian Government Financial Reporting Standards (IGFRS) – and five such standards have been developed
so far73. These are presently recommendatory for pilot studies. In line with this, a study on piloting accrual accounting
was conducted in two departments of Andhra Pradesh74 (other such studies have also been done). The study developed
model accrual financial statements and documented the key learnings from the pilot.
72
Such as New Zealand, Australia, United Kingdom, USA, Canada, France, Indonesia, Turkey, Philipines, Chile and Singapore
The equivalent international standards are the International Public Sector Accounting Standards (IPSAS) developed by IPSAS Board of
the International Federation of Accountants
74 Government Accounting Standards Advisory Board (GASAB) Secretariat Comptroller and Auditor General of India, India-Journey to
Government Accrual Accounting, Research Study on Piloting Accrual Accounting in the
State of Andhra Pradesh (March 2010) with technical assistance from Deloitte
73
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175. While GoK follows cash basis of accounting at the state
level, it has mandated accrual based accounting for
urban local bodies and for Gram Panchayats75 while the
Companies Act mandate accrual accounting for
companies. These bodies produce a full balance sheet, an
income statement and a cash flow statement. It is to be
noted that these bodies presently do not form part of the
state accounts. For ULBs, transition from single entry cash
based accounting to fund based double entry accrual system
was done under the ADB assisted Nirmal Nagar Program
and World Bank assisted Karnataka Municipal Reforms
Project (see box for implementation strategy) and
facilitated under the JNNURM. Transition for Gram
Panchayats was facilitated under the Gram Panchayat
Budgeting and Accounting Rules since 2007 through online
software called Panchatantra. This also meets one of the
financial management principles of the Local Bodies
Fiscal Responsibilities Act – adoption accrual system of
accounting for payables and receivables.
Accrual Accounting in ULBs in Karnataka –
Implementation Strategy
 Through support of ADB and World Bank
 Amendments made in Karnataka Municipal
Accounting and Budgeting Rules 2006 and
Karnataka Municipal Accounting Manual
 Phased implementation in 51 ULBs from April
2006, 4+69 ULBs from Apr 2007, 4 ULBs from
Apr 2008 and 85 from Apr 2009
 Recruitment of 92 Commerce Graduates and
Accountants through the Karnataka Public Service
Commission
 Support provided through a State level Consultant
and Chartered Accountant firms for each ULB for
field support
 Training modules developed for opening balance
sheet and valuation of assets, and about 5000 staff
trained
 Deployment of software called e-Gov Financials
176. GoK has achieved a robust cash accounting
Madhya Pradesh
system and the next step would be to set a
The IFMIS has the facility for accrual based
roadmap for transition from cash to accrual
basis
accounting as and when the decision of transition from
for state accounting. The 2004 SFAA also
cash to accrual is taken by the Government
suggested that since “basic systems are
functioning satisfactorily and in accordance with
satisfactory cash-basis standards, a structured move towards accrual accounting, based on appropriate accounting
standards, could be considered”. Other states are also moving towards accrual accounting albeit at a slow pace (see
box). GoK is in a relatively advantageous position as it has already implemented an IFMIS in the form of Khajane which
is presently being upgraded to the next version, and this would help in adoption and application of accrual basis. The
next version Khajane II would have an accounting and
reconciliation module. GoK has also implemented most of the
Maharashtra
supplementary information disclosure suggested by the CFCs
Under the stewardship of the state Accountant
and that will facilitate transition to accrual basis.
General, a Pilot Study for Migration to Accrual based
accounting system has been initiated for two
177.
There are few caveats in the transition from cash to
departments – Public Works and School Education. A
accrual.
The first one being that such transition would arise
tender for engaging external consultants for this
purpose has been floated in May 2014
only when GOI adopts and implement accrual accounting.
Sequencing of some activities prior to adoption of accrual
accounting would be important such as for instance information
on financial liabilities and valuation of land and buildings. Transition to accrual accounting is a costly proposition as it
involves adoption of a government wide integrated financial information system (IFMIS), extensive training and change
management. Political leadership and buy-in and change agents at all levels of the government would be crucial for the
success of this initiative. There is often a long time lag between the resolution to adopt accrual accounting and its full
implementation. Also with the transition GoK would need to take a decision whether to go for an accrual based budget
75
This was part of the “bubble-up approach” to transition mentioned in the XIIIth CFC report
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execution report 76 . Lastly, a structured strategy of implementation, such as that adopted in implementing accrual
accounting in ULBs, would be crucial to ensure success.
Enhancing Coverage of Reporting – Including all Public Entities in Fiscal Reports
178. Financial reports of GoK, including its annual financial statements, show only the revenue and expenditure of its
departments and its own debt. Transfers made to local bodies and other parastatals are reported as transfers, but the
actual revenue and spending and debt of these public entities are kept outside budget reports. In present times, several
entities are created by governments to perform public functions, occasionally with the objective of reducing their deficit
or debt by transferring responsibilities to these public bodies.
179. The principle gaining ground is that accounts of those entities which the government is responsible and can be
held accountable should be consolidated with the general government accounts. Government reports can either
include (a) the general government sector i. e. that part which is included in the budget; or (b) the general government
and its sub-sectors such as for instance the local governments; or (c) the entire public sector that includes the general
government sector, its sub-sectors and other government owned entities (for instance at least the non-commercial
government companies and corporations). This practice follows the reporting standard in the private sector that requires
companies to consolidate all entities that they control, even if the latter are legally distinct.
180. The 2004 SFAA reported that “consolidated all-of-government budgets are not prepared or presented.... there is
also need to rationalize the reporting of transfers to various public sector entities in the State Government’s
budget and accounts”. The SFAA further elaborated that preparation of “all-of-government” accounts including the
state government and public entities are important since: in many cases, these other entities are separate from the State
Government in form, but not in substance; and the financial performance of these entities substantially affects the
Government’s fiscal position
181. Therefore, the decision on which components of the government should be included in fiscal reports is of importance, in
case of GoK on two counts –
a)
The total devolution to urban and rural local bodies in Karnataka is to the tune of 40% of net owned revenue or Rs.
22,542 crore (2011/12 19,460 crore) which is about 25% of total expenditure (Source: Statement no. 8, Finance
Accounts); and
b) From the current year 2014/15 onwards, all central funds would be routed through the state budget (unlike direct
transfers to implementing agencies). Funds transferred outside the state budget (which eventually would now be
through the budget) during 2012/13 were of the order of Rs. 6,649 crore (2011/12 Rs. 5,469 crore) which is about
7% of state’s expenditure (Source: Appendix 7, Finance Accounts).
In both the cases, per extant practice, funds from the Consolidated Fund of the State will be transferred to local bodies or
agencies implementing the central schemes and the transfer of funds is charged off to the final head of account (as grants
in aid) and actual utilization is followed through utilization certificates. It is also to be noted that the fiscal data of public
entities (local governments, PSUs) are also not consolidated as a sector and reported (except partially in the report of the
C&AG) – therefore, information on consolidated revenue, expenditure, assets, liabilities including borrowing is not
readily available and is not part of periodic reporting.
76
Ideally, budgeting and reporting should be on the same basis. However, many governments (such as USA) have chosen to continue with
cash based budget reports even when they have switched over to accrual reporting system.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
182. Presenting consolidated financial data on public entities would enhance coverage of reporting and also provide
insights into the fiscal risks that these public entities pose for GoK and also on their performance. Presently, there
is no Indian Reporting standard (cash or accrual) on consolidation 77. In the interim, GoK could consider the following
suggestions for enhancing coverage of its reporting.
a)
CSS Implementing agencies: Amounts of direct transfer of central funds (without routing through the state budget)
under each scheme are disclosed in the state’s Finance Accounts – the actual expenditure, however, is not compiled
and disclosed. As stated above, central funds will now be routed through the state budget. GoK could therefore
implement a mechanism for reporting not only the transfers to the implementing agencies (these are mainly
incorporated as societies), but also provide a consolidated scheme-wise report of the expenditure incurred under
main heads.
b) Local government: In case of rural local
governments, financial statements of each tier could
be consolidated to get the consolidated financials for
a district and further consolidated for the state.
Similarly, financial statements of urban local bodies
can be consolidated (including separately for each
type, if required) for the state. Again, this is possible
as financial statements are in uniform format and
available in digital form (e-Gov Financials). These
will be a full consolidation of the revenue/
expenditure and assets/liabilities. Such a system is
followed in Kerala (see box).
c)
Consolidation of Annual Reports of Panchayats
prescribed under Kerala Panchayat Raj
(Accounts) Rules, 2011
 Each Panchayat prepares an annual report including
annual financial statements, budget variance report,
key ratios etc.
 The annual reports are sent to the district officer for
preparing a consolidated district annual report for
further consolidation to prepare the state
consolidated report.
The consolidated database is available up to
2011/12
Government Companies and Corporations: Two types of annual data on government companies and corporations
are presently available. One, the Department of Public Enterprises has started publishing an annual book on these
entities providing inter alia a brief of their financials. Second, financial data is also provided in the Report on Public
Sector Enterprises of the C&AG. But both these have partial and dispersed data that is available much later after the
close of the financial year. GoK could institute a mechanism for building a central repository of financial database of
government companies and corporations which can be used to present a consolidated financial report of these
entities.
183. One mechanism for reporting would be to present data on the entire public sector in the form of sub-sectors i.e.
separately for government, local government, companies and corporations and other entities. This would be more useful
once accrual basis of accounting is implemented and when government assets and liabilities are also accounted for – this
system will then be at par with the public entities. Till this is achieved, separate statements of consolidated financial data
for local governments, companies and corporations and other state implementing agencies can be produced, included in
Finance Accounts and available to the public. This would need consultation with the state Accountant General.
Enhancing Transparency in Budget and Finance Accounts
184.
Finance Commissions at the central levels are constituted by the President of India under Article 280 of the
Constitution of India. The terms of reference of these commissions include making recommendations to improve the
transparency in budget and annual accounts. Thirteen commissions have been constituted so far and submitted their
reports78. The latest report available is that of the XIII Central Finance Commission (December 2009) applicable for the
77
78
An international standard based on accrual accounting is available IPSAS 6 – Consolidated and Separate Financial Statements
The XIVth Finance Commission has been constituted in January 2013 and expected to submit its report by October 2014
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period 2010-2015. The XIII CFC has recommended specific and additional disclosures in the budget documents and/or
finance accounts of the states for greater transparency some of which have been brought forward from the report of the XII
CFC. Some key disclosures recommended and their status in GoK is summarized in Table 31.
Table 31: Key Recommendations made by XIII CFC for Disclosure in Budget/Finance Accounts
Recommendation of the XIII CFC
Disclosure
Status in GoK
Suggestion for 2014 PFM
Reform Plan
Providing
a
statement
on Budget and Appendix 13 of the Finance Accounts Provide object heads for
maintenance
expenditure Finance
provides segregation of maintenance segregation
of
bifurcating between work charged Accounts
expenditure in Minor Head 200 only into maintenance expenditure
expenditure and other expenditure
salary and non-salary portions.
into salary and non-salary
across six major heads viz. public
There is no disclosure in the budget.
components.
works, housing, major irrigation,
medium irrigation, minor irrigation
and roads and bridges.
 This statement is intended to
provide insight on the quality
of maintenance expenditure.
Provide list of all public sector Budget and Presently such a disclosure has not been Constitute an expert
enterprises that yield a rate of Finance
made.
committee to determine
return lower than benchmark rate Accounts
the benchmark rate of
decided by an expert committee.
return. Provide a list of
This would improve the
SOEs providing rate of
quality and transparency of
return lower than the
investment in government
benchmark rate.
companies
List of Inventory of vacant land Budget
A partial inventory of government land Issue instructions to all
with departmental and non(acreage) is presently provided in MTFP departmental and nondepartmental undertakings. This is
(for 20 districts).
departmental
expected to contribute to better
undertakings to provide
protection of public assets against
an annual return of vacant
the threat of encroachment. And it
land with area and
will also enable effective utilization
estimated market value.
of land for projects thereby
ALMC
could
be
minimizing the need for fresh land
entrusted with collation
acquisition.
and consolidation of this
information.
Disclose
details
relating
to Budget and The transfers to ULBs and PRIs are GoK has broadly adopted
expenditure incurred by the PRIs Finance
budgeted under
major head 3604 the disclosures suggested
by detailed heads and object codes Accounts.
(Compensation and Assignments to Local by the XIII CFC in
under the minor heads 191, 192 and
Bodies and PR Institutions). The following respect of ULBs and PRIs
193 for ULBs and 197, 197 and
details
are
available
in
budget in respect of making
198 for PRIs. Prepare a supplement
supplementary documentsdistinct provisions for
to the budget showing plan and
(a) ULB category wise allocation under local bodies in the
non-plan wise classification of
plan and non-plan under the relevant minor budget.
transfers to different categories of
heads with details heads of account Going forward, GoK
urban ULBs PRIs.
including object code.
could disclose object(b) Budget allotment to PRIs giving code wise allocations to
category-wise
plan
and
non-plan PRIs
(presently
not
expenditure district-wise scheme-wise.
done).
(c) Budget allocation to ULBs – schemewise for plan and non-plan with detailed
head up to object code.
Appendix 4 to the Finance Accounts also
discloses classification of grant in
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Recommendation of the XIII CFC
Disclosure
Status in GoK
aid/assistance to various categories of
ULBs and PRIs under plan and non-plan
schemes
Details of book adjustments that do not
represent actual cash transaction are
disclosed in the Finance Accounts
(Annexure A) and details of transfers
between
Consolidated
Fund
and
Contingency Fund are also available in the
Finance Accounts (Statement no. 18).
Details transactions in the Public Account
are available in the said Statement No. 18
and transactions with the Consolidated
Fund are provided by way of notes.
Appendix 3 of the Finance Accounts
provides details of explicit subsidy i. e.
subsidy that has been as paid by the
government. The C&AG have reported
implicit subsidies of Rs. 1,893 crore for
FY 2012/13 that are not disclosed in the
Finance Accounts. Implicit subsidies are
outlined in the MTFP.
Appendix 2 provides details of salary
department-wise
by
Major
Head
segregating between plan and non-plan.
Number of employees presently is not
disclosed.
Details of contra-entries as well as
the summary of transactions
between the public account and the
consolidated fund should be
provided as a separate annex to the
finance accounts of the states.
Finance
Accounts
Provide
statement
on
comprehensive data on all subsidies
Finance
Accounts
Provide statement on consolidated
information on the number of
employees at each level along with
the commitment on salary.
Finance
Accounts
Include a separate statement
indicating head-wise details of
actual expenditures under the same
heads as used in the budget for both
PRIs and ULBs.
Finance
Accounts
Link budget document is prepared but the
object codes used for PRIs and ULBs are
not the same as used for the State
Seven additional Appendices were
recommended by the XII CFC. The
XIII CFC recommended specific
compliance with the following  instances where verification
and acceptance of balances
involving large amounts has
been delayed
 information on details relating
to reconciliation of balances
 statement of incomplete capital
works costing Rs 1 crore and
above
Finance
Accounts


3.2
Annexure B to the Finance Accounts
provides
Particulars
of
details/information awaited from
Departmental/Treasury Officers in
connection with reconciliation of
balances
Appendix 10 provides details of
incomplete public works contracts
individually for works costing Rs. 1
crore and above
Suggestion for 2014 PFM
Reform Plan
GoK has broadly met the
disclosures suggested by
the XIII CFC.
Additionally
disclose
implicit subsidies in the
finance accounts
GoK
may
consider
disclosing information on
number of employees in
the Finance Accounts
based on the information
collected for Appendix B
of the Budget.
GoK should prepare link
documents using uniform
object codes and should
disclose the head wise
details in the budget and
Finance accounts.
GoK has broadly met the
disclosures suggested by
the XIII CFC.
TREASURY MANAGEMENT
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185.
The Directorate of Treasuries (DOT) is one of the key players in supporting and maintaining overall PFM
framework in the state. DOT works under the State’s Finance Department (FD), and is the backbone for the financial
transactions related to expenditure and revenue of the government. Treasury offices are the basic unit for recording the
financial transactions of the government and are the starting point of public accounts. All state funds and to a large extent
central funds are handled by these treasuries. In GoK, the DOT is headed by the Director of Treasuries who is supported by
Joint Director and Treasury officers. In 2012, out of the 2936 sanctioned strength 2218 posts were filled up in the treasuries.
GoK has 2 Special Treasuries (State Huzur Treasury and Pension Treasury), 31 District Treasuries (2 in Bangalore and one
each in 29 Districts), 182 sub- treasuries and one Stamps Depot in the state. GoK has set up a Treasury Network Management
Centre (TNMC) in Bangalore which works as the IT network Centre to support the working of treasuries across the state.
DOT implemented a core treasury system “Khajane” across the state in 2004. All the treasuries were computerized and
networked to the central database in TNMC using a client server model. Khajane was a core treasury software and covered
the following modules related to treasury functions: (a) Receipts; (b) Payments ; (c) Deposits; (d) Pensions; (e) Social
security pensions; (f) Budget allocation and monitoring; (g) Stamps and strong room; (h) Accounts and (i) MIS.
Implementation of Khajane lead to significant improvements in the treasury management, cash management and controls
available in the PFM system.
186.
DOT’s role begins once the budget is passed and allocations are made. The budgetary allocation is made by the FD
and is intimated to the administrative department secretary and TNMC, which uploads the allocation in the software. The
department secretary then bifurcates the budget allocation to offices under his control and the allocation is entered by TNMC.
The budget authorization process is depicted below:
Figure 4: Budget authorization process
FD
HOD (200)
CCO (1000)
DDO (22000)
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187. Once the allocations are uploaded the
concerned CCOs/DDOs can start
submitting the bills to the Treasury. Each
DDO is provided with the allocation and
the budget code, based on which the
DDO can use the budget. The DDO
prepares and passes the bills manually
and submits all the required documents
manually to the Treasury for payment.
The Treasury carries out all validation
checks as mandated, checks the budget
availability, process payments and issues
cheque in favor of the party. Once the
Treasury passes the bill in the system the
budget balance is automatically reduced
and simultaneously accounts are updated for the particular head. So for all departments, where payments are made
through treasury online accounting is being done at Treasury and budget is monitored on a real time basis.
188. Khajane ensured the following controls were implemented in the field:
a. Online budget monitoring through the system, monitoring of revenue and expenditure for better management of
budget and utilization;
b. System based clearance after checking for budget availability, i.e. if there is no budget available then payments
would not be processed;
c. Monthly generation of accounts from the system which is passed on to AG (A&E) for accounts compilation;
d. All internal controls are built in the system and 17 validations are carried out automatically by the system;
e. Better cash management due to availability of budget and cash position online;
f. Elimination of systemic manipulation possible in manual system like overdrawal of funds, fraudulent
withdrawals, delay in settling claims etc.;
g. Generated Comprehensive Financial management information system; and
h. Followed FIFO basis for payments which meant that there can be no out of turn payments
189.
Currently treasury management has significantly improved to the baseline set out in the 2004 report. At that
time Khajane was being rolled out, and normally the accounts were delayed by two – three months. LOC system was still in
vogue which affected the budget monitoring and cash position of the state. Now Khajane has been implemented across the
state and it has improved the overall PFM control as outlined above. In terms of submitting reports to the AG there has been
overall improvement in the situations as now the monthly and yearly accounts are submitted within the due date. MIS
Reports like Monthly Revenue Receipts (Tax & Non-Taxes) and monthly major head-wise and scheme-wise expenditures are
available to the Finance Department. Daily RBD Position, a Weekly and Monthly expenditure statements are available to the
Finance Department for better financial management. Details of expenditure demand-wise and scheme-wise are available to
the concerned Secretaries to the Government.
190.
Until 2008 GoK used to follow “Letter of Credit
(LOC)”system in four departments (PWD, Water Resources, Minor
Irrigation, and Forestry) which were the major spending departments.
These departments would make their own payments and then used to
send payment vouchers to the AG’s Office, along with a summary or
abstract of receipts and payments classified by account head. This
system had its own pitfalls as there was always time lag between
actual payments and accounting. As the payments used to happen at
LOC System
Treasury used to give periodic authorizations
(letters of credit) to the agency banks to honor
checks drawn by these Departments up to
specified limits and departments use to issue
checks drawn on the agency banks.
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the field there was less control on the accounts submission, sometimes these DDOs would not render accounts to the AG on a
timely basis. This system also affected the monitoring of budget and cash balance on a real time basis because while
payments would have been made from the banks, the treasury systems would be updated only when the accounts are entered
at the AG level. The issue of making more payments than the budget provision or non-reconciliation of banks with the
accounts also took place. GoK has withdrawn this method of payments and now all departments are using the Treasury to
make the payments. This is a good practice which other states also need to follow to improve their budgetary and cash
management control. While this reform has really strengthened the treasury and budget control for paid bills, some
departments have resorted to unhealthy practice of carrying out more work than the budgeted amount and piling up unpaid
bills which is not reported to Treasury. To this extent the gains of this reform is negated.
191.
While Khajane generates 62-B the treasury schedule for DDO’s and 62 E for CCO’s on a monthly basis, most of
these officers do not reconcile their books of accounts with the treasury statement and the AG accounts on a timely basis
(refer para 144). Also Khajane has the functionality for making e-payments but however this functionality was not used for
making payments to the vendors. Even today vendor payments are made through cheques printed by Treasury. These are
areas which can be addressed by the DOT within a short time frame. Khajane also has issues in terms of monitoring ZP/TP
object head wise expenditure as the current functionality only addresses overall budget control on the fund balances
maintained by the ZP/TP in the public accounts. The other priority areas of computerization as highlighted in the 2004 report
like DDO computerization and computerization of capital works are being developed as part of KII.
192.
GoK carried out a functional and technical review of Khajane in 2008, where certain issues in terms of
functionalities and hardware were identified by the consultants. In terms of functionalities the following issues were
identified:
a.
Khajane was a core treasury system and did not change the way how the stakeholders like CCO/DDO were
working. The DDOs used to pass the bills manually and send them for treasury, where treasury used to enter
them again leading to possible errors in misclassification of accounts.
b.
Data redundancy and duplication is prevalent in the current system as the existing manual processes and
framework has been computerized without business process re-engineering. For e.g. even today DDO maintains
manual books of accounts, Treasury maintains another set of books in computerized database and AG(A&E)
maintains the third set of books leading to data duplication and reconciliation issues. If there is one integrated
database and DDO are provided access to the treasury portal to enter the bills, then the need for maintaining
manual books as well as carrying out reconciliation would be eliminated. Similarly if AG adopts the treasury
figures and provides the details of loan payments to be entered in the same database, then parallel records at AG
level can be avoided. So for each DDO two sets of books had to be reconciled every month which was not
followed by the DDOs and CCOs were required to reconcile the total expenditure with AG which was not
followed in most of the cases;
c.
Budget preparation and finalization was done manually and then entered into the system. Khajane I did not have
any budget preparation module; and
d.
Key areas like Investments, Loans, Guarantees, Audit compliance where maintained outside the system in other
databases and software’s which was not linked with Khajane (refer Theme Four: Improving Fiscal Assets and
Liability Management System).
193.
Due to the above issues and also security issues highlighted by the consultants GoK embarked on developing and
implementing a web based IFMIS79 which is known as Khajane II (KII). The above challenges are being addressed as a part
79
Refer annexure 9.4 on IFMIS
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of the IFMIS development. The work done by GoK in terms of preparing the vision for the IFMIS, strategy for planning and
developing the IFMIS is commendable. The KII covers all the key areas covered by an IFMIS system and has followed all
the good practices for implementing the system such as:
a.
b.
c.
d.
e.
194.
This initiative is spearheaded by a Principal Secretary level officer from the GoK supported by officers from
FD, Treasury, Departments and all other stakeholders.
As a part of the reform, GoK constituted a dedicated team to work on developing this product along with
consultants and involved all the process holders to prepare the Functional Requirements of the System (FRS).
As part of development of the FRS, GoK ensured to review the business process underlying the transaction and
have modified the processes as required to avoid duplication and enhance efficiency of the system.
A consultancy firm has been hired for system development and integration while another firm has been hired to
carry out third party audit of the development process of the software. Adequate resources both in terms of
budget as well as technical manpower have been provided by the GoK for the team.
Powers to take decision like reviewing the outputs and providing sign off has been provided to the KII team
which goes a long way on timely review of outputs and implementation.
These good practices can be internalized by other states while planning for implementing an IFMIS in their state.
195.
KII is planned to be implemented in two phases – phase I will cover 12 core treasury modules for which Software
Requirement Study (SRS) has been completed; and phase II that will cover functionalities of other departments (such as asset
liability management, budget preparation , cash management) for which SRS is being developed and expected to be
completed shortly. Overall 24 separate modules have been envisaged under KII (refer Table 32)
Table 32: Modules of KII
Bill Preparation & Submission
Non Treasury Transactions
Bill Processing
Budget Preparation
Payment Authorization
Cash Management
Budget Control
Fiscal Management
Receipts
Asset & Liability Management
Deposit Management
Expenditure Tracking
PRI Financial Management
Audit Compliance Management
Pension Management
Document Management System
Beneficiary Management/Social Security Pension
House Building Advance
New Pension Scheme
Treasury Inspection
Account And Reconciliation
Inventory & Strong Room
General Administration
Works Module
196.
As a part of the KII implementation the business process review has been carried out and the processes have been
redesigned in certain cases. Such changes in the process could necessitate the need to change the underlying rules and
manuals to align these legacy documents to the new process which the GoK intends to undertake once the overall SRS is
completed. The Treasury Code would need to be revised at the time of implementation of KII. Similarly, the Manual of
Contingent Expenditure, Karnataka Financial Code, and other relevant manuals would need revisions (also refer section on
Updating PFM Manuals and Codes).
197.
GoK has made month wise implementation plan for piloting and roll out of the software. Piloting of the core
treasury modules is expected to be done in 2 Treasuries by September 2014 (Bangalore and Dharwad) to test and stabilize the
system and then the system would be rolled out to other districts. All modules are expected to go live from FY15. Legacy
data will be transferred through e-migration for which a team is proposed to be constituted.
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198.
are:
Some of the key areas which KII addresses over the previous treasury system and which would strengthen the PFM
a.
DDO computerization: Under KII all DDOs office would be computerized and all primary level data entry
would be done in the DDO office.
b.
Budget preparation: Earlier in Khajane, budget preparation used to be manual exercise and all data used to be
sent by the Departments to FD where the data would be entered in the computer cell and the budget prepared. In
KII it is proposed that the DDO would enter the budget requirements which would be scrutinized by the CCO
and send then submitted to the FD for budget finalization. With introduction of this module the entire budget
preparation would be online.
c.
Bill preparation and submission would be through the system: The DDO would prepare the primary bills for
payment in the system which would be approved by the competent authority in the system. The approved bills
are forwarded to Treasury
and based on validation, and
budget
availability
epayments would be made.
Due to change in the process
there would only on point of
data entry in this model.
d.
One set of accounting
books: As the DDO would
enter all the data from his
office, the primary book of
accounts
would
be
maintained in the KII
system itself. DDO can shift
over to the computerized
books of account and
generate their books of account from the system. 80 This would also in future make the practice of reconciliation
between DDO books and treasury books redundant as there would be only one database in which all accounts
would be maintained. An important development which is going on in parallel is that the AG (A&E) would
have data input rights and can view the full accounts. When this module is operationalized there would be one
database for the state accounts and all reconciliation issues would be sorted out as all adjustments and
generation of reports would be carried out in KII database.
e.
Payments can be made only against those works which have been entered in the system and a unique work ID
has been generated. This would ensure budget control at work level which is not currently being followed. Also
it would address the issue of providing for one work and paying for another work which is very rampant in the
manual system.
f.
Key features planned under of Khajane II

electronic payments would be default mode of payment and GoK aims to move more than 90% of
government payments to e-payment platform
80
GoK is engaging with AG to gradually discard the manual books and move to the computerized books and records. This would be
achieved once the rollout of the software is successful.
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


includes accounting for PRIs (ZP/TP), Guarantees, Investments, Loans and Advances, Debt etc., which
would be an enhancement over the previous treasury system.
covers all other entities like SOEs, Societies, GIA institutions which operate government funds outside the
treasury system through banking channel.
links RBI, National Securities Depository Limited (NSDL), Banks, CAG and all other external
stakeholders to the system so that it can cover all government related transactions in one database.
199. The key challenges and action plan for implementation of KII is summarized below:
81
a.
GoK needs to rework the staffing structure both at Treasuries as well as the DDOs office to have adequate
skilled manpower to implement the requirements of KII. GoK needs to have HR plan for both Treasuries
and DDOs in line with KII requirements including competency mapping, reskilling and capacity building,
to operate KII.
b.
Training has to be provided to all 22000 DDO’s and 1000 CCOs most of them would be new users to such
a system. While it is easy to train the treasury staff who are familiar with Khazane, constant support and
training would be required for other users. GoK needs to prepare a change management strategy and
training plan to address this challenge. This has been recognized by GoK in their overall KII
implementation plan.
c.
As a part of the KII implementation, GoK should review the number of DDOs and rationalize the number
of DDOs.
d.
In case of data migration all the current data needs to be moved to the software as well as in certain cases
like loans, debts, and investments where data is to be entered in the system for the first time, reconciliation,
verification and validation of the data needs to be completed before it is finally entered and signed off in
the system. GoK needs to prepare a data migration strategy for each of these areas and plan to
address this challenge.
e.
GoK needs to decide on the roll out strategy of the systems for all DDOs. Either there could be a complete
roll out across all DDOs or done District by District. GoK needs to clearly define a cutoff date by which
roll out would be accomplished. After the roll out GoK needs to decide if there is a need for parallel run
of both manual and computer books in DDOs. Ideally parallel systems should not be encouraged for more
than 6-9 months and the withdrawal of manual books should be timed around the closing period of the FY.
GoK needs to issue a GO outlining clear timelines on the implementation and how the manual
books81 would be withdrawn from the DDOs.
f.
KII needs to integrate/develop the following software’s /database currently used by other departments
(most of these find mention in the FRS 2010):
i. Budget Management Information Software (would be integrated with KII);
ii. Supplementary Estimate Information System (would be developed in KII);
iii. Debt management-debt data maintained in Excel sheets (would be developed in KII);
iv. Guarantees, Investments and Loans & advances- maintained in Excel sheets by DSS (would be
developed in KII);
v. Audit monitoring system including PAC module (would be developed in KII);
vi. Cash management to produce cash forecast and support in decision making for loans and investments
(would be developed in KII);
Concurrence from AG would be required for this purpose.
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vii.
viii.
ix.
x.
Linkage to e-receipts of the revenue departments (would be linked to KII);
Linkage with e-procurement software (would be linked with KII);
Linkage to HRMS for pay bill (would be integrated with KII);
Project Management Software of PWD for generating PWD contract wise progress, payments, and
bills– needs to be integrated with KII
xi. Beneficiary Management Software – used by departments like education and health to track subsidies
needs to be integrated with KII.
xii. ULB software and GP software to be integrated with KII for reporting purposes
xiii. ZP/TP Module and build fund control in KII for PD accounts related to ZP/TP.
g.
Develop and implement a Contract Management Module: Currently contract management module is not
being implemented in any of the departments. E-procurement software stops at the time of issue of work
order, while the current Khajane starts at the time of payment of bills against these work orders. KII needs
to interlink the entire process and should develop a contract management module as a part of the
works module so that the progress of works as well the payments made to contracts can be captured
in the system. In future this module can be used for monitoring commitments and preparing budgetary
estimates for capital works.
3.3
CASH MANAGEMENT
200. An effective cash management system is another major element of overall fiscal management and is an important
requirement for avoiding unnecessary borrowing and interest costs. Therefore, it is essential that all bank accounts
are known and consolidated and that there are defined arrangements for timely electronic clearing and payment
arrangements with the bankers.
201. In India, the system of cash management is nearly uniform across states. The receipts and withdrawals are recorded
at the Treasuries and Sub Treasuries who are attached to branches of designated banks handling the state government
business (these are called “Government Business Branches and for Karnataka the designated bank is the State Bank of
Travancore). Effectively, this means maintaining a Treasury Single Account which is a pre-requisite for effectiveness of
cash planning. Information then flows from these branches to the Reserve Bank of India (RBI) at Nagpur on a daily
basis. RBI then consolidates the cash position of the state and generates a daily cash position that is shared with the
Finance Department. This system is well established though states have to rely solely on the information from RBI as
their own systems are unable to provide the data.
202. Presently, Karnataka has a comfortable cash position. It has not availed any special or normal Ways and Means
Advances from RBI since 2007/08. Cash surpluses above the minimum prescribed limit by RBI (presently Rs. 2.63
crore) are automatically invested in Government of India 14-day/91-day Government of India Treasury Bills. GoK has a
system of estimating the timing of its Open Market Borrowing by communicating an advance indicative calendar for
borrowings. The State’s policy is to go for need based borrowings and maintain only basic minimum cash surplus as
buffer. Table 33 summarizes the cash balances of GoK.
Table 33: Cash balances of GOK
Particulars/As of March 31
Total cash balance
Of which Invested in Treasury Bills
Investment of Earmarked Funds
Source: State Finance Accounts
2013
2012
10,511
6,872
3,568
2011
9,609
7,641
1,962
2010
7,667
6,872
1,444
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9,773
8.782
980
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
203. In actual practice, the Finance Department forecasts monthly and annual cash requirement based on certain
assumptions, but a scientific tool for this function has not been implemented. There are also certain items that have
a significant bearing on the cash position of the state and its management.
a. GoK does not normally allow its departments to open bank accounts, but there are instances of drawl of
money from Treasuries and depositing them in bank accounts and information of unspent balances funds
under central schemes kept in bank accounts is not readily available. There are certain implementing
agencies at the state level that receive central funds directly (i. e. these funds are not routed through the state
accounts) for program implementation 82 . These agencies, however, receive funds (including state share as
applicable) in bank accounts that remain outside the state budget. These bank accounts are neither consolidated
nor included in the cash balance position of the state. This is prevalent in almost all the states in India. Though
there has been an attempt to record the receipts and transfer of funds in the State Finance Accounts from
2012/13, the guidelines do not require collection and consolidation of the balances in bank balances of these
agencies. The State Finance Accounts contain an appendix giving details of funds transferred outside the state
budget, but these also do not provide details of the bank balances. From 2013/14, central funds will be routed
entirely through the state budget – but, the system of keeping funds in bank accounts outside the
Treasury is expected to continue. Under the new regime, knowledge of bank accounts and balances on a
periodic basis would gain significance and GoK would need to institute a system to obtain the information and
consolidate them and consider these in its cash forecasting. This is expected to be addressed by the KII where
all banking transactions are expected to be covered.
b. Unencashed cheques are not considered under the cash position of the state although cash remains in the
Treasury– this therefore has a bearing on the cash position of the state 83. There is a rising trend on account
of unencashed cheques. Information on unencashed cheques including age-wise analysis and likelihood of
encashment is not known on a consolidated basis.
c. The 2004 SFAA identified off-budget borrowings and government guarantees as factors that had a
bearing on effective cash management. The main constraint at that time was lack of an organized system to
record these liabilities and hence complete and reliable information was not available for determining the cash
balance position. This has largely been addressed by GoK and now full data on these two items are available
along with the due dates for crystallization of liability which enables GoK to plan for honoring these
obligations.
204. On one hand while GOK has cash balances on other hand there are arrears of payments and loans being taken by the
government. One plausible explanation is that due to fiscal parameters of the KFRA, arrears are not cleared while cash
balance is being maintained. This is an area which needs to be reviewed on a holistic basis.
205. Control over expenditure including its incidence over the year is also a component of cash management. GOK
currently manages cash forecast based on excel sheets. GOK could integrate the cash management with the Monthly
Programme Implementation Calendar (MPIC) to estimate the expenditure requirements for each month. The system if
implemented would be similar to the system being implemented by GOI (refer box).
Salient Features of Cash Management System in Government of India - Modified Exchequer Control based
Expenditure Management
What does this system seeks to achieve
 Greater evenness in the budgeted expenditure within the financial year, especially in respect of items entailing large
sums of advance releases and transfers to corpus funds.
82
Funds transferred directly to the state implementing agencies during 2011/12 for major schemes aggregated Rs. 7,190 crore (Source:
C&AG Report on State Finances 2011-12).
83 For detailed discussion on unencashed cheques, please see section XXX
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



Reduce rush of expenditure during the last quarter, especially the last month of the financial year.
Reduce tendency of parking of funds.
Effectively monitor the expenditure pattern.
Better planning of Indicative Market Borrowing Calendar of the Central Government.
Who is responsible for implementing the system?
 Cash Management Cell, Budget Division, Department of Economic Affairs, Ministry of Finance
 The Financial Advisor of the respective departments
How does the scheme works
 A Monthly Expenditure Plan (MEP) separately for Plan and Non-Plan is prepared, on specified format, and included as
an annex for each Demand for Grant. The MEP is drawn so that expenditure in the quarter and month of March dies not
exceed 33% and 15%, respectively both at the level of scheme and also overall Demand for Grants
 Based on the above, Quarterly Expenditure Allocations (QEA) is fixed and the departments can issue cheques only up to
this limit. Beyond this limit and carry forward of savings in the QEA require permission of Ministry of Finance
 MEA and QEA for the 4th quarter is subsumed in the revised estimates
206. GoK can consider the following action plan for cash management:
a. Carry out a study on cash management practices and the amount of cash deposited with entities outside the
treasury and options on how cash management could be made better. This study should be led by FD and can be
supported by external consultants
b. Carry out a study on cash balance maintained and how the debt scheduling is being pursued by the GOK. This
study should be led by FD and can be supported by external consultants. The cash balance and forecasting
mechanism should be linked to the debt scheduling
c. Review if the cash parked with entities outside treasury could be reverted back to the treasury
d. Develop a cash forecasting model for monitoring cash management and integrate with KII
e. Link cash management projections with the Monthly Programme Implementation Calendar
3.4
SUBSIDIES- TARGETING, ACCOUNTABILITY AND TRANSPARENCY
207.
It is not uncommon for Governments in India to provide Explicit or Implicit subsidies to disadvantaged or specified
sections of the societies. GoK provides two kinds of subsidies:
a. Explicit Subsidy: where subsidy is explicitly provided by the government as expenditure in its budget for
certain schemes.
b. Implicit Subsidy: that arise when the government is unable to recover the costs it incurs in the provision of
social and economic goods/services, which are mainly private goods/services in nature, even though sometimes
these may have extended benefits. It can be indirect, can also be in kind or take the shape of tax concessions.
Budgetary support to financial institutions, inadequate returns on investment, and poor recovery of user charges
from social and economic services provided by the government fall in the category of implicit subsidies 84.
208.
Explicit subsidies are the second largest component of development revenue expenditure in Karnataka and are about
10% of revenue receipts or expenditure. During 2012/13, GoK provided explicit subsidy of Rs. 10,709 crore (Rs. 7,390 crore
during 2011/12) which is expected to be about Rs. 14,200 in 2013/14 (BE). Such subsidies are accounted for under the
84
The principle is that Governments need to take measures such as earning an adequate return on its investments or recover cost of
borrowed funds rather than bearing these in the form of implicit subsidy
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Object Code 106 (Subsidy) and disclosure is made in the State’s Finance Accounts (Appendix 3) and also in the budget
document (Overview of the Budget). Public sector undertakings are the largest recipients of the subsidy (Rs. 8,320 crore
during 2012/13) and it is largely paid to the companies in the power and infrastructure sectors. Subsidy payments are mainly
in the areas shown in Table 34.
Table 34: Major Explicit Subsidies in Karnataka
Area
Power
Amount
(Rs. crore)
Rs. 7,050 crore
Food
Co-operation
Transport
Rs. 991 crore
Rs.1,323 crore
Rs. 385 crore
Housing
Urban Development
Rs. 280 crore
Rs.86 crore
Purpose
Financial assistance to electricity supply companies to cover loss due to
rural electrification power subsidy provided for free supply of
electricity to farmers for usage of agricultural pump sets), and
contribution towards pension
Differential cost of food grains under Public Distribution System
Waiver of overdue loans (principal as well as interest) given to farmers
Fare concession extended to students, freedom fighters, physically
challenged, etc.85
209.
GoK also provides Implicit Subsidies. These were in the order of Rs. 2,466 crore during 2012/13 (Rs. 1,897 crore
during 2011/12)86. These are subsidies that are not accounted for under Object Code 106, but are disclosed in the budget
documents (these are also disclosed in the Report of States Finances of the C&AG). For instance, a major scheme that is
considered as an implicit subsidy in the budget document and also in the audit report is the Bhagyalakshmi scheme of GoK
(2012/13 Rs. 755 crore; 2011/12 Rs. 486 crore) as it is not accounted for under code 106.
210.
Way back in 2004, the XII Central Finance Commission had recommended that states should identify expenditure
on account of implicit subsidies and make disclosure in the Finance Accounts. GoK has yet to commence this disclosure like
most of the states. Odisha is one such state that discloses implicit subsidy in the Finance Accounts, though partially.
211.
One of the key areas in the term of reference of the Expenditure Reforms Commission (ERC) is to review the
framework of subsidies87. The ERC pointed out that the current system of tracking of subsidy bill in GoK is limited to the
budget head (object code) 106 - Subsidy. However, there are a number of other items, especially in the industrial sector, that
extend other forms of support for promotion of sales, purchase of raw material etc. The ERC recommended that GoK
identifies all such schemes, irrespective of the amount, and report the total subsidy bill.
212.
The estimation of explicit subsidy also needs to be strengthened as there is significant difference between the
budgeted amount and the actual subsidy bill. For instance, original budget estimates for 2012/13 were Rs. 7,583 crore but
the actual subsidy bill went up to 10,709 crore (+41%). Similarly, for 2011/12, the actual subsidy outgo was Rs. 7,390 crore
against original budget of Rs. 6,242 crore (+18%). In the most recent year 2013/14, subsidy was budgeted at Rs. 9,314 crore
but revised to Rs. 12,391 crore (post change in government) and the actual is estimated to be over Rs. 14,200 crore (Source:
Overview of the Budget).
85
The PAC in its 13th report (December 2011) had recommended that the said subsidy be borne by the corporations within their resources
as these were earning profits and were working on commercial lines.
86 Overview of the Budget, 2014/15
87 Review the framework of all subsidies, both explicit and implicit, examine the economic rationale for their continuance and make
recommendations for making subsidies transparent and suggest measures for maximizing their impact on target population at the minimum
cost. A detailed account of the explicit and implicit subsidies in Karnataka is provided in the 4 th report of the ERC (June 2011).
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213.
The MTFP 2014/18 recognizes that the challenge lies in ensuring that these subsidies do not become a
permanent source of additional support and thereby deter these sectors from undertaking reforms. With the number
and scope of subsidy-based beneficiary oriented schemes increasing, there are demands beyond the provisions made in the
budget and most often these have to be accommodated through Supplementary Estimates. Therefore, GoK acknowledges that
expenditure on subsidies needs to be moderated in the medium to long term to make them fiscally sustainable through
improving systemic efficiencies in sectors like energy, rational cross subsidization of costs, providing incentives to sectors to
perform rather than increasing their dependence on subsidies and also effective identification and targeting of beneficiaries.
214.
Bhagyalasksmi scheme of GoK is a major scheme that administered in accordance with a well-detailed
institutional and PFM structures including tracking and reporting mechanisms. The objective of the scheme is to
promote the birth of girl children in below poverty line families and to raise the status of the girl child in the family in
particular and society in general. Under the Bhagyalaksmi scheme each child is tracked through a unique ID via a Child
Tracking System over the life of the girl-child, a 3-stage verification process, online payment of scholarship and payment
administration managed by Life Insurance Corporation of India which also provides the utilization Certificate.
215.
On the other hand, there are schemes in respect of which there is no database of beneficiaries and the subsidy
is computed based on assumptions. Hence, there are issues in targeting, accountability and reporting of these subsidies.
a. In case of the Power sector, the subsidy is calculated on an overall basis – there is no tracking based on actual
electricity consumption. The reason is that only about 25% of IP sets are metered.
b. In case of Transport subsidy, either concession is provided to a class of population or passes are issued free/on
concessional terms and the cost is borne by GoK. The claim by the road transport companies are made on the same
number of passes equally over four quarters, based on the allocation made in the budget. Full details of the number
of beneficiaries are not maintained. There is a move to capture this information through Electronic Ticketing
Machines and this should be pursued.
c. The Department of Fisheries implements 13 schemes involving disbursement of subsidy to a large number of
fishermen for various purposes. The Department does not maintain database of beneficiaries at the level of the
implementing officers and controlling officers. There is an absence of verification of manual registers, maintained in
the Taluk offices, to acknowledge the receipt of the subsidies at the time of disbursing subsidy to a beneficiary to
rule out double payments. The absence of database aggravates the risk that of granting subsidy to the same
beneficiary under the same scheme during different periods more than once (C&AG Audit Report 2011/12).
d. The Department of Sericulture makes provision for subsidy payments under the object head “059-Other
expenditure” instead of “106-subsidies”. The C&AG Audit Report 2012/13 points to grant of subsidy to ineligible
beneficiaries in Sericulture Department, and without full compliance with the guidelines in the Agriculture
Department.
216. The priorities for strengthening the targeting, accountability and transparency in subsidies could include the
following:
a. Each scheme involving subsidies should have a mechanism for specific identification of beneficiaries and a system
of tracking and monitoring to provide fiduciary assurance and should not be based only on assumptions (which can
be adopted for budgeting purposes). Departments/agencies administering schemes involving subsidies should create
web-based information system for tracking and monitoring (on the lines of the Child Tracking System of the
Bhagyalakshmi scheme) and for improved transparency. Such beneficiary tracking system should be interlined to
KII for making payments and recording the subsidies incurred under these heads.
b. Implicit subsidies should be recognized as explicit subsidies with proper provision in the budget and accounting
under appropriate budget code. Till implicit subsidies are continued, full disclosure should be made in the Finance
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Accounts as recommended by the XII CFC. The recommendations of the ERC need to be implemented and all
subsidies needs to be worked out and presented in the finance accounts.
3.5
PAYROLL CONTROLS - HRMS
217.
In 2004, GoK set a priority to computerize its payroll system and it has successfully implemented a
computerized Human Resource Management System (HRMS) as a centralized web based application. The objective
was to maintain service records of all employees and make employee payments electronically to improve controls and
efficiency over the payroll system prevalent at that time which was decentralized and manual with transaction-level controls
at the level of the DDOs and the Treasury office.
218.
Development of the HRMS commenced in 2005, was piloted across few DDOs and rolled out in a phase manner
covering few districts in each phase. The application successfully went live in Feb 2008 across the state and is presently
managed by GoK’s Department of e-Governance. HRMS has seven modules88 and presently covers all employees of the state
government, approximately 5.5 lacs, including teachers, employees of Taluk Panchayats and Urban Local Bodies, 70,000
employees of fully aided educational institutions, employees of some public sector undertakings, and about a lac Anganwadi
workers. User access to HRMS has also been provided to the State Accountant General and Karnataka Government Insurance
Department (KGID). Successful implementation of an IT based payroll system is a major achievement for GoK as
expenditure on salaries (excluding salary grant to urban local bodies 89 ) constituted about 26% of revenue
expenditure net of interest payments during 2012/1390and HRMS has improved the control environment around this
vital function due to its design features.
219.
HRMS is designed as an Integrated database for Service Register and Pay bill unlike other states that have a
Pay bill system only. This feature implies that HRMS is capable of updating service records and generating payroll as an
integrated database.
a.
Service Registers of all employees are now available in electronic form and all events pertaining to an employee
are recorded in the electronic Service Register by the designated Drawing and Disbursing Officer (DDO) and
approved by the Head of Department (HOD). Each employee is identified through a unique KGID number.
Other modules enable entering information on promotion, suspension and transfers.
b.
The Pay Bill module generates the Pay Bill Report and Pay Slips based on the leave data entered by the
DDO91. Items such as Dearness Allowance applicable globally to all employees are entered in HRMS centrally
and changes due to an event such as a promotion are system calculated as business rules are entered centrally.
Also time-based increments are automated. The electronic Service Register is directly linked to the Pay Bill
module so that for any change in the Service Register affecting pay, the change is automatically made in the Pay
Bill module.
E-payments to staff directly from treasury have been rolled out in 15 districts while in other districts the
payment is made by the Treasury to the DDO in form of cheque which is further handed over to the staff.
c.
220.
Changes to the personnel database and pay bill are made in time for generating the month’s Pay Slips under
defined internal controls.
Service Register, Pay Bill, Transfers, Promotion, Suspension, Compliant Monitoring and Reports. A detailed “HRMS User Manual” is
available (2009).
89 Salary is presently part of the grants released to the Panchayats. Salary is accounted for at the district Panchayats but not included in
state accounts.
90 C&AG, Report on State Finances for the year ended Mar 31, 2013
91 The default attendance is 100%. The DDO enters the leaves taken by the employee and the system calculates the actual days worked by
that employee.
88
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a.
The changes could be made by a designated Data Entry Operator (DEO) but requires verification by the DDO
(and HOD as per delegation). Data entered by the DEO is marked as unapproved till approved by the concerned
DDO. Changes to static data are subject to approval from the central level. No retroactive changes are permitted
– all changes are made in a current date with “date of effect” being filled up. To view or validate changes, a
draft Pay Bill is generated and is finalized once approved by the DDO. Increments are already entered by the
DDO for each employee and this can be stopped with approval of the HOD.
b.
On transfer, the Service Register of the employee is transferred from the source DDO (Transfer OUT) to the
destination DDO (Transfer IN) on the system itself. Once Transfer OUT is made, the record appears as
Unapproved at the destination and requires approval by the concerned DDO. Changes such as adding new DDO
or head of account is done centrally (at Bangalore) based on written signed request sent by the concerned DDO.
c.
Centrally, HRMS is managed by a team of two officials supported by an outsourced maintenance team
including database administrators, testers and developers (together forming the Help Desk). Exception reports
are generated and reviewed at the central level. All the above processes are detailed in the HRMS User Manual.
221.
GoK is now upgrading HRMS to the next level two to enhance its capabilities and further improve
efficiencies. The upgraded application will include features such as direct interface to employees including accessibility to
mobile platform, linking to Khajane II to do away with paper bill, and including tax details and computation. HRMS 2 is
expected to be ready for rollout in about 1 – 1 ½ years horizon – the Functional Requirement Study has been completed and
finalization of the vendor is underway.
222.
The C&AG have brought out major concerns on the data validity particularly in respect of legacy data. The
C&AG has conducted an audit of the HRMS (in 2013) and has issued its report that was tabled in the State Legislature on
February 25, 201492. The key areas of concern are:
a. Insufficient data validation procedures to weed out duplicates and errors; and
b. Not all government rules incorporated in the software by way of validation checks are automated computation
thereby allowing manual interventions – these indicate ineffective application controls
223.
There are issues, other than raised by the C&AG, that need to be addressed, preferably during upgrading
HRMS to the second level which will contribute in strengthening the PFM systems around this IT application.
a)
A partial or full payroll audit or staff survey has not yet been undertaken. . A payroll audit essential to establish
the integrity of the pay transactions and to assess the effectiveness and continuity of internal controls has not been
conducted. The State AG audits the payroll on a test check basis as part of its annual audit of a department or its
units and is limited to the units that are taken up for audit in a year. The audit is concentrated on pay fixation
aspects. The AG however does a detailed check when the employees’ case is referred to it after retirement for
fixation of pension.
b) HRMS is presently not integrated with the treasury system Khazane. Presently, the Pay bill is generated (through
the Pay bill module) and a hard copy is presented to the designated Treasury for generation of cheque/transfers.
Therefore, the functionality of online transfer of Pay bill to the Treasuries is presently not available 93. This leads to
duplication of work including the risk of possible data entry errors.
c)
A Disaster Recovery Plan (DRP) is presently not in place. A DRP is being piloted in Belgaum after which it will be
placed before the Change Request Committee and the Steering Committee for approval.
92
C&AG, Report No. 3 of 2014, Report on the General and Social Sector (cag.gov.in)
The original design included this functionality but it could not be rolled out due to infrastructural problems at the Treasuries, at that
time.
93
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d) Linkage between HRMS and preparation of Appendix B is absent (refer section on appendix B).
e)
E-Transfer of salaries presently covers only 15 districts headquarters only. For other, the Treasury issues cheques
to DDOs for distribution to the employees. This facility needs to be extended to all districts & Taluks. States such as
Uttar Pradesh, Uttarakhand and Jharkhand has achieved near 100% in terms of direct transfer of salaries to the bank
account of the employee.
224.
GoK’s current PFM systems around Payroll function fares well when benchmarked to good practices under
PEFA.
Dimension/Good Practice
Degree of integration and reconciliation between
personnel records and payroll data
Personnel database and payroll are directly linked to ensure
data consistency and monthly reconciliation
Timeliness of changes to personnel records and the
payroll
Required changes to the personnel records and payroll are
updated monthly, generally in time for the following month’s
payments. Retroactive adjustments are rare
Internal controls of changes to personnel records and the
payroll
Authority to change records and payroll is restricted and
results in an audit trail.
Existence of payroll audits to identify control weaknesses
and/or ghost workers
A strong system of annual payroll audits exists to identify
control weaknesses and/or ghost workers.
Current Status
In HRMS, Personnel database is directly linked to the payroll
as for any change in the personnel database affecting the
payroll status of an employee, a corresponding change in the
payroll is automatically done.
Required changes to the personnel records and payroll are
updated monthly, generally in time for the following month’s
payments. Retroactive adjustments are not permitted.
Authority and basis for changes to personnel records and the
payroll are clear, and an audit trail has been established –all
changes can be made through a transaction change process
through the Service Record Module – Update Basic Details
and the change is preserved.
A comprehensive Payroll audit has not been undertaken in
the past, but an IT audit of HRMS has been conducted by the
AG.
A third party evaluation of HRMS is also planned to assess
the impact of HRMS - the Karnataka Evaluation Authority is
managing the selection of the consultants, presently in the
Expression of Interest (EOI) stage.
A security and technical audit is also planned and
engagement of a consultant is expected by end-April 2014.
225.
A reform plan to further strengthen the Payroll systems should include the following actionable points. Some
of these could be taken up under development of HRMS 2 or Khajane 2.
a)
Analyze the audit findings from the C&AG report (and the results of the third party evaluation and
security/technical audit now planned) and prepare a mitigation plan. This is to ensure that deficiencies in
effectiveness of application controls and automation of government rules through validation checks are
incorporated in the development of HRMS version 2.
b) Initiate a comprehensive payroll audit for validating the database prior to migration/roll out of HRMS II: This
will include (i) a documentation check, to ensure that everyone on the payroll is appropriately documented and
authorized to receive a particular amount of pay including entitlements, and (ii) a physical verification that the
payees exist and are identified before payment. Payroll audits should be undertaken periodically to identify ghost
workers, fill data gaps and identify control weaknesses. The third party evaluation and security/technical audit
that is planned could be integrated with Payroll audit. At the time of implementation of HRMS II it would be
beneficial to validate the existing database which could be done in a phased manner and carry out migration once
the entire database is checked and validated.
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c)
Include data on sanctioned and filled posts in HRMS to enable preparation of Appendix B from the same data
source. This functionality would bring significant savings in human effort and time (Estimation of Salaries).
d) Provide web enabled interface to employees to view their master data and propose rectifications. This will help
“cleaning” the data and weeding out any inconsistencies in the legacy data.
e)
Provide interface for transfer of Pay bill electronically to Khajane. This is to do away with physical transfer of
the Pay-bill and minimize the associated risks.
f)
Roll out e-payment of salaries across all districts. Going forward, the default payment mode under Khajane 2 is
electronic and this should take care of salary payment electronically.
g) Develop and institutionalize a Disaster Recovery Plan (DRP): Efforts are already underway and needs to be
expedited.
3.6
PROCUREMENT (KTTP AND E-PROCUREMENT )
226.
GoK enacted the Karnataka Transparency in Public Procurement Act (KTPP Act) in 1999 and framed the rules in
2000. The Act came into implementation from 2000 and has been from time to time modified and enhanced with
amendments/circulars. After the enactment of the KTPP, the State Government of Karnataka started implementing the Act
meticulously. The Act has been implemented across all departments and government organizations working in GoK. The Act
mandates that all goods and services above one lakh have to be procured following a tendering process. Whenever there were
issues in implementing the Act/Rules, amendments to a particular clause of the Act or rule were issued 94. Compared to
situation in 2004 when the Act was in its initial stages of implementation, currently the understanding and implementation of
the Act by the departments have improved substantially in GoK. All departments follow the KTTP except for certain very
specific exceptions provided by the GoK like Externally Aided Projects.
227.
Generally the departments have been following the provision of Act except in certain cases where AG (Audit) has
highlighted certain unhealthy practices followed by the departments like splitting of works to avoid tender, not providing
mandated minimum time to contractors for submission of bids, and not collecting EMDs as per the rules etc. GoK needs to
carry out a systemic review of the audit reports relating to procurement and take steps to address these systemic issues.
Currently no procurement plans are prepared which can be compared with the budget estimates and the MPIC submitted for
review.
228.
Due to change in the PFM environment and lot of amendments and clarifications issued in the past 12 years it would
be prudent for GoK to review and redraft the Act and Rules taking into account, the good practices from procurement acts of
other states and GOI. Penal provisions if any for non-compliance, needs to be included in the Act. The following areas of
procurement can be added to the Act/Rules:
a. PPP model of procurement is not outlined in the Act which needs to be incorporated in the Act;
b. A separate chapter on Code of Integrity for procuring entity or bidders is to be included in Act/Rule. This would
set out the penal provision for the bidders in case the bids were won following any fraudulent/corrupt practices.
c. Penal provisions for violating the Act/rules should be included
d. Include a requirement of procurement plan entity wise for each of the item of goods, works or services to be
procured during the year to keep track on the procurement and expenditure with reference to budget estimate.
94
Some of the suppliers/contractors approached the legal forum for clarifications/decision and the same are available in the form of case
laws. So for there are 53 cases for which the judgement has been given.
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e.
Public disclosure of contracts awarded on the website.
229.
The following table provides the comparison of certain key rules in the Rajasthan procurement act compared to
KTTP which GOK can consider as a part of enhancing KTTP.
Table 35: Comparison of KTTP with Rajasthan Procurement Act
SL.NO
1.
2.
3
4
Karnataka
No detailed instruction in the Act about the
Procurement Plan to be prepared
As of now there is no provision for taking bid
security declaration form State govt.,
Undertakings, Corporations etc.
Rajasthan
Whereas in Rajasthan Act there is a detailed
instructions about the preparation and its contents.
Rajasthan Act envisages the provision for taking in
lieu of bid security, a bid securing declaration shall
be taken from Departments' of the State Government
and Undertakings, Corporations, Autonomous
bodies, Registered Societies, Cooperative Societies
which are owned or controlled or managed by the
Government and Government Undertakings of the
Central Government.
Penalty. Whoever contravenes the provisions of
this Act or the rules made there under shall be
punishable with imprisonment for a term which
may extend to three years and with fine which
may extend to five thousand rupees. So for no
evidence to show that the same has been
implemented effectively
There is no such provision in the KTPP Act
Lack of competition.- (1) A situation may arise
where, if after evaluation of bids the bid evaluation
committee may end-up with one responsive bid only,
in such situation, the bid evaluation committee
should check as to whether while floating the Notice
Inviting Bids all necessary requirements to
encourage competition like standard bid conditions,
industry friendly specifications, wide publicity,
sufficient time for formulation of bids, etc. were
fulfilled. If not, the Notice Inviting Bids should be
refloated after rectifying deficiencies. The bid
process shall be considered valid even if there is one
responsive bid.
5
No such review of performance of contractors Review of performance of Registered contractors
exists. They may consider in evolving such every year to ensure the contractor possess the
review to ensure the quality, competency of the technical competence, financial resources, necessary
contractor.
equipment to carry out the work, managerial
capability, reliability, experience etc;
6
Consider in introducing such clause and Provision of incentive for completion of work before
disclosed in the tender document in selected schedule time of completion in some important work
cases where the time is the essence for the (not all work) to get the work done in time and avoid
completion of the work..
cost overrun.
230.
Apart from changes to the Act, capacity building programs, trainings and workshops should be conducted
for staff across departments. A user guidance manual should be prepared and shared with the procuring entities.
231.
Prior to the introduction of an e-Procurement platform, procurement in GoK was carried out through a manual
tendering process. This process involved obtaining internal approval of the projects, publishing a Notice Inviting Tenders
(NIT) in several media outlets, bid submissions (voluminous sheaths of paper) by suppliers, bid evaluations by departments,
and finally, the awarding of the Contract, issuing supply order and signing of agreements. The complete process required a
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
long chain of internal authorizations and scrutiny (at times involving several departments), several visits by suppliers to
departments, and the generation of paper-based statements and evaluations.
232.
GoK introduced e-procurement through an Ordinance on the 25th of Nov. 2006. The KTPP Act was amended to
enable to include e-Procurement system in Public procurement on the 27th of April 2007. E-Procurement is aimed to enhance
transparency, accountability, reliability and responsiveness in all government procurement activities. The e-Procurement
system is a ‘Unified’ solution, i.e., a common platform used by all Government departments / agencies patronizing it. The
implementation of e-Procurement system has enabled bidders to easily navigate through Tenders published by various
government departments / agencies and efficiently submit tenders. Also, the system has enabled departments in
standardization of procurement methodologies and instant retrieval of MIS. Currently more than 200 departments and
organizations use the e-procurement platform.
233.
This project is being implemented in PPP mode, wherein private partner has invested to set-up and operationalize
the e-procurement system. The e-procurement system is hosted out of the Data Centre facility provided by Government.
Training for government officials is provided in a training set-up established by the Government. The cost for up-gradation of
IT infrastructure and provision of internet connectivity in department offices is borne by the Government. Private partner
earns revenue from this project by charging transaction fees for usage of the system. Usage herein refers to:
a. Processing of supplier registration application
b. Submission of online bids by a bidder
c. Handling of contracts online &
d. Online submission of invoices by contractors
234.
The transaction fees is paid by suppliers / contractors to GoK, which gets consolidated and after due processing is
paid to private partner for the services rendered. Payment to the contractor is done only to the extent the system get used.
This project is being implemented in Build Own Operate and Transfer (BOOT) model.
235.
Introduction of KTTP and e-procurement has increased the transparency in process of procurement there by
enhancing PFM in GoK. The following are the key benefits of the e-procurement system which is currently being followed:
a. Improvement in Transparency, accountability, efficiency, economy, fairness
b. 10% reduction in tender premium (saving approximately USD 3 billion)
c. 2 to 3 fold increase in bidders participation
d. 40% reduction in tender cycle time
e. The Earnest Money Deposit (EMD) is refunded to the bidder as soon as the contract is awarded without any
delay.
f. Cartelization and physical prevention has reduced
g. Technical sanction/approvals obtained through online work flow.
236.
The system has about 15,000 registered contractors and 4500 government users. More than 20,000 tenders valued
more than USD 15 Billion cumulatively have been published in this platform by 115 Government departments since
inception of this project. Most of the Government departments now use the platform to publish tenders valued at Rs. 5 Lakhs
(approx. 10,000 USD) and above.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Table 36: Details of progress in e-procurement
S. No.
PARTICULARS
1
Departments/Boards/Corporations
2
200708
200809
200910
201011
201112
201213
TOTAL
7
19
31
58
60
32
207
PSUS/Central Government Org.
74
972
1072
2455
0
1
4574
3
Number of Government Users
74
972
1072
2455
3138
2127
9838
4
Number of Suppliers Registered
130
1775
4420
7700
12271
9989
36285
5
Number of Tenders Published
Value of tenders Published(INR in
Crores)
No. of Government Officials & Suppliers
Trained
15
1262
4883
14166
46759
64034
131119
57
10226
25630
33554
27603
56360
153430
865
1034
2936
3803
5066
3418
17122
205
1003
1874
3966
1710
3156
11914
6
7
8
No of digital Signature issued
237.
The system has been subjected to functional and security audit by a reputed third party audit agency. The key
finding of the audit are
a. Time savings due to automation of key steps from indent management to evaluation of tender
b. Improved participation of bidders/contractors
c. Centralized registration by the bidders were strongly supported by the suppliers and user departments
d. Better governance such as generation of various reports and MIS relevant to the respective department
e. Increased accountability on Government officials due to transparent e-procurement system.
238.
The main concern with respect to employees of user departments were increase in workload post introduction of eprocurement as many departments retain the practice of evaluation and decision making on the basis of hard copy of tender
documents in addition to e-procurement. Over dependency of key staff for approval and forwarding of task was also a key
area of concern that challenged the overall efficiency of e-procurement with respect to timelines. In order to overcome the
current challenges that prevent e-procurement platform to realize its full benefits, the consultant proposed certain areas of
improvement. The significant suggestions are:
a. proactive involvement of supplier community in training initiatives,
b. encourage delegation to reduce the bottleneck of approvals, and
c. Provision of automatic alert to suppliers on status of change of key events during the bid process etc.
239.
The e-procurement system in GoK is envisaged as a unified end to end e-Procurement platform. The primary
purpose of the e-Procurement system is to facilitate automation of the entire procurement cycle from the stage of estimate /
indent creation till the payment to the Contractor/Supplier. All modules of the software have been approved for Go-live.
However, the modules being actively used are: Supplier Registration, Indent Management, e-Tendering and e-Auctions. The
modules to handle post tendering activities viz. Contract Management and Catalogue Management modules is ready but is
yet to be fully operational.
240. While e-procurement is being used by all departments, there are certain issues in the process.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
a.
b.
c.
d.
e.
f.
The current e-procurement system is only up to bid evaluation stage. Once the bid is uploaded by the vendor,
the bids are downloaded and evaluated outside the system manually. After the evaluation is completed then the
evaluation is entered in the system.
Contract management module of e-procurement, has not been implemented. Departments use their own system
for monitoring the contract progress. This is an area of concern as the contract management module was a key
part of e-procurement software and which was to be and implemented gradually in departments.
Also while all other software’s have been audited by CAG IT wing, this software has not been audited by the
AG. It would be imperative for the GoK to get an IT audit of the e-procurement software through AG office.
Even though the rules have provision for EOI, e-procurement system does not have a provision for calling for
EOI for short listing under selection of Consultancy firm.
The issue of work order is not included in the e-procurement module.
In some department/Ministries there is no provision to get the online approval from the competent authority
after a particular level. It is being obtained manually.
241. The following key actions can be considered for strengthening e-procurement:
a. A CAG audit of the e-procurement software should be conducted so that any gaps in the software could be
addressed;
b. Contract management module and its implementation should be reviewed by the government so that suitable
arrangements can be done in KII to develop this very important aspect
c. Online Bid Evaluation Process is required to be developed to reduce the manual and outside system evaluations.
d. Include issue of work order in the system or this function needs to be captured in KII.
e. Provide adequate delegation of powers as required by the departments in consultation with the DPAR.
f. Include provisions for EOI in the e-procurement system.
242.
Apart from changes to the system, capacity building programs, trainings and workshops should be conducted for
staff across departments. A user guidance manual should be prepared and shared with the procuring entities.
3.7
PUBLIC ACCESS TO KEY FISCAL INFORMATION
243.
Public Access to Key Fiscal Information is mainly through the website of the Finance Department and the
AG: Transparency will depend on whether information on fiscal plans, positions and performance of the government is easily
accessible to the general public or at least the relevant interest groups. GoK provides fiscal information to the public through
the website of the Finance Department (finance.kar.nic.in) including the budgets (and supplementary budgets), the MTFP,
quarterly receipts/expenditure and taxes collected. Audit reports and annual financial statements are available on the website
of the Accountant General Karnataka (agkar.cag.nic.in). The major enabling legislations for public disclosures are briefly
discussed in the box below.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Legislation for Fiscal Transparency in GoK
The Right to Information Act (RTI Act) - GoK has implemented the RTI Act, in order to promote transparency and
accountability in the working of every public authority. Primarily, the Act empowers all citizens to have the right to
information, and all public authorities to sou moto publish minimum prescribed information and to appoint Information
Officers. The Karnataka State Information Commission has been constituted under the RTI Act headed by a State Chief
Information Commissioner supported by a maximum of Ten State Information Commissioners who exercises powers as
prescribed in the RTI Act 2005 mainly to receive and enquire into complaints, guide public authorities about the
implementation of the Act. 33 departments of GoK have appointed Public Information Officers and published the
minimum information on their websites. A time period of thirty days has been prescribed for providing information
requested under the Act.
The Karnataka Fiscal Responsibility Act - Public disclosure requirements have been significantly enhanced through
the KFRA which requires the State Government to ensure greater fiscal transparency and minimize secrecy in the
preparation of the annual budget. The key disclosure requirements mandated are –

GoK to publish a half-yearly report which shows whether it is on track in achieving its targets and, if
not, what remedies it will take;

Key fiscal information, e.g., contingent liabilities from guarantees, off-budget borrowings through
Special Purpose Vehicles, tax arrears, tax expenditures, losses through public sector entities, expenditure
arrears of major works and contracts, and subsidy payments; and Significant changes in the accounting
standards, policies or practices that affect the computation of fiscal indicators.
Karnataka Ceiling on Government Guarantees Act - requires GoK to place before the Legislature a comprehensive
report on the liabilities that the State may incur in future, if the State fails to meet the contractual obligation stated in the
performance guarantee. Guarantees, other than Performance Guarantees, are disclosed in the annual budget
documentation and the Finance Accounts.
Karnataka Transparency in Public Procurement Act, 1999 – All goods and services of Rs. 5 lacs and above are to
be procured by inviting Tenders through the electronic platform
244.
The PEFA framework lists six elements of information to which public access is essential and GoK disclosure
of key fiscal information has been benchmarked against these elements and also against the position assessed in the 2004
PFMA. GoK makes available four out of the six essential elements for public disclosure – details of contracts awarded
and budgetary allocation to primary resource/delivery units are not appropriately publicized and the public can get this
information only under the RTI Act.

Annual budget documentation: (Benchmark: A complete set of documents can be obtained by the public through
appropriate means when it is submitted to the Legislature):
The Karnataka Budget Manual prescribes the “budget literature” required to be presented before the state
Legislature. Additionally, the KFRA requires GoK to lay the Medium Term Fiscal Plan before the Legislature along
with the annual budget. Traditionally, documents are deemed to be publicly disclosed when they are laid before the
Legislature. Full budget documents when presented to the Legislature are also available to the public in electronic
form on the website of the Finance Department. This is an improvement since 2004 – as at that time only the
Overview of the Budget and Budget Speech were accessible on the website and not the full budget. Printed copies
continue to be available with some difficulty. Supplementary Budgets are also available to the public once it is
passed by the state Legislature. The set of disclosures compares well with the PEFA framework.

In-year budget execution reports: (Benchmark: The reports are routinely made available to the public through
appropriate means within one month of their completion):
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
While detailed in-year budget execution reports are prepared, these are made available to the public with a time lag
of one to two months which is slightly delayed in comparison to the benchmark. Details are provided below:
i. Reports in respect of tax and non-tax revenue collected and receipts and expenditure (at a glance)
along with deficits as percentage of GSDP compared to the budget estimates are published on a
quarterly basis on the website of the Finance Department. The information is usually available within
2- 3 months of the close of the quarter. However the last quarter report is not normally published.
ii. Monthly Accounts at a Glance95 compared to budget estimates along with fiscal indicators and Monthly
Civil Accounts which discloses detailed head wise figures are published on the website of the PAG
(A&E) Karnataka. The latter report details the budget allocated, actual receipts and expenditure both for
the current month and progressive expenditure. Normally these reports are finalized and publicly
available with one to two months’ time lag.
iii. Mid-year review of state finances (half-yearly) as mandated by the Section 6(2) of the KFRA is prepared
by the FD and reviewed by the FMRC and then placed before the Legislature within 2 months from close
of the half-year and hosted on the website of the Finance Department.

Year-end financial statements: (Benchmark: The statements are made available to the public through appropriate
means within six months of completed audit).
Year-end financial statements comprise of the State Finance Account and Appropriation Account and are made
available to the public after they have been audited by the C &AG and placed before the Legislature. Full copy of
the audited financial statements is available, in electronic form, on the website of the C&AG/AG Karnataka. In
recent years, the audited financial statements are available to GoK within six months from close of fiscal year and
made public within 3 months of completed audit in the next session of the Legislature (refer Table 37 ) and so meets
the benchmark. This is commendable and is an improvement since 2004 both in terms of easy access to the public
and completion of audit/ placing before the state Legislature. In 2004, the audited accounts were placed before the
Legislature usually after one year from close of financial year but not in the session immediately after receipt of
audit accounts.
Financial Year
Table 37: Public availability of year-end financial statements
Date of signing by the C&AG
Date of placing before
Months taken to place report before
Legislature
Legislature after completed audit
2012-13
Sep 14, 2012
2011-12
Sep 26, 2011
2010-11
Nov 30, 2010
2009-10
Source: Karnataka Legislative Assembly Secretariat

Dec 10, 2012
Dec 12, 2011
Feb 25, 2011
3
2½
3
External audit reports: (Benchmark: All reports on government consolidated operations are made available to
public through appropriate means within 6 months of completed audit).
Full text of all audit reports issued by the C&AG are available on the website of the C&AG (www.cag.gov.in) and
the AG Karnataka (www.agkar.cag.gov.in) after the reports have been placed before the state Legislature, and are
also available as a priced publication. Usually six types of audit reports are issued by the C&AG covering the
government’s operations (refer Table 38 ). Reports are therefore available to the public within six months of
completed audit i.e. actually available within 1-2 months of completed audit; and hence meets the benchmark.
Table 38: Public availability of State External Audit Reports in Karnataka
Audit Report
95
2012-13
Date of
Date of
2011-12
Date of
Date of
2010-11
Date of
Date of
2009-10
Date of
Date of
The Accounts include revenue expenditure and deficits; capital expenditure, deficit financing, monthly trend of revenue and expenditure
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
1. State
Finances
2. Civil
signing
by
C&AG
Feb 5,
2014
NA
placing
before
Legislature
Feb 19,
2014
NA
signing by
C&AG
Jan 22,
2013
NA
placing
before
Legislature
Feb 14,
2013
NA
signing by
C&AG
Feb 27,
2012
Feb 27,
2012
NA
3. General
Feb 5,
Feb 25,
Jan 22,
Feb 14,
and Social
2014
2014
2013
2013
Sector
(GSS)96
4. Economic
Feb 5,
Feb 19,
Feb 11,
Feb 14,
NA
and
2014
2014
2013
2013
Revenue
Services
Sector
(ERSS)
5. Public
Feb 24,
Feb 26,
Feb 11,
Feb 14,
Feb 27,
Sector
2014
2014
2013
2013
2012
Undertakin
gs
6. Revenue
Jan 27,
Feb 19,
Jan 30,
Feb 14,
Mar 14,
Receipts
2014
2014
2013
2013
2012
7. Local
Not
Not issued Not issued Not Issued
Jul 13,
Bodies
issued
2012
Source: Karnataka Legislative Assembly Secretariat and respective report
placing
before
Legislature
Mar 30,
2012
Mar 30,
2012
NA
signing by
C&AG
Feb 1,
2011
Feb 25,
2011
NA
placing
before
Legislature
Mar 14,
2011
Mar 14,
2011
NA
NA
NA
NA
Mar 30,
2012
Feb 11,
2011
Mar 14,
2011
Mar 30,
2012
Jul 27,
2012
Mar 1,
2011
Jun 23,
2011
Mar 14,
2011
Dec 7,
2011

Contract awards: (Benchmark: Award of all contracts with value above approx. USD 100,000 equiv. are published
at least quarterly through appropriate means).
GoK has adopted e-Procurement system as mandated in the KTPP Act and has made it mandatory for all its
departments and organizations to procure goods and services or award construction works exceeding Rs 5 lacs each
on the e-Procurement portal97. Accordingly, all tenders and e-Auctions are published on the e-Procurement portal.
Details of contracts awarded, however, are not made public in any medium and this information can be
accessed by the public through RTI.

Resources available to primary service units: (Benchmark: Information is publicized through appropriate means
at least annually, or available upon request, for primary service units with coverage in at least two sectors, such as
elementary schools or primary health clinics.
Information on resources available to the primary service units particularly the schools and hospitals is not
disseminated to the public at large. Such information may be disclosed by some schools or hospitals on an individual
basis locally and such information can only be accessed under the RTI Act.
245. GoK discloses four of the six essential elements to the public as benchmarked under PEFA.
Dimension/Good Practice
Public Access to key fiscal information
The government makes available to the public 5-6 of the 6
listed types of information
Current Status
GoK makes available to the public four out of the six
elements of information listed in the PEFA framework.
The GSS and ERSS reports were earlier issued as one report – The Civil Report. From 2011-12, the Civil Report was segregated into
GSS and ERSS Reports
97 www.eproc.karnataka.gov.in. Please see section for detailed discussion on procurement
96
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
246. Summary of issues
a. Contracts awarded are not available in the public domain
b. Information on resources available to the primary service units is not disseminated to the public at large
247. The priorities for the 2014 PFM Reform Action Plan could include a. GoK to publicly disclose information on contracts awarded on the e-Procurement website. Initially this can be done
for contracts over $ 100,000 and later on mandated in the KTPP Act for full disclosure.
b. Budgetary allocation to primary service units particularly the primary schools and primary health centers should be
publicized on the website of the Education and Health Departments.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 4. THEME FOUR: IMPROVING FISCAL ASSETS AND LIABILITY MANAGEMENT
SYSTEM
4.1
GOVERNMENT GUARANTEES
248.
GoK provides substantial Guarantees for borrowings of various public sector entities. Guarantees are in the
nature of contingent liabilities and the issuing government is called upon to pay when a guarantee is invoked. Aggregate level
of guarantees issued and outstanding in GoK is summarized in Table 39. In terms of value, the maximum guarantees have
been provided in respect loans of the cooperative institutions and the state financial corporations. There has been no
invocation of guarantees during the past few years.
Table 39: Aggregate Guarantees Issued and Outstanding
Aggregate Guarantees issued
Guarantees Outstanding (including interest)
Source: State Finance Accounts
2012/13
14,306
6,688
2011/12
13,262
6,515
(Rs. in crore)
2010/11
19,150
6,618
249.
The legal basis for issuing Guarantees emanates from the Constitution of India. Article 293 of the Constitution
of India permits the states to give guarantees within fixed limits. In 1999, GoK enacted the Karnataka Ceiling on Government
Guarantees Act (effective from April 29, 1999). The Act provides that the total outstanding government guarantees as on the
first day of April of every year shall not exceed 80% of the state’s revenue receipts of the second preceding year as in the
books of the AG. The KFRA draws upon the provisions of the Guarantee Act and mandates its compliance. This has been
adhered to by GoK since 1999 and presently (April 2013) the outstanding is about 11% of the prescribed base down from
14% a year hence (MTFP 2014-2018). In Karnataka, all guarantees require the concurrence of the Finance Department which
issues the GO for giving the guarantee and also authorizing the official who will sign the guarantee deed. Guidelines in
respect of “aspects to be reviewed while recommending cases” has been prescribed by GoK through circular of 2003 that
requires the concerned Administrative Department to review each case in terms of public interest, credit worthiness of the
borrower, financial viability of the project and the terms of the guarantee.
250.
There is a system of reporting and disclosures in respect of guarantees. A summary position of guarantees given
by GoK is given in “Overview of Budget”, details are provided in the Finance Accounts as Statement No. 9 in accordance
with the disclosure requirements prescribed by the Ministry of Finance, GoI (2010) and discussion on guarantees is also
included in the MTFP. Disclosure requirements relating to guarantees in the accounts of the governments (Union and States)
have now been specified in the Indian Government Accounting Standards - 1 (IGAS) notified by the Central Government in
December 2010. GoK is in compliance with the disclosure requirements.
251. The 2004 PFMA identified a number of shortcomings in the PFM framework governing Guarantees.
a. The system for recording and reporting of guarantees was weak. There were no systems for this purpose.
b. Guarantees were approved by the Finance Department; however, the Finance Department did not sign the
guarantee itself.
c. The concerned departments signed the guarantees, maintained data on them and monitored the performance of
the entities to which guarantees have been issued. The Finance Department received information on the
guarantees only when there was a possibility of default and payments needed to be made.
d. Reporting of guarantees was based on ad hoc information collected by the Finance Department from the various
departments. Although this ad hoc system produced information for annual reporting, given the extensive
volume of guarantees, the system needed to be strengthened.
| Theme Four: Improving Fiscal Assets and Liability Management System
90
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
252.
The 2004 PFMA recommended several measures to strengthen the system. The Finance Department needed to
countersign all guarantees, and maintain a central system to record the various guarantees made and discharged. A system
for regular monitoring of the financial performance of the entities to which the guarantees were provided was needed to
enable early follow-up action. A systematic methodology for evaluating the risks of these guarantees, both for monitoring
and reporting purposes was recommended to be done as per the Reserve Bank of India’s Report of the Group to Assess the
Fiscal Risk of State Government Guarantees, July 2002.
253.
GoK has carried out reforms particularly in establishing a credible guarantee database. It has institutionalized
the recording and reporting of guarantees in the Asset Liability Monitoring Cell 98 (ALMC) under the Finance Department’s
Directorate of Pensions, Small Savings, and Asset Liability Monitoring. ALMC collects data from the departments on a
yearly basis and updates the guarantee database (or at lesser interval as and when information is provided). As of now, the
guarantee database matches with the State Finance Accounts compiled by the AG (A&E). The ALMC also carries out
balance confirmation with some of the lender institutions who are responsive, but not with the department or entity which
takes the guarantee. While details are available with the ALMC in respect of Guarantees issued after 2004, some details of
guarantees issued before this period are not readily available. The guarantee database is currently being maintained in excel
spreadsheets and the system is working sufficiently well to meet the current requirements. Cleaning up of the database was
done in 2012 by deleting guarantees for which the loans were repaid which resulted in reducing the maximum amount
guaranteed from Rs. 19000 crore to Rs. 13000 crore.
254.
The current study identifies structural and other issues to strengthen the PFM arrangements in respect of
Guarantees.
98
99
a.
GoK recognizes the need to evolve a comprehensive State Guarantee Policy (MTFP 2013-17) similar to the policy
of the GoI. At the Central level, guidelines are imbibed in a Guarantee Policy supplementing the Government
Financial Rules, 2005 (chapter 11). The Government of Gujarat’s Guarantee Order of 1988 is another instance of a
comprehensive document.
b.
GoK needs to operationalize its Guarantee Reserve Fund. This was set up in 1999-2000 with a corpus of Rs. 1
crore pursuant to the recommendations of the XI Finance Commission. The objective of the Fund is “to provide for
a sudden discharge of State’s obligations on guarantees”. Besides the original contribution, there has been no further
transfer to the Fund which is lying dormant. The C&AG reports that Guarantee Fee of Rs. 714 crore have not been
transferred to the Reserve Fund and a part of it was utilized for payment of financial relief, on building expenses and
investments99.
c.
Guarantee Commission is not recovered but adjusted through book entries. The Guarantee Act mandates a charge
of guarantee commission (minimum 1%) and prohibits waiver of the guarantee. As of March 2013, guarantee
commission receivable was Rs. 360.35 crore. Each year, GoK indirectly adjusts the guarantee receivable either as
subsidy or equity to the same entity that was to pay the guarantee commission – such amounts were of the order of
Rs. 127 crore and Rs. 69 crore during 2012-13 and 2011-12, respectively disclosed in the State Finance Accounts.
This has been reported by C&AG as non-compliance with the Guarantee Act.
d.
The current database could be further strengthened. It does not capture information such as date of expiry of
guarantees which facilitates tracking the due date for obtaining no dues from the concerned lending institutions for
deleting the guarantee from the outstanding; a process that presently takes considerable time. The database
maintained on spreadsheet does not provide advance automatic “flags” on expiry date of the guarantee, arrears of
guarantee commission etc. and for which an application would be needed. GOs of FD conveying its concurrence to
Vide GO No. FD 25 Savula 201, dated 21.04.2010
C&AG, Report on State Finances, March 31, 2013
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Guarantees is not copied to ALMC directly leading to delays in recording of guarantees. The CAG in its report on
State Finances (2011-12 and 2012-13) has observed that the amount of guarantees does not include the guarantees
given by GoK to some power utilities ((Bangalore Electricity Supply Company Limited (BESCOM) 100, Gulbarga
Electricity Supply Company Limited (GESCOM) and Chamundeshwari Electricity Supply Corporation Limited
(CESC)) for loans taken by the latter (“and hence the statement on guarantees is not complete and reliable”). The
ALMC, however, does not concur with this observation and hence there is a need to reconcile this with the AG. The
above steps are expected to strengthen the database and migration to the proposed Asset Liability Management
Module in the 2nd phase of Khajane II would be easier.
e.
A system of tracking, recording and reporting of Performance Guarantees has presently not been established.
The Karnataka Guarantee Act allows GoK to issue Performance Guarantees (PG) “in the interest of development of
infrastructure”. The PGs issued by GoK is presently not captured in the database maintained by ALMC. The statute
requires that GoK will place before the state Legislature a comprehensive report on the liabilities that the State may
incur if the obligations in the PG are not met. This is an area which needs to be reviewed and if any PGs are given it
needs to be updated in the database.
f.
Staffing at ALMC is an issue, as there are no core finance professionals or staff from Finance Department in this
cell. While the ALMC is recording and reporting on guarantees, investments and loans & advances), a more strong
linkage with and frequent reporting to FD would improve interactions so that issues are discussed and resolved more
frequently. The available staff from DSS requires training including a better understanding of corporate financial
statements.
255.
GoK’s PFM systems around issuance of guarantees match well when benchmarked to good practices under
PEFA.
Dimension/Good Practice
Systems for issuance of guarantees
Issuance of guarantees are made against transparent criteria
and fiscal targets, and always approved by a single
responsible government entity.
Current Status
GoK’s criteria for issuance of guarantees are documented in
a 2003 circular and needs to be updated and issuance of a
State Guarantee Policy is desirable. Fiscal targets are
prescribed through legislation and adhered. The delegated
authority for issuance of guarantee is vested solely in the
Finance Department.
256. The following priorities have been identified for 2014 PFM Reform Action Plan.
a.
Develop a Government Guarantee Policy. The MTFP 2013-2017 already recognizes the need to develop such a
policy, on lines of the policy issued by Government of India. This is an initiative which is in the right direction and
must be done expeditiously. A guarantee policy provides direction relating to consideration in reviewing the
guarantee proposals, channels of submission of proposals and the decision levels, execution of guarantee agreements
and their monitoring, recording and reporting and rules in respect of guarantee fees and maintaining a Guarantee
Redemption Reserve. The new policy should also include norms for risk profiling of the guarantees at the time of
appraisal of the proposal and periodically post-issue of the guarantee.
b.
Operationalize the Guarantee Redemption Fund. This is a requirement of the XIII Finance Committee and has
been echoed by the C&AG. The State Public Accounts Committee has also recommended that GoK operationalize
the Guarantee Redemption Fund and transfer the guarantee fee received to the fund.
100
The audited financial statements of BESCOM disclose payment of Guarantee Fee to GoK in 2011-12 and 2010-11. However, the
financial statements do not disclose which loans are covered by government guarantee
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c.
As a corollary to the above, GoK should revisit its policy of book adjusting guarantee commission so as to be in
compliance with the Guarantee Act.
d.
Further strengthen the database and widen reconciliation efforts: Reconciliation efforts are underway and should
be continued - system of obtaining no dues/clearance certificate from the concerned lending institutions for deleting
the expired guarantees from the outstanding list and clearing old items should be strengthened. The database should
include fields for capturing information such as due date of guarantees (other than for continuing guarantees).
Confirmation of balances with the beneficiary and lending entities needs to be carried out every year. All GOs by
FD authorizing the issue of guarantees must be directly copied to the ALMC. IGAS 1 (ibid) requires disclosure of
PGs given by state government for fulfillment of contracts and if this is to be complied with, a database would be
required to be maintained.
e.
GoK has entrusted ALMC the work of tracking government investment under loans and shares, and but not
guarantees. The GoK needs to amend the GO to include maintenance of guarantees by the ALMC.
f.
Resource constraints in ALMC should be addressed through training, and appointing finance professional The
ALMC staffing should be reviewed by the FD, which needs augmentation with finance professionals for short
tenures and staff from FD. The ALM cell should be led by the staff from FD and the current officers can be trained
for carrying out their activities with more focus on fiscal and financial management of corporate form of business
and also IGAS disclosure requirements.
g.
Develop and incorporate the guarantee database in KII. The Functional Requirement Specification of Khajane II
recommends building capability in the application to capture all details of guarantees. This is a step in the right
direction and should be pursued. All legacy data needs to be incorporated in KII. In case implementation of the
Asset Liability Module in Khajane II is in the distant future (more than 2 years), then an suitable application
compatible to KII for recording and reporting of guarantees (along with loans and advances and investments) could
be developed for use by the DSS (in contrast to the present system of maintaining database on spreadsheets).
4.2
OFF BUDGET B ORROWINGS
257.
State governments in India often float companies/corporations (Public Sector Undertakings – SOEs) or Special
Purpose Vehicles – SPVs) to implement programs outside the state budget.
Ideally, funding for these programs should be arranged outside the state
Off-Budget Borrowings
budget i. e. the funds should not have a “contingent effect” on the state
Liabilities via state agencies that have a
budget. However, due to the social and development nature of the program
potential risk on state finances, including
debt sustainability and is a component of
being implemented by these state owned agencies and more often an
contingent liabilities of the state
absence of revenue streams or long gestation periods, funds raising outside
the state budget is difficult. To support such SOE/SPVs some form of
“credit enhancement” is needed – one such instrument is to provide a
sovereign guarantee to the lenders. This implies that although the funds are available to the SOE/SPV, the state government
has often to provide budgetary support to pay the interest or repay the loan when such companies are unable to repay such
loans from their own funds. Expenditure met out of these borrowings or corresponding assets created are not part of state
budget or accounts.
258.
Significant off-budget borrowings mean that the budget is not comprehensive. Recognizing this, the 2004
PFMA documented the steps being taken or planned by GoK to control OBB:
a. the KFRA required off-budget and on-budget borrowing to be consolidated in determining the achievement of
fiscal targets i. e. OBB are considered part of the state’s own borrowings;
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b.
c.
the annual quantum of OBB had started to drop; and
GoK planned to phase out its OBB by 2006-07
259.
Over the years, GoK has curtailed its OBB and has reduced the outstanding and its interest costs – in fact there
were no fresh OBB during 2008-09 to 2010-11 (see Table 40). Overall, the ratio of fiscal liabilities including OBB is within
the limit prescribed by the XIII Finance Commission.
Table 40: Off Budget Borrowings in SOE/SPVs of Government of Karnataka
2012-13
2011-12
2010-11
1. Outstanding as the beginning of the year
1917
2056
2749
2. Raised during the year
18
512
-3. Repayment during the year
480
665
689
4. Outstanding as at the close of the year
1455
1903
2060
5. Interest Paid during the year 101
166
184
202
Source: C&AG, Report on State Finances for items 1-3 and 5; item 4 is derived
2009-10
3747
-984
2763
569
(Rs. in crore)
2008-09
6222
-640
5582
595
260.
Off Budget Borrowings are adequately disclosed. Details of OBB are disclosed in the Budget documents (planned
for the budget year), the MTFP and the Mid-Year Review Report under KFRA and a discussion is included in the C&AG’s
annual Report on State Finances.
261.
GoK is the leading state in India to include OBB for the purpose of calculating fiscal deficit. The KFRA
mandates that OBB would be treated as the state’s own borrowings for arriving at the fiscal deficit and that interest on such
OBB met by the government would be considered as revenue expenditure. However, the definition of “total liabilities” in
KFRA presently does not include OBB – this need to be done through an amendment of the Act (see Chapter 3 on Fiscal
Responsibility Legislation) – in actual practice, GoK considers OBB towards computation of Total Liabilities. An
amendment to KFRA to include OBB in total liabilities is already underway.
262.
Although GoK has not fully eliminated OBB, yet it has taken several steps to curtail the outstanding, follow
prudent accounting norms and improve transparency all in compliance with the KFRA. Key measures taken by GoK
are -
101
a.
Fiscal policy in respect of OBB is provided in the MTFP. In MTFP 2009-13, GoK committed to eliminate OBB
from 2008-09 “to ensure transparency in fiscal performance”. For three successive years 2008-09 to 2010-11,
no fresh OBB were raised. In MTFP 2011-15, GoK decided to allow OBB in a limited manner, but maintaining
at the same level as at the close of 2009-10 “as the State Government was well advanced on the fiscal
consolidation road map set in the FRA” and based on the recommendations of the XIII Finance Commission. In
MTFP 2012-16, the limit was fixed at Rs. 3,249 crore. In 2011-12 the amount raised through OBB was lower
than the repayments and in 2012-13, the OBB was restricted to a small amount of Rs. 18 crore (see Error!
eference source not found. above). Due to availability of fiscal space, GoK allowed fresh OBB of Rs. 1,250
crore during 2013-14 to the three water resource management companies. For 2014-15, GoK has planned to
raise Rs. 2,335 crore as OBB and Rs. 183 crore are due for repayment.
b.
Earlier interest on OBB was included in capital expenditure even though there was no corresponding build-up
of assets in the state accounts that resulted in understatement of interest expenditure and overstatement of
Excluding releases made to urban local bodies for servicing of debt
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capital expenditure / revenue surplus and this was not in compliance with the KFRA 102. From 2011-12 onwards,
interest on OBB is now appropriately included in revenue expenditure.
263.
While GoK follows good practice in respect of disclosure of OBB the following issues needs to be addressed.
a.
The C&AG has reported release of budgetary funds despite the SOE/SPV having surplus liquid funds available:
Krishna Bhagya Jala Nigam Ltd. and Karnataka Road Development Corporation had cash balances of Rs. 1,246
crore and Rs. 791 crore, respectively as at March 31, 2013 mainly on account of funds released during 2008-09 and
2011-12 for servicing of debt, but not utilized 103. This is an issue from the cash management perspective of the state.
b.
Debt servicing met by GoK for city corporations are not considered as OBB. GoK makes provision in its budget
for debt servicing on account of borrowings of the City Corporations - this has been included for the first time since
2011-12. Apparently these are not considered as OBB, even though the obligations are met by GoK, as except for
provision in the state budget, the amount of loans is not disclosed. These OBB of the ULBs are also not considered
in the computation of Total Liabilities. The amount towards debt servicing of ULBs provided in the state budget is
briefed in Table 41.
Table 41: Provision of Debt Servicing in State Budget for Urban Local Bodies
Debt Servicing costs of ULBs provided in state budget
2014-15
408
2013-14
517
2012-13
375
(actual)
(Rs.in crore)
2011-12
279
(actual)
Source: Government of Karnataka, Detailed Estimates of Expenditure Vol 2
264. The following priorities have been identified for 2014 PFM Reform Action Plan.
a.
Going forward, GoK needs to ensure that budgetary funds directed towards debt servicing should be utilized for
the intended purposes by the SOE/SPV. And, GoK to assess the uncommitted financial resources available with
the SOE/SPV prior to release of funds for debt servicing.
b.
GoK to make adequate disclosure of OBB on account of ULBs in the budget document including MTFP and
include the amount outstanding for the computation of Total liabilities (in the same manner as done for
SOE/SPVs).
102
The KFRA stipulates that interest payment by Government towards borrowings by PSUs and Special Purpose Vehicles (SPVs) and other
equivalent instruments where liability for repayment is on Government, shall be treated as revenue expenditure
103 C&AG Report on State Finances, 2012-13
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4.3
INVESTMENTS IN GOVERNMENT COMPANIES
265.
There is a ten-fold increase in total investments between March 2002 (2004 PFMA) and March 2013. GoK
makes investments in government companies and corporations, other companies and in entities such as regional rural banks
and cooperative institutions/local bodies. Investments may emanate out of conversion of loans to equity or providing funds to
state companies to honor their commitments to financial institutions. This forms 35% of GoK’s total asset base (Statement
No. 1, State Finance Accounts 2012-13). The book value of investments over the years is summarized in Table 42.
Table 42: Book Value of Investments of Government of Karnataka
Type of Investee
2012/13
Stock
2,154
21
45,369
1,562
358
Statutory Corporation
Regional Rural Banks
Government Companies
Joint Stock Companies
Cooperative Institutions and
Local Bodies
Total
49,464
Source: State Finance Accounts Statement No. 14
Flow
121
5,056
5,177
2011/12
Stock
Flow
2,032
255
22
2
40,313
5,594
1,562
5
366
12
44,295
5,868
Stock
1,777
19
34,716
1,557
352
(Rs. in crore)
2010/11
Flow
104
5,369
450
1
38,421
5,924
266.
Information on Investments is provided in the budget and the financial statements. Summary information on
investments is provided in the “Overview of Budget” and a detailed statement of investments of the GoK is included as
Statement No. 14 of the Finance Account of the state. All proposals of investments require the prior concurrence of the
Finance Department.
267.
The 2004 PFMA identified the following areas of concern in respect of PFM environment governing
Investments, particularly in recording and reporting.
a. Data on investments was maintained in individual departments and there was no central source that had the
responsibility for recording and monitoring these investments or a system to record them.
b. Information required about these investments for year-end reporting in the Finance Accounts was obtained in an
ad hoc manner from various departments.
c. Systems for recording of investments were weak apparent in the differences that exist between data in the State
Government’s accounts and those in the corresponding entities’ accounts.
d. Investments in public sector entities were classified as capital expenditure rather than capital transfers.
e. Furthermore, they were reported at their invested values instead of their true value. In many cases, public sector
entities had significantly eroded net worth, and in some cases, exhibited negative net worth.
268.
GoK has strengthened and institutionalized the system of recording and reporting of its Investment portfolio.
Maintenance of database in respect of Investments has been centralized with the ALMC of DSS since 2005. The ALMC
collects annual information on investments from the respective investees in predefined form and updates its database,
presently maintained on spreadsheets.
269.
Accounting and controls in this area has not kept pace with the growth in the investment portfolio.
Reconciliation of investment data between Finance Accounts and that provided by the investee-institution remains a concern.
Material differences are pending due to both due to identification and reconciliation issues: As of March 2013, investment
had been reconciled between the investee-institutions and the Finance Accounts for an amount of Rs. 2013 crore (Rs. 1774
crore as of March 2012) being just 4% of the total portfolio. There is a net difference is Rs. 13,590 crore as of March 2013
that has increased over the difference of Rs. 12057.20 crore as of March 2012 which needs to be reconciled - this difference
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is over 27% of the total investment – the figure in Finance Accounts exceeds that reported by the investee-institutions (details
in Table 43). There are cases where the amount reported in the Finance Accounts exceeds that reported by the institution (Rs.
15,657 crore) and vice versa (Rs. 2,067 crore) and some of these differences are material and pertain to the past several
years104. The resultant effect of these differences is two-fold – one, the Finance Accounts may not exhibit the correct
investments of GoK and two, this could impact the dividend to which GoK is entitled to.
Table 43: Reconciliation issues in Investments
Entity
As per DSS
Working Statutory Corporations
Regional Rural Banks
Working Government Companies
Non-Working Government Companies
Joint Stock Companies
Cooperatives
Total
Finance
Accounts
2012-13
Net Difference
between Finance
Accounts and
DSS
(Rs. in crore)
Excess of
DSS over
Finance
Accounts
Excess of
Finance
Accounts
over DSS
1,594
2,152
560
733
173
22
21
(-) 1
-
1
32,449
45,307
105
14,582
1,724
84
63
(-) 21
16
5
1,726
1,562
(-) 164
-
164
0
358
358
358
-
35875
49,464
13,589
15,657
2,067
12,857
Source: Directorate of Small Savings, Finance Department GoK
270.
The reasons for the differences identified point to the need for a complete revamping of identification,
accounting and reporting of investments by all stakeholders – GoK, AG and the investee-institution. The major
difference pertains to GoK’s own working companies.



Often, government orders on investments are issued near to the close of the financial year. So while the transaction
is accounted by the AG in the Finance Accounts, action may be wanting from the investee-company.
Government order is issued under minor head 190 or 211 – Investments (under major head pertaining to Capital
Outlay) which reflects the intent of GoK to invest in the capital of the investee. This, however, may not be
considered as investment by the investee-company but rather as capital grant in their books. For instance, in
Karnataka Housing Board and Rajeev Gandhi Rural Housing Corporation for amounts released by GoK under minor
head 190 for repayment of HUDCO loans or Karnataka Police Housing Corporation for funds released by GoK for
construction of residential quarters under AHS III scheme under Major Head 2055 and Minor Head 211 – in these
cases the investee-companies contend that these amounts are construction grants or capital expenditure and not share
capital.. These transaction are recorded in the state accounts by the AG based on the government order issued
without ascertaining whether the investment has been allotted by the investee-company or not.
Investments made by GoK is parked as Advance against Equity pending allotment as the authorized capital of the
investee-company is not sufficient to issue the additional share capital (for instance Karnataka Road Development
Corporation Ltd., Rs. 1786 crore shown as advance against equity but authorized share capital available is for Rs.
200 crore only).
104
The quantum of differences reported by the C&AG in its Report on Public Sector Undertakings differ from the difference identified by
the ALMC- this needs to be reviewed.
105 Major differences pertain to Rail Infrastructure Development Corporation (Rs. 1900 crore); Karnataka Housing Board (Rs. 1137
crore); Karnataka Power Corporation Ltd. (Rs. 680 crore); Karnataka Power Transmission Corporation Ltd. (Rs. 425 crore); Karnataka
Niravari Nigama ltd. (Rs. 1087 crore); Krishna Bhagya Jala Nigam (Rs. 1053 crore); Karnataka Road Development Corporation (Rs.
2261 crore); Karnataka State Industrial Infrastructure Development Corporation (Rs. 1196 crore)
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
In some cases loans have been converted into equity but has not been considered by AG for want of GO. Eg
(BMRCL)

Other reasons include non-accounting of assets due to want of budget provision and hence the contra accounting in
investments yet to be done; non-accounting by AG including want of the government orders; merger of companies
but GoK’s investment not reflected in the continuing entity; and investee-company under liquidation or ceased to
exist
271.
Identification of the reasons for the differences and the process of reconciliation is under way, yet formal
adjustment or resolution is yet to be achieved – as and when the difference is identified, the DSS recommends to the
Finance Department to issue a government order for corrective action which are pending issuance. In 2012, ALMC had
engaged the services of consultants for reconciliation and some success was achieved. ALMC has already commenced
reviewing the share capital position in the Annual Reports of the investee-institutions.
272.
There are other operational issues discussed under Guarantees that are applicable to the investment portfolio present database is maintained on spreadsheets and an application for recording and tracking investments and dividend has
not been developed; ALMC or AG not in possession of some GOs authorizing the investment and ALMC is collecting these
GOs from the respective investee-institution; and staffing at ALMC is an issue including their limited understanding of
corporate matters and financial statements.
273. The following priorities have been identified for the 2014 PFM Reform Action Plan.
a.
Develop Operational Guidelines, in consultation with the AG, providing clear norms for determination, timing
of accounting and reporting of investments. These guidelines, to be followed by the Administrative Departments
while recommending investment proposals, should elaborate circumstances when the transaction is to be
considered as investment (alternately capital grant), the prior conditions necessary for making investments (for
instance, ensuring availability of sufficient authorized capital with the investee-company), issuing appropriate
government orders, confirmation by the investee-institutions and reporting the transaction to the AG and ALMC.
b.
Identification and reconciliation of differences between state accounts and investee-company accounts should
be widened and issue of necessary government orders for corrective action expedited. This exercise needs to be
carried out on top priority basis. ALMC has already examined most of the cases. Reconciliation efforts, in the
first instance, focus on “big ticket” items, those pertaining to recent years and those companies that declare
dividends (so that there is no loss of revenue). Corrective action recommended by DSS should be expeditiously
implemented. External support to supplement staff constraints within ALMC could be obtained for a short tenure
for one time reconciliation. Going forward, reconciliation should be done on a concurrent basis, at least quarterly,
reported to FD and action taken at the earliest possible and efforts should be made that no difference is carried
forward to the next financial year/s.
c.
The government order authorizing the investment must be explicit as to the intent of the government – whether
to invest in the entity or provide it as a grant and the correct head of account should be stated. Till such time as
the share is not allotted by the investee-institution, the amount not be charged to minor head 190 as this gets
reflected as investments in the state accounts. All GOs must be copied to the ALMC so as to eliminate their
dependence on the investee-institution.
d.
Resource constraints in ALMC should be addressed through training, and appointing finance professionals:
The ALMC staffing should be reviewed by the FD, which needs augmentation with finance professionals and
staff from FD. The ALM cell should be led by the staff from FD and the current officers can be trained for
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carrying out their activities with more focus on fiscal and financial management of corporate form of business
and also IGAS disclosure requirements.
e.
Develop and incorporate the investments database in KII. The Functional Requirement Specification of Khajane
II recommends building capability in the application to capture all details of investments. This is a step in the
right direction and should be pursued. All legacy data needs to be reconciled and incorporated in KII. In case
implementation of the Asset Liability Module in Khajane II is in the distant future (more than 2 years), then an
suitable application compatible to KII for recording and reporting of investments could be developed for use by
the DSS (in contrast to the present system of maintaining database on spreadsheets).
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4.4
DEBT MANAGEMENT RECORDING AND REPORTING
274.
Public Debt of the Government of Karnataka comprises of market borrowings, loans from financial institutions
including National Bank for Agriculture and Rural Development (NABARD) and National Cooperative Development
Corporation (NCDC), securities issued to the National Small Savings Fund (NSSF) collectively called Internal Debt (about
84% of total public debt), and loans from Government of India. There is no external debt. The total borrowings or public debt
of GoK over the years are summarized in Table 44.
Table 44: Borrowings or Public Debt of Government of Karnataka
Particulars
2012/13
Market Borrowings
63,418
Loans from GoI
11,634
Total
75052106
Source: Statement No. 1, Finance Accounts GoK
2011/12
54,333
10,982
65315107
2010/11
48,762
10,515
59277
2009/10
45,468
9,902
55370
(Rs. in crore)
2008/09
39,996
9,692
49688
275.
Debt Strategy - the KFRA requires the state to maintain Government debt at prudent levels as recommended
by the XIII CFC. GoK, therefore, manages its debt so that the outstanding liabilities (including off-budget borrowings) as
the end of FY 2010/11 to 2014/15 does not exceed the specified percentage of estimated GSDP that are based on the targets
fixed by the XIII CFC. GoK has maintained these levels much before the timeline fixed, as summarized in Table 47. These
fiscal rules ensures ex ante fiscal discipline. Interest payment as a percentage to total revenue receipts were 8.68% in 2011/12
that is below the 15% threshold prescribed by the XIII CFC and down from 9.69% in 2010/11. GoK has not availed any
Ways and Means Advances since the last few years.
Table 45: Public Debt level (Total Liabilities) prescribed by KFRA compared to actual (percent of GSDP)
Particulars
2014/15
2013/14
2012/13
2011/12
2010/11
Prudent Public Debt level per KFRA
25%
25.4%
25.7%
26.0%
26.2%
Actual levels maintained by GoK
22.7% (RE)
22.7%
22.9%
23.6%
Source: C&AG, Report on State Finances, 2012/13 and GoK, Medium Term Fiscal Plan (2014-2018)
276.
Debt Contracting - raising of debt by GoK is subject to consent of the Government of India under article 293
of the Constitution. Market borrowings are raised in tranches as per requirement determined by the GoK based on cash
position and funds requirements. This is done in auctions managed by the Reserve Bank of India (RBI) in accordance with a
borrowing calendar. Debt contracting is centralized with the RBI or falls under pre-defined norms such as the Rural
Infrastructure Development Fund Loans from NABARD. All debt is raised centrally by the Finance Department, GoK unlike
the situation in 2004 – at that time “Departments may be engaged in negotiations with GoI for loans, without the knowledge
of the Finance Department and loans may suddenly appear.”
106
The corresponding amounts shown in the MTFP 2014/18 are Rs. 68,698, Rs. 13131 and Rs. 82,099 crores that do not match with the
figures in the Finance Accounts
107 The corresponding amounts shown in the MTFP 2013/17 are Rs. 56,853, Rs. 11,782 and Rs. 68,635 crores that do not match with the
figures in the Finance Accounts
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277.
Debt Management Institution - there is no formal Debt
Management Office (DMO) in GoK – the maintenance of debt profile of
Debt Office in GoI
all loans borrowed by GoK and repayments of principal and payment of
GoI has set up (Sep 2008) a Middle Office
for Debt Management in Ministry of
interest are done by the Computer Cell under a Special Officer (Budget)
Finance with major focus on skill building
assisted by an Under Secretary and Senior Assistant. In actual practice,
and developing expertise required for a
market borrowings and NSSF loans are handled by the Fiscal Reforms
fully functional DMO and the major
Cell; determination of debt timing and quantum is looked after by an
function include work related to legislation
Assistant Controller; while the debt data is looked after by a retired Joint
of the “Public Debt Management Agency of
Secretary level officer from GoK, all in the Finance Department.
India”
Therefore, the various debt functions are dispersed. At GoI, the debt
management functions are presently performed by various agencies
including the RBI and Ministry of Finance. These will be undertaken by a “Middle Office” in a phased manner to ensure a
smooth transition from the existing arrangements 108.
Functions of Middle Office for Debt Management, Government of India
 Pilot the evolution of the legal and governance framework appropriate to an independent debt office
 Formulation of a long term debt management strategy consistent with sustainability requirements
 Formulation of annual debt issuance strategy and periodic calendars of borrowing
 Forecasting cash and borrowing requirements
 Formulation of a comprehensive risk management framework
 Ensuring compliance to debt/cash management policy strategy and risk guidelines
 Developing and maintaining a centralized database on Government liabilities
 Dissemination of debt related information to the public – the quarterly Report on Public Debt Management
278.
GoK maintains a comprehensive and complete Debt Data: Debt data is recorded on spreadsheets since 2004/05.
This data covers all loans availed by GoK and provides detailed information on all aspects of the debt and is recorded based
on letters and clearance memo issued by the RBI. Debt data is also maintained by the AG and reconciliation between GoK
and AG is done at least bi-annually. Earlier, GoK tried to implement the Commonwealth Debt Recording System, but could
not succeed to technical issues. Overall, the present debt data recording system is a significant improvement over the quality
of debt data in 2004. At that time, an organized system to record these liabilities was not prevalent (e.g., the amounts
borrowed, source, terms, debt-servicing dates, payments made, outstanding balances, etc.) and information on these
borrowings and outstanding amounts were obtained in an ad hoc manner from the respective departments and the public
sector entities. Such a system was especially necessary for cash management because the debt service payments, at that time,
were large. Going forward, a debt data recording functionality as part of the Asset Liability Management Module is planned
in the second phase of Khajane II.
279.
Reconciliation prior to 2004/05 is under process and there are
some reconciliation issues in respect of loans from NCDC, NSSF and
financial institutions and loans for central plan and sponsored schemes
written off on the recommendations of the 13th CFC. The differences
have increased during the period 2009/10 to 2011/12, particularly on
account of NABARD and NCDC, and are about 1% of the outstanding
market borrowing.
Public Transparency – Debt Data
Disclosure
The Government of Gujarat discloses the
debt stock on the website of the Finance
Department along with the average cost of
the
funds
under
each
category
(http://financedepartment.gujarat.gov.in/debt/deb
t_stru.php )
108
A Bill is proposed to be introduced to set up the Public Debt Management Agency that intends to separate the work of the RBI from the
determiner of interest rate and acting as banker to GoI
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280.
Public Transparency - there is a system of Debt Data reporting and Disclosure. A summary of the debt position
of the state (stock and flows) is provided in the annual State Finance Accounts (Statement No. 6) including borrowing from
internal debt, GoI, other obligations and debt servicing. Another statement No. 15 provides a detailed account on borrowings
and other liabilities showing public debt and other interest bearing obligation during and up to the end of the reporting period,
maturity profile, repayment schedule and interest rate profile. The MTFP and the Mid-Term Review Report under KFRA
also provide detailed discussion on the composition of state debt. Debt data is not specifically available on the website of the
Finance Department though the data can be assessed in the documents mentioned above.
281.
GoK’s Debt Sustainability Analysis is based on the indicators suggested by the XIII CFC - Interest Payments
to Revenue Receipts (IP/RR) and Total Liabilities to GSDP. Besides, the C&AG also conduct an annual Debt Sustainability
Analysis (DSA) for the state on five indicators on a 5-year rolling period and the results are provided in the Report on State
Finances. This framework is followed for each state by the C&AG. The results of the DSA for 2012/13 are given in Table 46.
Both the GoK and C&AG analyses however refer to the short term debt sustainability analysis on a static basis i.e. the DSA
is carried out in respect of borrowings outstanding as on a particular date.
Table 46: Debt Sustainability Analysis conducted by the C & AG for GoK
Results (C&AG Report on State Finances 2013)
 During 2008-13 the primary revenue balance was positive and sufficient to
meet interest expenditure
 In 2012-13, interest and quantum spread109 were positive.
Sufficiency of incremental non-debt  The resource gap was negative during 2008-10, turned positive in 2010/11 and
receipts (resource gap110)
once again was negative in 2011/12 as well as in 2012/13 indicating that the
State had to depend on borrowed funds for meeting current revenue and capital
expenditure
Net availability of borrowed funds  Debt redemption ratio continued to be less than one since 2010/11 and was 0.8
(debt redemption ratio111)
in 2012/13 (0.9) as debt redemption was lower than debt receipts
 16% of debt receipts were available in 2012/13 for productive/capital
expenditure as compared to 13% in the previous year
Burden of interest payments
 The ratio of interest payments to revenue was 9.5% in 2012/13, same as in
(Interest Payments/Revenue Receipts)
2011/12112, that was below the limit of 15% prescribed by the 13 th CFC.
Maturity profile
 Around 33% of the outstanding stock of market borrowings at the end of
2012/13 belonged to a maturity bracket of 5-7 years and 46% in the maturity
bracket of 7 years and above, indicating no short term redemption pressure
Source: C &AG Report on State Finances 2012/13
Parameter
Debt Stabilization
282.
The RBI has conducted a study on sub-national debt
sustainability 113 including an indicator led analysis of fiscal
sustainability comprising of six parameters (see box). Based on this
assessment (up to 2012/13), on two main parameters (Interest
Payments to revenue Receipts and Debt to GSDP ratio), RBI has
categorized Karnataka under medium risk category. GoK should
examine alternate DSA models such as that of the International
Monetary Fund, which looks at both short and long term
109
Fiscal Sustainability Analysis by RBI (2013)

Rate of nominal growth of GDP should be more than rate
of growth of debt

Real output growth should be higher than real interest rate

Primary Balance should be in surplus

Primary Revenue Balance should be in surplus and
adequate to meet interest payments

Interest Burden defined by Interest Payments to GDP ratio
should decline over time

Interest Payments as a proportion of Revenue Expenditure
should decline over time

Interest Payment as a proportion of Revenue Receipts
Interest spread is the difference between average lending rate and
average
borrowing
rate. Quantum spread is the
should
fall over
time
product of debt stock and interest spread
110
Resource gap is the adequacy of incremental non-debt receipts of the State to cover the incremental interest liabilities and
incremental primary expenditure. Negative resource gap indicates non-sustainability of debt.
111
Debt Redemption Ratio is Principal + interest payments to total debt receipts and application of available borrowed funds
GoK estimates IP/RR to be 8.68% and 8,74% respectively during 2011/12 and 2012/13 (different from C&AG’s assessment), and is
expected to reduce to 8.27%, as per MTFP2014/18
113 Reserve Bank of India, Sub-National Debt Sustainability: An Assessment of the State Governments, Jan 10, 2013 (www.rbi.org.in)
112
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
impact of debt on the state finances and adopt the model with parameters that are broader than the parameters on
which the current DSA is based.
283.
Debt Repayment Management – GoK has commenced
contribution to RBI Consolidated Fund Scheme: The X and XI
Sinking Fund – Practices in other states
 The state of Maharashtra created a Sinking Fund
Central Finance Commissions recommended creation of a Sinking
in 1999 through a contribution of 3% of its annual
fund for amortizing open market loans. GoK created such a sinking
market borrowings.
fund in 1999/2000, but there had been no accretion to the fund since

Gujarat contributes to the CSF of the RBI for
then. The C&AG, RBI and the PAC have emphasized setting up
redemption of debt raised from Open Market
such a fund through suitable contribution from revenues for taking
Borrowings and the corpus as on March 2013 was
care of the loan discharges. In FY 2014, GoK contributed Rs. 1000
Rs. 6,917 crore.
crore 114 to RBI’s Consolidated Fund Scheme (CSF) being 1% of
total outstanding liabilities which was transferred from the existing
Fiscal Management Fund. During FY 14-15, a sum of Rs. 500 crore has been earmarked for transfer to the fund. GoK will
need to make adequate contribution to build up the corpus up to 3-5% of the state liabilities.
284.
The current debt management, recording and reporting practices in GoK matches well when benchmarked
to good practices under PEFA.
Dimension/Good Practice
Scope and Frequency of Debt Data Analysis
DSA for internal and external debt is undertaken annually
Quality of Debt Data Recording and Reporting
Debt records are complete, updated and reconciled on a
monthly basis with data considered of high integrity.
Comprehensive management and statistical reports (cover
debt service, stock and operations) are produced at least
quarterly
Current Status
GoK monitors its debt sustainability through the two
parameters: interest payments to revenue receipts and total
liabilities to GSDP which is provided in the MTFP. Debt
Sustainability Analysis is undertaken annually by C&AG on
five indicators over a 5-year rolling period.
Debt records are complete, updated and reconciled at least
bi-annually. Data quality is of fairly high quality though
some gaps and reconciliation problems are recognized.
Comprehensive data on debt stocks and service are produced
annually and some data is also available half–yearly in midyear review report under KFRA, and also in monthly
accounts on the website of the AG Karnataka.
285. Summary of Issues a.
A dedicated Debt Management Office has presently not been formed in GoK and a second line of management
is missing. A more permanent and robust debt office is needed.
b.
Debt data is presently maintained on spreadsheets and the risk of data completeness and integrity is higher.
c.
While reconciliation of debt data with AG takes place periodically, reconciliation of data prior to 2004/05 and
the issues with loans from NCDC and NABARD need to be resolved.
d.
GoK to provide adequate budget provisions to build up a corpus fund equivalent to 3-5% of the state’s
liabilities.
e.
Debt Sustainability Analysis methodology adopted by GoK refers only to the short term debt sustainability
aspects on historical data.
286. The following priorities actions are identified for 2014 PFM Reform Action Plan in the area of debt management,
recording and reporting.
114
Head of Account 2048 by plus under Plan and minus under Non Plan and has been met from the Fiscal Management Fund
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
a.
Set up a combined Debt and Cash Management Office within the Finance Department and depute experienced
officers for dealing exclusively with debt and cash management, recording and reporting.
b.
A sub-module for Debt Management within the Asset Liability Module is planned under Khajane II. In case this
is developed and implemented with some time lag (say more than two years), software in Oracle or similar
application could be developed and debt data maintained on spread sheets can be migrated to new software (and
finally e-migrated to Khajane II).
c.
Reconciliation issues in debt data should be resolved with the AG on priority (being 1% of the total open
market debt) and debt data integrity be established in full.
d.
Continue budgetary contribution to the Consolidated Sinking Fund maintained by RBI to build a corpus of 3 to
5% of the state’s liabilities.
e.
Examine alternate DSA models such as that of the International Monetary Fund, which looks at both short and
long term impact of debt on the state finances and adopt the model with parameters that are broader than the
parameters on which the current DSA is based.
f.
Disclose debt data and DSA on the website of the Finance Department.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
4.5
LOANS AND ADVANCES
287.
Significant amounts of loans and advances are extended by the GoK to state agencies including statutory
corporations, government companies, cooperative institutions, urban development authorities, urban local bodies, and to
government staff. The rules and regulations governing the grant of loans and advances in GoK are contained in the Karnataka
Financial Code (articles 185-198 of the KFC). The salient provisions in the KFC governing Loans and Advances are briefed
in the following box.
Loans and Advances - Salient provisions in Karnataka Financial Code
 All loans require special sanction of GoK unless covered under a general order
 Loans expected to be provided during the next year including recoveries should be provided in the budget
 Special rules on loans and advances (e. g. made to local bodies and cooperatives) can be made by the concerned
department in their departmental manuals or standing orders
 Order sanctioning a loan or advance should be in a prescribed format and each such order will specify the terms and
conditions of the loan or advance
 The sanctioning authority is responsible for fiduciary assurance over the end use of the loan and advance; utilization
certificate (in prescribed format) to be provided by the concerned CCO/sanctioning authority to the auditors
 General rules for repayment, charging of interest, default etc. have been included; GoK has the power to remit the
interest due or postpone the repayment
288.
Table 47 provides an institution group-wise break-up of the loans and advances made by GoK. The loans and
advances portfolio of GoK shows an increasing trend over the years from Rs. 9,623 crore in 2011 to Rs. 11,198 crore in 2012
and Rs. 12,143 crore in 2013. Hence, it is imperative that this area in governed by a set of adequate, effective and continuing
system of internal controls.
Table 47: Institution-wise outstanding of Loans and Advances in GoK
Institution Group
Statutory Corporations
Government Companies
Urban Development Authorities and Housing Boards
Cooperatives including Banks
Others
Total
As on March 31, 2013
4,762
2,877
2,876
805
823
12,143
(Rs. in crore)
As on March 31, 2012
3,950
2,803
2,884
715
846
11,198
289.
The loan and advances portfolio in GoK is characterized by significant control weakness including record
keeping and arrears in reconciliation.
a.
b.
115
116
Loans and advances have not been reconciled by any of the Chief Controlling Officer (CCO). This despite
specific instructions of the Finance Department to the Treasuries that non-salary bill should not be passed unless it is
ensured that the process of reconciliation of loans and advances is full and complete 115.
Loans and advances have adverse balance of Rs. 1,186 crore (as of March 2013) due to mis-classification of
recoveries and poor reconciliation by the concerned CCOs 116 . The reasons for adverse balances are - non
Government of Karnataka, Finance Accounts 2012-13
ibid
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reconciliation by the departmental authorities and credits appearing in accounts without corresponding debits under
the same heads. Reconciliation efforts are underway between Departmental Officers, Treasuries and ALMC
c.
Loans and advances are made without finalizing the terms and conditions. Out of the 58 loans for Rs. 1,270 crore
sanctioned by GoK in 2012-13, loans valued at Rs.551 crore (43%) were sanctioned without specifying any terms
and conditions117. This is not in conformity with the requirements of the KFC.
d.
Departments do not share the detailed accounts on Loans and advances with AG. The responsibility of
maintaining detailed accounts of loans and advances vests with the concerned department granting the loan or
advance. For loans and advances that are sanctioned by GoK, the detailed accounts are maintained by the
Accountant General. Information on loans and advances in respect of which detailed accounts are maintained
by the department is not furnished to the AG – such information was provided for only 22 out of 842 cases for
2012-13118.
e.
Further, loans and advances are made when earlier loans were in arrears
290.
The ALMC is entrusted with collation of details and reconciliation of loans to 173 institutions. The
methodology adopted by ALMC is to obtain details of the loans from the institution and reconcile with the Finance Accounts.
As of March 2013, ALMC has achieved reconciliation only in 98 institutions with outstanding loans of Rs. 3,595 crore
(30% of total portfolio outstanding). In some of these cases, though the cause of the difference has been identified, yet the
rectification is yet to be finalized. Reconciliation of remaining 75 institutions is underway – aggregate outstanding
involved Rs. 7,687 crore as per Finance Accounts (63% of total outstanding) – the net difference between Finance
Accounts and the books of the institutions is Rs. 3,761 crore! The biggest difference is on account of Karnataka Water
Supply and Drainage Board – Rs. 2,383 crore – and the power utilities, and these differences are yet to be analyzed. The
concern is that there are differences in current year transactions as well.
291.
A limitation that ALMC is likely to face is the lack of information on individual outstanding in the Finance
Accounts from FY 2012-13 due to the revised classification and disclosure norms of IGAS 3 (see below). This would put
further limitations on reconciliation and ALMC has yet to consult with the AG for providing this information outside of the
Finance Accounts. For the remaining balance of Loans and Advances no specific agency has been designated for
reconciliation.
292.
Loans and Advances are disclosed in the Finance
Accounts and an annual report of loans (and reconciliation
position) is submitted to the Finance Department by ALMC.
Disclosure requirements now follow the Indian Government
Accounting Standard 3 (IGAS 3) effective from FY 2012-13 and
GoK’s Finance Accounts are largely in compliance except for
unavailability of some information such as loans in perpetuity.
The disclosure requirements under IGAS are onerous (see
box) and GoK would need to strengthen its systems around
Loans and Advances to provide full and validated
information for disclosure.
117
118
Disclosure requirements under IGAS 3 – Loans
and Advances
 Summary by loanee group-wise and sector-wise
 Summary and detailed statements (with loanee
names) of repayments in arrears
 Major and Minor head wise details
 Details of loans and advances made during the year
(with name of loanee)
 Amount of interest in arrears
 Loans made in perpetuity
 Loanee-wise details where terms and conditions not
settled
 Fresh loans and advances made where there are
arrears
ibid
ibid
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293.
There are significant arrears in repayment of the loans and advances including some in arrears since the past
several years. The annual gross repayments are equivalent of 1-2% of the outstanding. In respect of loans to institutions, Rs.
3,790 crore119 (March 2013) are in arrears and hence are stressed assets. Many of these are to institutions that are not capable
of repaying these amounts on their own due to their precarious financial conditions. Such loans are carried at their historical
cost and writing off has not yet been considered by GoK. A strategy to address these is yet to be formulated by GoK.
294. Summary of Issues
a. Policy Issues
i.
There are significant arrears in repayment of the loans and advances including some in arrears
since the past several years. A strategy to address these is yet to be formulated by GoK.
b. Reconciliation and Reporting Issues
ii.
has not been done by any of the Chief Controlling Officer
iii.
there are adverse balances
iv.
Reconciliation of 75 institutions is underway - – aggregate outstanding involved Rs. 7,687 crore as
per Finance Accounts and difference to be reconciled is Rs. 3,761 crore
v.
ALMC entrusted with reconciliation of institutions is faced with resource constrains
vi.
agency to reconcile advances other than to institutions has not been designated
vii.
adequate information on loans in respect of which detailed accounts are maintained by departments
are not provided to the AG
viii.
need to strengthen systems to provide full and validated information to meet the disclosure
requirements of IGAS 3
c.
Compliance Issues
i. Loans and advances are made without finalizing the terms and conditions
ii. Further loans and advances are made when earlier loans were in arrears
295.
Most of the above shortcomings were also highlighted in the 2004 PFMA. To strengthen the systems around
its Loans and Advances portfolio, the following priority actions are suggested for the 2014 PFM Reform Action Plan.
a)
Strengthen and widen reconciliation of the portfolio. Constitute a dedicated team for working on the
reconciliation exercise. Initially focus on the “big ticket” items starting from the later years and working
backwards. To facilitate this, GoK issue GO to all CCOs maintaining detailed accounts to ensure that all
information is available to the team. This is to be accorded high priority.
b) Institute formal Reporting System for updating database and to meet IGAS 3 requirements to provide full and
validated information for reconciliation. A standard reporting format should be developed meeting IGAS 3
requirements, and status to be submitted to ALMC say on a bi-annual basis for updating the database and
reconciliation with the Finance Accounts.
c)
Initiate a special audit of the detailed records of Loans and Advances maintained departmentally. The
objective of the audit would be to review - (a) the maintenance, completeness and adequacy of the records
maintained and underlying controls; and (b) the compliance with the KFC in respect of sanction of loans and
advances; and make recommendations for strengthening this area.
d) Issue GO reiterating rules governing sanction and monitoring of loans and advances and ensure strict
compliance particularly grant of further loans when previous are in arrears. Loans should be made only after
119
For instance, BWSSB has arrears of Rs.2710 crore including interest.
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the terms and conditions have been agreed and finalized and included in the sanction letter/GO. Cases
where this is not compiled are now required to be disclosed in the Finance Accounts.
e)
GoK to develop a strategy to address the significant arrears in loans. This could include the methodology for
conversion of loans to grant or equity.
f)
Resource constraints in ALMC should be addressed through training, and appointing finance professionals:
The ALMC staffing should be reviewed by the FD, which needs augmentation with finance professionals and
staff from FD. The ALM cell should be led by the staff from FD and the current officers can be trained for
carrying out their activities with more focus on fiscal and financial management of corporate form of business
and also IGAS disclosure requirements.
g) Develop and incorporate the loans and advances database in KII. The Functional Requirement Specification of
Khajane II recommends building capability in the application to capture all details of loans and advances. This is
a step in the right direction and should be pursued. All legacy data needs to be reconciled and incorporated in KII.
4.6
MONITORING ARREARS OF PAYMENTS
296.
One of the fiscal management principle envisaged in the KFRA is to “ensure discharge of current liabilities in
a timely manner”. Current liabilities/ arrears are expenditure obligations under a specific legal obligation/contractual
commitment that has been incurred by the government, for which services have been obtained but payment has not been
made. A high level of arrears can indicate a number of different problems, such as inadequate commitment controls, cash
rationing, inadequate budgeting for contracts, under-budgeting of specific items and lack of information. Internationally,
arrears are defined as default in payments for goods and services beyond 30 days of passing of bills or rising of invoice by
the supplier or service provider.
297.
The 2004 PFMA Report assessed that unpredictability of funding and cash rationing at that time, resulted in
inordinate delays, lobbying, and ineffective poor expenditures as well as a buildup in arrears. The fiscal policy
framework made no mention of arrears (i.e., pending bills), apart from reporting requirements. Although departments,
particularly those with high capital spending, recorded and maintained data on arrears (i.e., bills not paid), the system of
recoding was weak and there was no mechanism to compile this information to report (end-year or within-year) or to monitor
the total amount of arrears.
298.
The 2004 Action Plan recommended to accord first claim on resources to payments of arrears under a
defined hierarchy of priorities. This implied increasing control over entry of capital projects into the budget under which
first priority is given to payment of arrears, maintenance second, ongoing projects third, and new initiatives fourth. In short,
this meant that the first priority in determining annual expenditure allocations should be full payment of all expenditures
already incurred, so that arrears do not accumulate. Reduction in the size of arrears is important for better fiscal and cashflow management.
299.
Guidelines issued by GoK for including works in the budget are not strictly followed by the departments.
Instructions are provided in the budget circulars and budget manual to the effect that no works should be included in the
budget unless (a) plan and estimates have been approved administratively and sanctioned technically; (b) the works are
included in Appendix E; and (c) a minimum provision is proposed in the budget 120. A system of pre-scrutiny of new plan
schemes is also prescribed – the heads of departments are required to send the proposals to the Secretary of the
Administrative Department who will forward the proposal to the Planning and Finance Departments for approval and
120
For works estimating less than Rs. 5 crore, minimum 40% provision is mandated in year 1 and the balance in year 2. For works of
higher estimates, provision of minimum 30% in year 1 and the balance in years 2 and 3 in required.
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clearance. This includes scrutiny by the Internal Financial Advisors 121 in case of departments having this position. The
objective is to avoid detailed examination of the proposals / Schemes at a later date and the schemes could be implemented in
the beginning of the financial year itself. Over commitment without adequate budget leads to payments arrears, which is
not in line with KFRA 2002.This also exhibits internal control weakness in the system which could lead to excess
payments and frauds122
300.
GoK like other state governments follow the cash basis of accounting and hence outstanding payments are not
disclosed in the annual accounts (i.e. Finance Accounts) and hence these are required to be compiled and consolidated
separately outside of the accounting system. A consolidated statement of payment arrears, therefore, is not available in
GoK. There are no payment arrears of “committed liabilities” on salaries, pension and debt servicing in Karnataka.
Therefore, this section deals with arrears of payments (bills passed but not paid by the due date) arising from rendering of
services or provision of goods or execution of works to the government, and in particular those pertains to the Public Works
Department of GoK (PWD) besides discussing arrears on account of electricity bills payment. According to international
norms, the stock of arrears should be less than 2% of the total expenditure. Payments Arrears in GoK are at a high level
thus undermining the prudent financial management principles and have a contingent effect on the fiscal parameters
of the state.
a) Arrears data is available for PWD but it did not distinguish between current outstanding and arrears. During the past
two years, PWD has reported more than Rs.1000 crore (~$200 million) of pending bills and it is expected to rise as
per projections particularly under roads as according to the department the budget provision is insufficient to allow
for payment for ongoing works (Table 48). The total budget under the major heads of PWD for 2013/14 is Rs. 8,174
crore (Annual Financial Statements 2013/14) and the arrears as a percentage of total budget is about 15% down
from 24% in 2011/12 but slightly higher than 2012/13. Over commitment without adequate budget leads to arrears
which is in contravention of the KFRA 2002. It is also understood that there are arrears in expenditure bill
payments in the several public sector enterprises (Nigams) under the Irrigation departments, for ~Rs.650 crore. A
strategy for clearance of arrears is presently not visible.
b) PWD is also one of the departments that requires significant supplementary provisions, about 40% of original
budget estimates during 2010/11 and 2011/12 and 80% during 2012/13 although actual expenditure falls short of the
aggregate of original and supplementary estimates. It is noted that many supplementary provisions are made for
“payment of pending bills” that shows the ad hoc nature of the estimation process. For instance, a provision of Rs.
700 crore was proposed in the Third Supplementary Estimates for 2012/13. As on March 2014, the total awarded
cost of contracts in PWD is Rs.14,283 crore, out of which value of work done is Rs. 5,453 crore, and payment which
is in arrears is Rs.1208 crore. An amount of Rs. 8,830 crore of works is expected to be completed and paid in the
next two years. It would be prudent that MTEF is introduced in PWD and a proper scheduling of works is carried
out to work out the budget requirements.
Table 48: Arrear of Expenditure Bills in Public Works Department, Karnataka
(Rs. in crore)
As at the close
of
Amount of Arrears
Plan
Non Plan
31-Mar-12
31-Mar-13
852.54
191.89
Outstanding
Total
Arrears
Total
Expenditure
1486.4
Total
Budget
Outlay
6151
As percent of
Outlay
5116
24%
As percent of
Actual
Expenditure
29%
1044.4
7677
6562
14%
16%
121
In some departments IFA role is limited to administrative work, which affects their effectiveness of acting as advisors and providing the
right financial perspective to the departments.
122 Refer Report No. - 2 of 2014 Government of Karnataka - Report of the Comptroller and Auditor General of India on Economic SectorIssues in civil works carried out in Magadi Taluk
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
31-Oct-13
1033.99
186.92
1220.9
8174
15%
Source: Public Works Department, Government of Karnataka and Karnataka Appropriation Accounts
c)
Besides the arrears in PWD, there are also arrears on account of electricity dues of the urban and rural local bodies
for which funds have to be provided in the budget of GoK. For urban local bodies, the estimated amount of
electricity dues is Rs. 500 crore while for the rural local bodies’ electricity dues is Rs.3300 crore. Provision is made
each year in the state budget for clearance of these dues. In 2013/14, a provision of Rs. 135 crore was made, but Rs.
100 crore was reverted at the time of full budget presentation in July 2013. GoK has constituted a committee to
study the issues of electricity dues by Panchayats and also determine the exact dues. In 2012/13, non-plan untied
grant under State Finance Commission recommendation for the fourth quarter was not released.
301.
Disclosure of arrears is neither made in any government document nor available in public domain 123 .
Maharashtra has a system of disclosing outstanding liabilities in its statement under FRBM (see Box).
302.
Due to the system of accounting followed, payment arrears
are not captured in expenditure and remains outside the system
unless paid. As at the close of October 2013, the estimated Revenue
Surplus of GoK was Rs. 1,692 crore124 and arrears of PWD itself
(Rs. 1221 crore) are 72% of the surplus. Full provision for
payment arrears if made could adversely affect the fiscal
indicators of GoK. One of the reasons for this situation is
commencement of new capital works (including those cleared by
the state Cabinet) without ensuring adequate funding provisions or
completion of works already underway.
The Maharashtra Fiscal Responsibility and
Budgetary Management Act 2005
An Annual Statement of Miscellaneous Liabilities
Outstanding is disclosed in the budget documents
in respect of major works, contracts and supplies
(presently for each contract of over Rs. 1 crore)
and arrears of grants payable to various institutions
etc. This is being done on an annual basis in March
providing details as of the close of the previous
year.
303.
The current system of control over payment arrears in
GoK and the estimated stock of arrears when benchmarked to good practices under PEFA indicate that substantial
efforts are needed to remedy the situation.
Dimension/Good Practice
Stock of expenditure payment arrears (as a percentage of
actual total expenditure for the corresponding fiscal year)
and any recent change in the stock.
The stock of arrears is low (i.e. is below 2% of total
expenditure
Availability of data for monitoring the stock of
expenditure payment arrears.
Reliable and complete data on the stock of arrears is
generated through routine procedures at least at the end of
each fiscal year (and includes an age profile)
Current Status
The stock of payment arrears in PWD is about 15% of the
budgeted expenditure of PWD (FY 2013/14) but has shown a
decline over the previous years. There are other payment
arrears but quantification is not available.
Reliable and complete data, generated through routine
procedures, may be available on an individual and standalone
basis for some departments. The data available does not
distinguish between current outstanding and arrears and does
not provide an age profile.
304. Summary of Issues
a. Guidelines issued by GoK for including works in the budget are not strictly followed by the departments.
b. Data on arrears is presently available on standalone basis and is neither compiled nor consolidated.
c. Currently there is no visible strategy for clearance of payment arrears – significant supplementary estimates are
made for “payment of bills”
Appendix 10 of the Finance Accounts provides a Statement of Commitments on Incomplete Public Works Contracts including “Pending
Payments”. It is, however, not clear if the “Pending Payments” are current or arrears and besides this appendix does not provide
“Pending Payments” for other than incomplete works.
124 Accountant General Karnataka, Monthly Fiscal Indicators, Monthly Accounts at a Glance, October 2013 (http://agkar.cag.gov.in)
123
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d.
e.
Payment arrear data is not in public domain
Piling of such liabilities by PWD is an issue which leads to draining of the budget provision for payments of old
liabilities and in effect could prevent new works to be taken. This needs to be brought in line with requirements of
KFRA 2002.
305.
The following priority actions are identified for the PFM Reform Action Plan that could address the issue of
payment arrears over the medium term. However, the most crucial aspect is that the guidelines in the budget circular for
estimating the works and paying arrears need to be strictly followed.
a.
Recognize the existence of these financial liabilities. A formal and clear definition of payment arrears is required
(this was also a recommendation in the 2004 PFMA).
b.
Institute a periodic reporting system. Institute a system of recording and consolidation of expenditure payments
outstanding across all departments and para-statals, distinguishing between current outstanding and arrears. This
is fundamental as existence and completeness of data on arrears, is essential not only to recognize the arrears but
also to develop a strategy so that new arrears do not accumulate.
c.
Develop a strategy for clearance of arrears as on a cut-off date. While liquidation of historical arrears may not
be immediate, GoK has to (a) determine strategy to clear payment arrears by setting a time table, and (b) make
adequate budgetary provision.
d.
Improve transparency. Disclose expenditure payments outstanding in the mid-year report and budget documents.
4.7
UNENCASHED CHEQUES
306.
Cheques issued by the Treasury but remaining unpaid are “Unencashed Cheques” and specific treatment is
prescribed for their cancellation in case the cheques remain unpaid for over 1 year from issue. Cheques are issued by
the Treasuries based on the bills rendered by the Drawing and Disbursing Officers. The relevant expenditure/advance head is
debited and Public Account Head 8670 is credited 125 reflecting the liability of the state, and the balance under 8670 is shown
separately in the State’s Finance Accounts (Statement No. 18). The Karnataka Financial Code (KFC) prescribes (Rule 75)
that cheques that remain unpaid (or unencashed) for a period of 12 months or more from the date of issue should be destroyed
or cancelled by the DDO and the Treasury should be informed to stop payment (such cheques are termed time-barred). The
Treasury is required to prepare an annual list of all such cheques (by May 15th of next year) and submit an Alteration
Memoranda to the AG for adjustments (by June 1st of the next year) and to the concerned DDO. After making the entries, the
AG is required to inform the Treasury along with transfer entry numbers date.
307.
The 2004 PFMA reported that reliable information on the amount of unencashed cheques was not available
(at that time) as the bank accounts were not reconciled regularly. There were major unreconciled amounts in GoK’s bank
balances specifically relating to unencashed cheques - both in the Treasuries and the departments under Letter of Credit
mechanism. The accounting system did not provide basic information required for cash management viz., the government’s
bank balance and amount of unencashed cheques and the cash position of the state were incomplete from the state’s
perspective, since it excluded unencashed cheques. The report recommended including unencashed cheques as part of cash
balances, and not in the Public Account..
The standard accounting process is as follows: The amount of cheques issued against bills are shown under the head 8670 – Cheques
and Bills and included in the List of Payments. Subsequently, the Treasury Officer obtains the Schedule of Paid Cheques from the bank and
sends it to the AG and the amount of paid cheques is shown under head 8675 – Reserve Bank Deposits by contra credit to head 8670 and
the balance in head 8670 represents unpaid or unencashed cheques.
125
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308.
The specified procedure appears not to be working effectively as the quantum of unencashed cheques is showing an
increasing trend over the years. The outstanding as at March 2013 is at a level of Rs. 6,820 crore compared to Rs. 1,120 crore
in 2001/02, (see Table 49Error! Reference source not found.). The level of unencashed cheques is showing a continuous
increase over the years. While some increase could be attributed to increase in overall quantum of transactions handled by
the Treasuries, but a 6-fold increase needs to be viewed seriously. The AG (A&E) has estimated that the State Huzur
Treasury itself accounts for unencashed cheques of Rs. 1759 crore from 2003-04126.
Table 49: Unencashed cheques under major head 8670
(Rs. in crore)
As of March 31
2013
2012
2011
2010
2009
6820
6785
4195
4520
3972
Amount of Unencashed Cheques
Source: C&AG Finance Accounts
309.
Time barred cheques include items such as recoveries from contractors, subsidy payments including cases where
names do not match and judiciary cheques that are valid only for three weeks. The accumulation of such cheques adversely
impacts the adequacy of internal controls and could be an indicator of frauds. Beneficiaries may be deprived of
subsidies or cheques could be issued deliberately to show better budgetary performance, Moreover, the balance of
unencashed cheques is shown in the Public Account and hence not considered in the cash position of the state.
310. The following issues emerge that needs to be addressed to strengthen the PFM in this area.a.
Treasuries are not strictly following the prescribed procedure The KFC details the procedure for identification,
reporting and adjustment of cheques issued but remaining unpaid for over 12 months - Alteration Memos are either
not prepared or the process is delayed and regular follow up is not done. Year-wise break up is also not available.
There are also instances where Alteration Memos were prepared and submitted to the AG, the clearance by the AG
took an inordinately long time (5-6 years). Moreover, the current timeline of annual reporting of unencashed
cheques over 1 year appears too long.
b.
Unencashed cheques also pose issues in respect of accounting. When these cheques over 1 year are cancelled in
later years, expenditure of previous year/s need to be reversed in the year when the cheque is cancelled that may
distort the expenditure/receipt of the current year if the quantum is high. There is some ambiguity as to which head
of account should be affected.
311.
The head 8670 – Cheques and Bills is an intermediary accounting device for initial record of transactions which
eventually has to be cleared/withdrawn and accumulation of balance is not to be allowed. The priorities identified for 2014
PFM Reform Action Plan are two-fold – (a) to identify the time-barred cheques under 8670 and reduce the present
accumulated balance by making necessary accounting reversal; and (b) to strengthen the process of identification,
reporting and cancellation of unencashed cheques to avoid the past situation. The AG has already taken up this matter
on its priority agenda and following up on a monthly basis127. With introduction of KII and payment through e-transfers,
these issues are expected to be addressed automatically. In the interim the following actions are suggested.
a.
Clear the backlog of unpaid cheques. In respect of the outstanding in head 8670 on a cut-off date, carry out a
one-time special exercise so that cheques remaining unpaid for over a year from the date of their issue are
identified by the Treasuries, their non-payment is confirmed by the respective DDOs and lists of such cheques are
sent to the AG for issue of Alteration Memos.
126
AG (A &E), Report on the Annual Inspection of Treasuries, 2011/12
The Central Treasury section in the office of the AG is calling for monthly lists of cheques issued and cheques encashed in for further
analysis to identify unencashed cheques.
127
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b.
Initiate a special study to identify the underpinning causes for accumulation of unencashed cheques. This will
help in formulating a strategy for both clearing of backlog and to avoid its recurrence. For this study, retired
officers from AG or Karnataka Institute of Public Auditors (KIPA) or FD could be availed.
c.
Reiterate instructions to all Treasuries and DDOs forthwith to follow the procedure prescribed in the KFC.
This is important so that reporting of unencashed cheques is current and efforts should be made to reverse such
cheques within the FY. Develop a process for compilation and collation of unencashed cheques (cheque-wise and
year-wise), reporting to the Treasury and then liaisoning with AG for issue of Alteration Memos on a priority
basis. The AG is strengthening its internal procedures and is gearing up to receive list of unencashed cheques over
1 year and issue of Alteration Memos at any time and not wait after the close of the FY – the AG has also
instituted a system of reporting on Alteration Memos received and disposed of. On the other hand, the Treasuries
should report such cheques to the AG for cancellation say at least once every quarter and not wait till the close of
the FY.
d.
Reduce the periodicity of cancellation of unencashed cheques from the present 12 months to 3 months – this
would require amendment to the KFC. The GoI and some state governments such as West Bengal and New Delhi
already follow the procedure of cancellation of cheques six months after the month of its issue. In fact, the
Treasury Rules, 2005 of West Bengal requires writing back of all cheques remaining unpaid as on June 30 th of the
next year and the corresponding date in UP is April 30. Since treasury cheques are valid for three months
succeeding the months of issue, GoK can adopt this period for identifying unencashed cheques and reversing them
in the accounts. In case the beneficiary approaches GoK, a new cheque can be issued under the same budget head.
e.
Monthly reporting of lapsed cheque to AG: Currently the treasuries report to the AG once in a year after the FY
closure which does not help in passing the reversal entries within the FY. All treasuries should report to AG every
month the list of lapsed cheques so that AG can advise on the accounting treatment to be followed in such cases.
f.
Finalize the accounting treatment post reversal of the unpaid cheques in consultation with the AG particularly
for those items reversed in subsequent FY. The options available are either to reflect the amount under a specific
income head (such as 2075) or to reduce it from the current year expenditure.
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Section 5. THEME FIVE: STRENGTHENING AUDIT AND LEGISLATIVE OVERSIGHT
5.1
EFFECTIVENESS OF INTERNAL AUDIT
312.
Internal audit is intended to examine and evaluate the level of compliance with the rules and procedures so as
to provide a reasonable assurance on the adequacy of the internal control (C&AG). An effective internal audit system,
both in the manual as well as computerized environment, is a pre-requisite for the efficient functioning of any Department
The objective of an internal audit function is to have a deterrent and reforming effect in the direction of prevention of
mistakes and to play a corrective role by pointing out mistakes and ensuring remedies without loss of time.
313.
The 2004 PFMA concluded that practically there was no internal audit system in GoK barring internal audit
wings (IAW) in some revenue earning departments. The function existing at that point in time was limited in terms of
coverage and follow up of audit findings and absence in the major spending departments. The situation is summarized below.
a. Major revenue-earning departments had IAWs, though Stamps and Registration was an important exception.
There is no formal system of internal audit in all the other departments including major spending ones.
b. Internal audit focused on transactions and compliance, but a systematic review of the adequacy of control
systems, nor identifying systemic improvements was absent.
c. Follow-up of internal audit findings was inadequate.
d. The external auditor covered some aspects that would normally have been part of an internal audit, e.g., detailed
transaction audits, and reporting of compliance with the various rules.
314.
The 2004 Action Plan recommended introducing a small, focused internal audit function to improve the
effectiveness of the system focusing on identifying systemic improvements, and reporting on implementation of these
systemic improvements. It recommended that internal audit function should contract with and draw extensively on expertise
from professional accounting and management firms (e.g., chartered accountants, cost accountants, management consultants).
315.
GoK has not travelled far in strengthening the internal audit arrangements in government and no significant
reform interventions have been made in this vital function. Internal audit guidelines were last issued in 1992 prescribing
an annual audit, units to be audited at least once in two years and the report to be submitted within two months of completed
audit. The C&AG has reported non-existence of IAWs in departments and identified serious shortcomings in the function in
departments having established an IAW, (as briefed in Annex 9.1). C&AG has observed non-functional IAWs, shortage of
audit staff strength, inadequate coverage of auditee-units, absence of internal audit manual and lack of follow up of audit
reports. In conclusion, internal audit function is not effective in GoK.
316.
The Commercial Tax Department (CTD) of GoK has established audit and review mechanisms as proxy to
internal audit. These include risk based e-Comprehensive Audit System, analytics based system of comparative analysis of
dealers, and a Peer review system besides having an Internal Audit cell. These are briefed in the box below. The department
proposes to further strengthen the systems through IT including random selection of 10% cases for audit and concentrating
more on the quality and correctness of orders. While it may be argued that these are not internal audit systems under the
traditional definition, yet for a revenue department, such audit and review systems (in particular IT based taking advantage of
the repository of digital data available) are more efficient and effective than the archaic transactional audit procedures. The
lesson learned is that within the overall audit methodology, internal audit procedures should be attuned to the nature of
business of each department to achieve optimum benefit.
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






Audit and Review Mechanisms in Commercial Tax Department, GoK
E-Comprehensive Audit System: a pre-defined risk assessment criteria1 is applied electronically to the entire
population of assesses out of which cases meeting the risk criteria are thrown up by the system. These cases are
reviewed by the officers and a sub-set is identified for audit, approved by the Commissioner through “Assignment
Notes”. For instance, in 2012/13 from a total of 5 lakh assesses, the system highlighted ~80,000 cases that met at
least one of the risk parameters, and post review about 36,900 cases were assigned by the Commissioner for detailed
scrutiny.
Comparative Analysis of Dealers: The CTD systems have a separate module that does an analytical analysis (data
mining) based on 4 parameters on a two year comparison – output tax payable, input tax earned, tax payable and tax
actually paid and other parameters such as non-filers, return filed but tax not paid, carried forward of tax etc.
Peer Review: Order of an officer is directed to another officer of same cadre (this is system generated). The peer
reviewer looks for apparent errors in the assessment and reports to the Joint Commissioner in case errors are
identified; else the file is returned to the originating officer. The entire system is digital
Sou Moto Reassessments: done at the level of Asst. Commissioner and Jt. Commissioner which are referred to the
Commissioner for final approval.
Compulsory Audit: Each assesse with an annual turnover of Rs. 10 crore and above are required to get the books of
account audited by Chartered Accountants. The report is submitted in prescribed format and is uploaded online.
Internal Audit Cell: CTD established an internal audit cell in 2010/11 under a Deputy Commissioner (Internal
Audit) supported by 2 Commercial Tax Officers and about 55 officers. The emphasis of internal audit is to review
the correctness of orders issued in respect of mistakes apparent on record or sou moto revisions.
Others: Other mechanisms include a Vigilance Cell under a Joint Commissioner, Mobile Squads and Enforcement
Wing under an Additional Commissioner
1
This is a set of 9 criteria taking into account items various parameters and the criteria is decided by the Assistant
Commissioner (Inspection and Control) on a year to year basis.
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317.
At the central level, the Internal Audit function is
decentralized at the ministry/department under supervision of
the Comptroller General of Accounts while majority of the
states prefer a centralized structure. The practices at the central
government level and in some states are discussed in annexure 11.2:
Internal Audit Practices in Government of India and State
Government in this report. Whatever the structure assumed, the
common thread is that the function needs to have a centralized
command to guidance and monitoring. While Internal Audit
mechanism is being strengthened across the states, the audit
methodology is still largely transactional and compliance-based,
with risk based or system audit being done only sparingly. A few
states such as Bihar and Chhattisgarh have embarked upon
reforming their internal audit strategies with support from the World
Bank. Uttarakhand has enacted Uttarakhand Audit Act, 2012 and the
responsibility of Internal Audit is placed upon a Director – Audit
(currently on deputation from C&AG) under the Finance Department
supported by state staff.
Uttarakhand Internal Audit Strategy
Internal audit wing has been setup under the
Finance Department. Director audit heads the wing
and
is
a
senior
officer
from
the
government/deputed from AG (Audit). All
government agencies are covered under internal
audit. ABC risk categorization determines
frequency of audit. Category A- annual audit;
Category B – once in two years and Category Conce in 3 years. An audit plan is prepared each
year and approved by the government. A Manual
of Internal Audit has been prepared and
implemented.
Development of Internal Audit Strategy
Chhattisgarh: Development of an overall strategy
is in process for the internal audit function
including i) setting up of an internal audit unit
within the Finance department, ii) train a core team
for undertaking internal audits on a pilot basis
including risk based audits and, iii) prepare an
Internal Audit Manual and train its staff to handle
the internal audit function.
Bihar: A roadmap to modernize and strengthen
Internal Audit function in government through a
strategic plan has been developed. The strategy and
the audit manual is now being field tested along
with transfer of skills to the core staff.
318.
Considering the state of the function, the overall conclusion
is that there is no effective internal audit function in GoK.
Departments having established IAWs are short of staff resulting in
inadequate coverage in terms of scope and numbers and compliance
to audit reports is also not adequate, and internal audit is usually
conducted after the close of the financial year. Such internal audit
arrangements are not commensurate to the risk and the nature of
business carried out by these entities. There are major revenueearning and spending departments that have not instated a mechanism
of internal audit. Effectiveness of Internal audit function is assessed in terms of the following parameters. The status in GoK
mapped to these parameters is briefed in Table 50. It is well recognized that regular and adequate feedback to management is
required on the performance of the internal control systems, through an internal audit function that meet international
standards.
Table 50: Effectiveness of Internal Audit
Parameter for assessing effectiveness of Internal
Audit
Appropriate structure particularly with regard to
professional independence
Sufficient breadth of mandate, access to information
and power to report
Use of professional audit methods, including risk
assessment techniques
Mechanism for action by management on the
internal audit findings
Status in GoK
There is no central guideline for setting-up an IAW. The IAWs,
wherever established, is located within the department and
functionally reporting to the head of the department that does not
provide sufficient independence. There is no central oversight of the
function.
There are no formal written guidelines as to the scope of audit or the
powers and responsibilities of the function and functionaries. The
function is fragmented and not under a central umbrella.
Internal audit is largely transactional and use of professional audit
methods or risk based audits is virtually non-existent. Some headway
has been in the CTD. There is no focus on high risk areas and
reporting on significant systemic issues.
C&AG has observed that the mechanism for follow up on internal
audit findings is inadequate and needs considerable strengthening.
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319.
Benchmarking the current internal audit function in GoK with the good practices in PEFA indicates that the
current Internal Audit system in GoK needs to broaden its scope and modernize its audit methodologies to enhance its
effectiveness and efficiency.
Dimension/Good Practice
Coverage and quality of the internal audit function
Internal audit is operational for all government entities, and
generally meet professional standards. It is focused on systemic
issues (at least 50% of staff time)
Frequency and distribution of reports
Reports adhere to a fixed schedule and are distributed to the
audited entity, ministry of finance and the SAI
Extent of management response to internal audit findings
Action by management on internal audit findings is prompt and
comprehensive across central government entities
Current Status
The function is operational in only few government
entities, does not undertake systems review and would not
meet recognized professional standards
Reports are either non-existent or very irregular and not
submitted to the Finance Department or the C&AG
Internal audit recommendations are usually not followed
up effectively and timely
320.
Based on the above discussion, the following actions, if implemented are expected to strengthen the Internal
Audit function in the state and are suggested for inclusion in the 2014 PFM Reform Action Plan.
a.
Conduct a situational analysis of current internal audit arrangements in GoK departments to study the
existing organizational structure, the skills and capacity of existing staff, and current audit methodologies and
procedures. This inventorying will help in a SWOT analysis which can then feed into the internal audit strategy.
This study should also document the “proxy” internal audit mechanisms in the departments and dovetailed with the
core function and also study the systems on other jurisdictions.
b.
Develop risk based strategy for implementing internal audit function in the state. The strategy will suggest the
institutional model for Internal Audit – centralized or departmental; staffing; implementation strategy; audit
committees; capacity enhancement; internal audit approach, methodologies and procedures including reporting;
liaison with external auditors etc. for maximum effectiveness and efficiency of the function.
c.
Carry out ABC categorization of the departments based on budget spent, revenue earned, and the risk perception
based on earlier AG audit reports and start the IA in gradual manner targeting the larger departments
d.
Develop and implement Internal Audit Manual at the state level with sub-manuals for specific revenue and
spending departments.
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5.2
EXTERNAL AUDITING - RESPONSIVENESS
321.
The external independent auditor of the State
Government is the Comptroller & Auditor General of India
(C&AG, India’s Supreme Audit Institution), through its field
office in Karnataka (the Principal Auditor General or PAG)128; this
is similar to the arrangement in all states. The CAG’s functions
and powers are derived from the Constitution of India and
specified in a national audit act - the C&AG’s (Duties, Powers and
Conditions of Service) Act, 1971 129 . The Constitution of India
(Articles 148 to 151) guarantees C&AG’s independence from the
executive - the C&AG is appointed by the President of India.; on a
fixed non-renewable tenure of six years; the C&AG can be
removed from office only by the Parliament by a process of
impeachment; and C&AG’s budget is “charged” and not voted by
the Parliament130. The C&AG, however, does not have the power
or authority to prosecute.
Reports of the C&AG
 Report on State Finances: Review of annual
Finance Accounts and Appropriation Accounts and
compliance with legislations and financial rules
 Report on Revenue Sector: Audit of the revenue
departments and receipts
 Report on Economic Sector: Audit of departments
under the Economic Services category
 Report on Social and General Sector: Audit of
departments under the Social and General Services
sectors
 Report on Public Sector Enterprises: Audit of
public sector undertakings
 Report on Local Bodies: Audit of urban and rural
local bodies
Role of C&AG in regard to audit
The C&AG is the sole authority prescribed in the
Constitution entrusted with the responsibility of
audit of accounts of the Union and the States. It is
the duty of the C&AG to audit receipts and
expenditure of the Union and each State/Union
Territory. The audit reports of the C&AG are
placed before Parliament or the Legislature of the
State/Union Territory. The duties of the C&AG also
extend to audit of Government companies and
corporations and bodies and authorities in
accordance with the laws made by the legislature
and rules made there-under. Source: Regulations on
Audit and Account, 2007
322.
The C&AG primarily conducts three types of
audits – Financial, Compliance and Performance and can
also conduct Special audits. Its audit processes are guided by
Auditing Standards (2002) based on The International
Organisation of Supreme Audit Institutions (INTOSAI)
standards. These are supplemented by the Regulations on
Audit and Accounts, 2007, Internal Controls Evaluation
Manual, Financial Attest Audit Manual and Information
Technology Audit Manual supplemented by several
guidelines/guidance notes and practice guides. The C&AG
submits six types of audit reports that are tabled in the
Legislature (see box)
323.
The 2004 PFMA expressed concern over lack of
responsiveness to external audit reports and identified it
as the single biggest problem affecting the impact of the
audit. The track record had been poor and responses to audit observations and reports were negligible. The report further
identified that since the government’s response was not provided for most audit observations, its position on these
observations was largely unknown. Equally important, action was not taken on systemic issues arising out of the audit
observations.
324.
There are clear and well-defined rules and processes for responding to and follow up on audit reports. These
are described in Hand Book of Instructions for the Speedy Settlement of audit Observations, Inspection Reports, Speedy
Disposal of Audit Paragraphs. The various stages when the departments get the opportunity to respond to the audit
observations and the status and adequacy of follow up is discussed in this section followed by a discussion on the audit
database Audit Monitoring System.
128
The C&AG has 136 offices all over the country and a staff of 46000
The Act lays down the service conditions to secure the autonomous nature of the C&AG and also gives him a wide mandate and puts
almost every spending, revenue collecting or aid/grant receiving unit of the Government under his audit domain.
130 The C&AG’s budget was Rs. 2804 crore during 2013/14
129
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Stage 1-Half Margin Reports: During the course of audit, the local audit party issues “half-margin” audit observations that
provide the first opportunity to the auditee-unit to provide clarifications. An exit conference is usually held with the head of
office to explain and validate the audit observations and also to seek responses.
Stage 2- Inspection Report: Audit observations not cleared or responded during the course of audit are then reported in
Inspection Reports (IR) that pertains to each individual auditee-unit. The IRs are copied to the head of office of the concerned
auditee-unit and to the next higher authority. Initial or first reply on the rectification of the defects and compliance is to be
submitted within one month to the PAG and final action taken within three months. The PAG keeps track of the follow up of
the inspection reports. Table 51 provides the status of pending IRs in the revenue sector.
Table 51: Status of Compliance of Inspection Reports – Revenue Sector
Particulars
As of June (for reports issued up to
December of previous year)
Number of outstanding IRs (no.)
Number of outstanding audit observations (no.)
Amount involved
(Rs. in crore)
First reply not provided (no.)
Source: C&AG Report on Revenue Receipts/Revenue Sector
2013
3363
7283
1,550
86
2012
3115
6668
1,589
73
2011
3738
7610
2,205
25
2010
3554
7106
1,701
As per 2004
PFMA as of
June
2002
8079
3693
Stage 3: Proposed Draft Audit Paras: Audit observations of a serious nature deserving to be included in the main audit
report of the C&AG and results of the Performance Audits are shared with the Principal Secretaries of concerned departments
and the Head of Departments, copied to the Finance Secretary. Reply to these Draft Audit Paras is to be provided within six
weeks of receipt. Table 52 provides a bird’s eye view of the status of reply to the Draft Audit Paras by the auditee. As of
October 2002, responses for 44 of the 52 paras (85%) included in the Civil Audit Report for 2000-01 had not been provided
(2004 PFMA)
Particulars
Draft audit paras shared
Reply provided
Reply not provided
Source: Reports of the C&AG
Table 52: Status of reply to Draft Audit Paras
Revenue Sector
Social Sector
2012/13
2011/12
2012/13
2011/12
36
25
24
15
11
21
5
6
25 (69%)
4 (16%)
19 (79%)
9 (60%)
Economic Sector
2012/13
2011/12
14
11
5
7
9 (64%)
4 (36%)
Stage 4: Action Taken Notes: The Reports of the C&AG are tabled in the Legislature and another opportunity is available to
take action to comply with the audit observation. The departments are required to prepare and submit to Karnataka
Legislative Assembly Secretariat their Action Taken Reports or Departmental Notes (detailed replies) on audit paras within 4
months from tabling the audit reports in the Legislature (and before they are taken up by the Legislative committees for
examination). Prior to submission of these ATNs, these are required to be vetted by the PAG. Table 53 briefs the status of
submission of ATNs (pending) after the reports of the C&AG are tabled in the Legislature.
Particulars
No. of paras
No. of departments
Table 53: Status of pending Action Taken Reports
Revenue Sector
Social Sector
2012/13
2011/12
2012/13
2011/12
126
105
51
45
11
9
15
21
Economic Sector
2012/13
2011/12
24
18
6
4
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1992/93
to 2011/12
Source: Reports of the C&AG
Period/s involved
1992/93
to 2010/11
1995/96
to 2011/12
1995-96
to 2010-11
2001/02
to 2011/12
2002/03
to 2010/11
325.
Besides the above, there are other mechanisms available to provide compliance and settle the audit
observations.
 There is a mechanism of constitution of an “Ad Hoc Committee” in each of the major departments was introduced in
1968 comprising of the Secretary, Administrative Department, Head of Department, Budget Officer Finance Department
(or any other representative) and Deputy Accountant General from PAG’s office. The objective is to expedite clearance
of audit observations in the IRs with at least one meeting every quarter. The PAG forwards a half yearly report of
pending IRs to the Secretary of the Department to facilitate monitoring of the audit observations. Although Ad Hoc
Committees have been formed, they are not proactive and their meetings are irregular (see Table 54).
Particulars
No. of Meetings
Paras settled
Source: Reports of the C&AG
Table 54: Status of Meetings of Audit Ad Hoc Committees
Commercial Taxes
Geology and
Land Revenue
Mines
2012/13
2010/11
2012/13
2010/11
3
3
1
4
38
277
162
Transport
2011/12
1
9
2010/11
2
46

One of the roles of the Internal Financial Advisor (IFA) is to monitor follow-up and compliance on the C&AG audit
reports. For this purpose, the IFAs maintain a manual Watch Register. The IFA circulates the audit paras to the respective
sections through the HoD, consolidates the compliance/action taken and after obtaining approval of the Secretary, forwards
the compliance to the AG. The IFAs however do not use the AMS for data updation nor use the reports from the application.
Moreover, the IFAs do not follow up on Inspection Reports.
326.
Significant pendency in recovery of accepted cases of Revenue leakage reported by the C&AG is another area
of concern. For instance, Table 55 provides the status of recovery of revenue leakage reported by the C&AG in the revenue
sector in GoK – the recovery percentage is quite low and hence the amounts pending recovery is quite huge.
Table 55: Pendency of Revenue leakage reported by C&AG in Commercial Tax Department
Particulars
as of Sep 2013
as of Sep 2012
No.
Amount
No.
Amount
(Rs. in crore)
(Rs. in crore)
2007/08 to 2011/12
2006/07 to 2010/11
Period of pendency
50,671
4,887.00
43526
1,708.00
Total cases reported by C&AG
25036
1,870.00
23148
600.00
Accepted by the Department
2381
39.00
2331
33.00
Recovered
9.5%
2.1%
10.1%
5.5%
%age recovered of accepted cases
Source: C&AG, Report on Revenue Sector
327.
The Controller (Accounts Management) under the
Finance Department has created, in July 2005) a database of
audit and inspection reports and response of the departments.
The database captures the information as given below. The
application has drill-down capability – so one can see the reports
year-wise and department-wise. This is an extremely useful
application for monitoring and also improves transparency as the
database reports are available in public domain. The following
Central Audit Report Management Systems
Karnataka is perhaps the first state to have an online
audit report management system. Other states that
have recently implemented similar systems are
Rajasthan and Odisha (Odisha Central Audit
Management Portal)
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reports are available from this application  Audit Objections/Observations in Inspection Reports
 Draft Audit Paragraphs/Reviews Proposed for inclusion in the C&AGs Audit Report (Civil, Commercial, Revenue
Receipts, ZP)
 Departmental Notes to Paragraphs/ Reviews included in the C&AGs Audit Report (Civil, Commercial, Revenue
Receipts, ZP)
 Departmental Notes to Excess over voted grants/charged appropriations requiring regularization
 Action Taken Notes to PAC/CoPU Reports
328.
Data in AMS, however, is not complete and updated and analysis done based on this data may not provide
the correct picture. A review of the AMS data indicates that although information on audit para has been filled up to
2011/12 or 12th Assembly, yet data on paras cleared may not be up to date. For instance, in case of Action Taken Reports, the
AMS (accessed on May 2, 2014) shows that all paras pertaining to reports issued by the PAC and the CoPU of the 10 th, 11th
and 12th Assembly (and also 4th Assembly) are pending. In case of Departmental Notes pending to C&AG audit paras, the
data in AMS indicates pendency of 60%, 42% and 66%, respectively for 2011/12, 2010/11 and 2009/10. While the
quantitative data is there, the qualitative aspects are not captured by the system. The AMS currently does not have a system
to classify the observations into various types so that systemic and recurrent issues can be identified and addressed by the
GoK. AMS only captures the audit reports issued by the C&AG while reports for ULBs and PRIs are issued by KSAD which
is not recorded or monitored in any system. Even KSAD do not have a database on the pending audit paras and compliance
received from the field. AMS should have a separate module for tracing KSAD audit reports also.
329.
Despite the above, the AMS is a strong tool as it captures the full observation itself although it does not
capture the action taken. The AMS can be further upgraded to capture the nature of the observation so that a classified list
of audit observations are available that could provide insight into the most significant areas of weakness or systemic issues.
330.
Based on available data, although efforts have been made but it appears that not much headway has been
achieved in enhancing responsiveness to audit and improvement in compliance or follow-up with audit observations.
In terms of evidence of follow up on audit observations, the status in GoK when benchmarked against good practices under
PEFA indicates need for improvement.
Dimension/Good Practice
Evidence of follow up on audit recommendations.
There is clear evidence of effective and timely follow up
Current Status
A clear and comprehensive system of follow up on
audit observations exists. A formal response is made
often delayed and compliance is not effective.
331. The following actions are suggested for the 2014 PFM Reform Action Plan.
a)
At the outset GoK needs to re-iterate the seriousness of compliance with audit paras and prescribe action
against those who fail to take action to recover loss/outstanding demand in a time bound manner. The
nature of recourse to be taken by GoK for non-compliance should be pre-determined in consultation with the AG.
b) At the first stage, the role of the IFA vis-a-vis follow up of audit reports needs to be clarified and enhanced.
Training should be provided to the IFAs in the process of follow up and also in the use of AMS. They should also
be entrusted the responsibility of monitoring the follow up of Inspection Reports.
c)
At the second stage, strengthen the institution of Ad Hoc Committees. GoK to ensure that Ad hoc Committee
Meetings are convened periodically for effective and expeditious settlement of outstanding paragraphs. The
minutes of the meetings should be posted on the website of the concerned department. GoK may consider adding
functionality in AMS to capture the meetings held and the minutes.
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d) Constitute a state-level Apex Audit Committee to oversee the status of compliance and also the working of
the Ad Hoc Committee. The apex committee could have the Chief Secretary as the Chairperson, the Secretary of
the Finance Department as the convener with representations from the office of the AG and some external
professionals such as the Finance Controllers of large SOEs and well-known Chartered Accountants from the
state.
e)
The C&AG has recommend that GoK takes measures to ensure expeditious recovery of revenue at least in
respect of the cases that have been accepted by the Departments. This is a good suggestion and proposed for
inclusion in the Action Plan. Considering the amounts involved, the concerned departments should develop a plan
including deploying special manpower to recover amounts that they have accepted are recoverable.
f)
GoK should make data updating (both audit observations and clearance) in AMS compulsory and the
Controller (Accounts Management) should monitor this on a more frequent basis. Enhance the functionality
of AMS by including other aspects such as meetings of the Ad Hoc Committees and integrate the digital database
of the Karnataka Legislative Assembly Secretariat with AMS to avoid duplication.
g) Systemic issues need to be captured in AMS. The AMS can be further upgraded to capture the nature of the
observation so that a classified list of audit observations are available that could provide insight into the most
significant areas of weakness or systemic issues.
h) KSAD Reports to be captured in AMS: AMS should have a separate module to monitor the KSAD audit
reports and the level of compliance made by the departments in respect of this report. Going forward this would
be important as KSAD would be submitting a consolidated report on ULBs and PRIs to the Legislature.
i)
Linking AMS to KII: The AMS is being developed as a module under the KII – Audit compliance management
module. The above recommendations on the software having feature for classification needs to be incorporated in
KII.
5.3
STRENGTHENING KARNATAKA STATE ACCOUNTS & AUDIT DEPARTMENT (KSAD)
332.
KSAD is a key pillar of PFM of GoK: KSAD is one of the key departments of GoK which supports both
accounting and auditing functions131 for GoK. KSAD functions under the direct control of the Finance Department and is
headed by a Controller who is a senior KSAS staff. The sanctioned staff strength of KSAD is 4326. Nearly 84% (3687 staff)
of the staff are on deputation to various departments for carrying out accounting function while 16% (639 staff) of the staff
are carrying out the audit function.
333.
Accounting functions in the state is supported by 3687 KSAD staff 132 : KSAD provides majority of the
accounting and finance workforce who carry out accounting function of the state. KSAD deputes its officers to work as
financial advisors, chief accounts officers and accountants in various Government Departments, Boards, City Corporations
and other Institutions. The key roles of these officials are to assist in preparation of budget, maintenance and compilation of
accounts, conduct internal audit and to provide opinion on financial matters as Financial Advisors. The accounting functions
of officers/staff of KSAD who are deputed to Government departments and quasi government institutions are detailed in GO
issued in 1961133. Only 9% of the staffs are in the cadre of IFA or chief accounts officers which have advisory function to the
departments, while other staffs are in the level of audit officer/accounts superintendent which are support function to the
departments. With the evolving changes in the PFM environment like PPP, double entry accounting, introduction of IT
131
KSAD also functions as the treasurer for 309 charitable endowments. KSAD is the authorized agency for calculating and approving the
pensionary benefits to the municipal employees.
132 45% of the staff are deputed to PRIs, 38% are deputed to PWD, and about 17% are deputed to other organizations.
133 Order no: FD 142 PSA 61 dt: 27th Nov 1961
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systems, and increasing needs from the organizations/departments, the functions and the expected outputs from these staff are
increasing which needs to be addressed.
334.
Statutory auditor for 6637 auditee institutions carried out by 639 staff: KSAD is the local audit office for all
key offices and organizations (which are not audited by the C&AG). The Controller, KSAD is designated by the provisions
of various Acts or by Government Orders as the auditor of accounts of local bodies like Urban Local Bodies, Gram
Panchayats, as well as Universities, Muzrai Institutions, Urban Development Authorities and other specified autonomous
Boards and Authorities. The audit of the entities is carried out through the 29 Local Audit Circles (LAC) at the District level.
These LACs audit Local Bodies and other entities within its division. In case of City corporations and Universities, Chief
Auditors are attached to the City Corporations and Audit officers are attached to various Universities to conduct
concurrent/post audit of the respective Institutions. Every year they have to cover all the auditee institutions, but due to
limited staff all audits don’t get completed on time. There is a disproportionate allocation and deployment of staff for
accounting and auditing functions.
335.
In keeping with the evolution of government systems over the years and expanding PFM requirements, KSAD
responsibilities have increased too. GoK and KSAD have recognized the challenges due to changes and have been working
on strengthening the department. As part of the ongoing reforms the following actions have been taken:
336.
New vision for KSAD: KSAD should strive
to be a model department in providing timely and
IFA
efficient services of accounting, auditing, and
Function
supporting public financial management in the state.
The new vision envisages KSAD to have an enhanced
role in the areas of accounting, auditing, providing
services of IFA, new roles for providing services of
PFM
Audit
PFM specialist to FD and act as internal auditors in
Function
Function
entities where KSAD is not the statutory auditor. While
the KSAD currently provides the accounting and
auditing function, there is a lot of scope for
improvement to address the challenges faced in these
areas. Currently KSAD contributes to the IFA
function134 to a limited extent as only 3 IFAs of the GoK
are provided by KSAD. KSAD is required to identify
staff and develop talent through training and capacity
Internal
Accounts
building so that in future all IFA staff could be provided
Function
Audit
by KSAD. Similarly KSAD is required to identify staff
and develop their talent to carry out the function of PFM
practitioners who can work in the Finance department. These two areas are immediate requirements of GoK and needs to be
addressed by KSAD at the earliest. The role of internal audit for the government is still evolving. KSAD is ideally suited to
take on this role in those cases where it is not the statutory auditor. As the internal audit function evolves in GoK, KSAD
needs to develop capacity and support this function. (Also refer internal audit section)
KSAD
Areas of Support
Accounting Services
Table 56: KSAD strengths and weakness
Strengths
Limitations
More than 80% staff provides Staff has very limited exposure to
accounting services. Staff double entry basis of accounting
Way forward
Staff identified for accounts
cadre should be provided
134
Only three departments namely RDPR, PWD, and WRD have IFA from KSAD while others are employed from the secretarial services.
Refer to IFA note
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Areas of Support
Strengths
are generally well versed in
government accounting
Auditing Services
Staff are well versed with
manual auditing currently
carried out
IFA Services
Currently only three staff
provided from KSAD
PFM Services
Internal
services
audit
Limitations
as
well
as
computerized
accounting system which is now
followed in ULBs, PRIs and
government companies.
Most staff are placed in same
sector/organization which does
not help in broad basing their
knowledge
Staff has no exposure to double
entry accounting or carry audit
through system, while most of
their clients have moved to double
entry computerized accounting
system.
Inadequate staff and increasing
number of auditee leading to
piling up of arrears
Way forward
intensive training on double
entry accounting aspects along
with
operation
of
computerized
accounting
software.
Staff should be rotated to
support them in broad basing
their skill sets.
Train auditors for carrying out
audit through the system
Training auditors on double
entry accounting aspects along
with
operation
of
computerized
accounting
software.
To reduce arrears, in the short
term do outsourcing of audit
and in the long term look at
compulsory rotation of staff
from accounts to audit, cosourcing and risk based audit.
Identify staff and develop
talent through training and
capacity building so that in
future all IFA staff could be
provided by KSAD.
IFA rules to be changed to
ensure that IFA can be
sourced only from KSAD.
This is a new line of service to
be supported by KSAD.
KSAD is required to discuss
with FD, identify staff and
develop their talent to carry
out the function of PFM
practitioners who can work in
the Finance department.
This is a new line of service to
be supported by KSAD.
KSAD should create a
separate set of staff for
carrying out internal audit.
Depending
on
the
governments model of internal
audit KSAD should develop
the staffing plan and support
this function.
337.
New Cadre & Recruitment (C&R) rules issued135: KSAD has introduced a new C&R Rules effective from 2011
which covers both the qualifications needed and the training which should be completed by the staff for promotions. The
C&R has prescribed commerce graduate with computer training as minimum qualification for recruitment for cadres starting
135 GoK
has also issued State training policy 2011 and computer literacy rules 2012 which mandates staff to attain computer literacy.
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from Accounts Assistant, while for promotion, completion of training on accounts and computers is mandatory. At the cadre
level of assistant controller and accounts officer 50% of the staff will be hired through direct recruitment and another 50%
will be hired through promotions. The percentage of direct recruitment is higher in the lower cadre levels. While this is a step
in the right direction, the government needs to develop a training strategy and plan for the new staff.
338.
Training for KSAD officers: GoK has developed a detailed training plan for KSAD officers in the areas of
accounting, auditing and financial management, and as a part of this plan has identified institutes like Institute for Financial
Management and Research (IFMR), Institute of Public Enterprise (IPE), National Institute of Financial Management (NIFM),
and CAG for training the staff. The state has developed a detailed curriculum of training with these institutions and has
signed MOU for conducting these training programs. These trainings would cover a wide range of financial management
subjects helping KSAD staff to understand and appreciate the PFM environment and linkages in a holistic manner.
339.
IDF assistance to KSAD: An IDF grant has been provided to GoK to strengthen KSAD. The objectives of this IDF
to strengthen the accounting and auditing services of the KSAD so that it evolves into an effective service department in
providing efficient and timely accounting and auditing services. The IDF is supposed to develop deliverables like a) audit
manual; b) HR manual; and c) provide training and handholding to KSAD staff. While this activity is delayed and still on
going, GoK needs to ensure that these studies are completed and adopted by them.
340.
Challenges before KSAD: Even though KSAD has carried out some reforms in the last decade the organization
strength, and capability of resources have not kept pace with the changes. In this context, following are some challenges
faced by the KSAD:
Capacity issues:
a.
b.
c.
GPs & ULBs have switched over to the Double Entry computerized System of accounting. Having traditionally
worked in cash based single entry system of accounting, the KSAD’s staff faces serious capacity constraints while
taking up either preparation of accounts or auditing of accounts prepared on double entry accrual accounting basis.
Further, increasingly the governments as well as local bodies are moving towards computerized maintenance of their
accounts in which KSAD needs to develop its capabilities to account as well as audit using computers. There is an
increasing need for qualified finance managers both the state level and at department level which has to be provided
by SAD.
KSAD has been traditionally carrying out transaction and compliance audit and has not carried out financial attest
audit due to nature of accounts and statements which were prepared by entities before. However now ULBs and GPs
are producing financial statements and KSAD has not been able to carry out financial attest audit function for these
entities. The financial attest function is carried out by CA firm, and this audit report is not used by KSAD.
Audit issues:
d.
e.
f.
g.
KSAD does not have an enabling audit act which provides them with powers and responsibilities. KSAD derives it
powers to audit from various statutes and the aspects of responsibility of the auditee both in terms of producing the
records and compliance required to address the audit issues. Also there is no penalty for non-compliance for the
audit findings. KSAD initiated formulating such an Act in 2002 but it was not taken forward.
KSAD is following the Mysore Local Fund Audit Manual 1959 and Official Memorandum No. CSA 6 CIR 76 dated
4th April 1977. Even though KSAD has prepared a revised manual in 2000 it was not approved.
KSAD audit methodology of carrying out 100% audit of all transactions coupled with manual audit and limited staff
capacity contributes to backlog of audit. Such traditional practices are not considered good practices for an auditing
agency and they need to move to new audit methodologies.
KSAD is required to place before the Legislature every year a consolidated report on the ULBs and PRIs in a time
bound manner, however this is delayed due to non-production of records and completion of audit on a timely basis.
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h.
One area of concern is the delay in completion of audit and pending audits. As on 31-03-2014 the pending audit
periods are 2167 audits (refer Table 57). This backlog needs to be viewed seriously with the closure of FY 13-14 the
pendency of audits would increase. Concerns about quality of audit, as well as poor compliance by organizations to
audit observations/findings need to be addressed.
Sl. No
Name of the
institutions
1
Gram Panchayats
3
Urban Local
Bodies
Universities
4
Other Institutions
2
Total
Table 57: Status of outstanding audits as on 31.03.2014
Not audited
Not audited
Number of
Total
Audit
Due to Non
Due to
institutions
entities
completed
production of shortage of
not audited
reasons
staff
Number of audit
reports to be
completed
5630
5168
462
220
242
1319
220
200
20
0
20
68
24
13
11
5
6
30
765
429
336
0
336
750
6639
5810
829
225
604
2167
Staffing and other issues:
i.
j.
There has been a massive increase in the scale, as well as variety of schemes being implemented by the local bodies
in recent years. New entities are being brought under the purview of SAD audit over time without corresponding
increase in KSAD staffing therefore leading to backlog of accounts and audit. Also skewed allocation of persons
between accounting and auditing function is affecting the efficiency of department in providing timely audit
services.
Currently IT infrastructure available in KSAD and the LAC offices is very minimal. The department as of now does
not even have a repository of all audit reports issued in soft form nor any database is available for this purpose.
341. The following priorities have been identified for 2014 PFM Reform Action Plan:
Capacity building on accounting and PFM:

Training for staff on commercial accounting: Specialized training for accounting staff on deputation is required in
the areas of accrual based system of accounts, financial management and analysis, computerized accounting, and
public financial management so as to equip them to handle the challenges faced in the changing PFM environment.
The current training program envisaged by the GoK needs to be continued. Refresher and advanced accounting and
financial management training needs to be provided to the staff on regular basis.

Identify train and groom core group of staff for IFAs and PFM profile: KSAD in discussion with FD, should
identify core group of staff who could be trained and groomed for the post of IFA in departments and PFM staff to
work with the FD. The identified staff should be provided specific training on financial management and PFM
depending on the roles envisaged for them.
Enablers for improving audit efficiency

Enact KSAD Audit Act to provide a legal status to KSAD: GoK can consider framing an audit act for KSAD on the
lines of act issued by other state like Uttarakhand, Kerala, AP and Odisha and can frame rules and manuals to
support the act. Such an act would provide mandate, independence and powers to KSAD to carry out audit as well as
the follow up on compliance. In this regard GoK should also revisit the provision of payment of fees for carrying out
audit which is currently on the lower side.
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
Develop and implement a comprehensive audit manual: KSAD should develop an audit manual covering all the
entities for which audit are carried out by KSAD. The audit manual should have the audit policies, audit procedures,
a sample audit plan, operation area wise risk perception and the extent of checking to be carried out by the auditor,
detailed audit checklist, audit reporting format and formats for tracking audit compliance. The manual should be
developed and piloted in one or two LAC and the rolled out across the department.

Enhancing audit capacity and capability through training: KSAD needs to provide continuous training on audit
methodologies and techniques to staff. KSAD has identified a core curriculum of training and has also identified
CAG office as one of the trainers for audit. Institute of Chartered Accountants of India (ICAI) can be enrolled as
another trainer to provide training on a regular basis to the staff. Apart from audit, staff need to be trained in the
following areas: (a) sector wise trainings for audit entities covered by KSAD, (b) audit report writing and
presentation, (c) financial statement attest audit, (d) auditing through computer records, (e) training on CAAT and
(f) audit of double entry based accounting records. Going forward KSAD can design an audit certification course for
their staff in consultation with CAG and ICAI.

Centralized Audit monitoring cell to improve compliance: A centralized audit monitoring cell is to be created at the
central level. This would help KSAD in audit planning, monitoring, as well as ensuring quality assurance of reports
issued and improving efficiency of reporting. 136
IT Interventions to support faster and efficient audit

Implement Audit management software to increase efficiency: KSAD should consider implementing audit
management software which would help them from audit planning up to audit report preparation and follow up. The
software would help KSAD in carrying out risk assessment and preparing a risk based audit plan. Based on the plan,
the audit can be carried out and the software would support KSAD in both resource scheduling and tracking the
progress of work in terms of time and resources spent. The application would facilitate filing of working papers
electronically and would be useful for report generation. This would help KSAD to have a uniform and structured
reporting and have a database of all reports issued which would help in analyzing and tracking the reports for
compliance. The reports and working papers would be available for audit in the subsequent year.

IT infrastructure to improve efficiency: KSAD should engage an IT consultant to work out the IT infrastructure to
address the immediate needs so that the current functions could be done faster and better in an IT environment as
well as work on the medium term needs for implementing audit management software.
Introduce new audit practices

136
Risk based audit: Risk based audit needs to be introduced
by KSAD at the transaction level. Currently KSAD is
carrying out 100% audit of all transactions. KSAD needs to
identify the key business processes for each type of audit
entities, and then determine the risks and the systems control
available in these areas. Based on the risk perception the
transactions sample would be determined which would be
audited and based on the results of audit, KSAD would
Risk Based Audit : ULB
For ULB, more efforts should be focused on
checking revenue collection, and remittance of
such collections into the Bank, and can limit
checking of salaries and other benefits which are
being handled by HRMS.
GoK has sanctioned posts and budget for creation of this cell during this FY.
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decide on whether to expand the testing further or not. For carrying out such audits clear procedures and guidelines
need to be laid down in the audit manual. The risk parameters and sample size can be set in the audit manual initially
for first two years and going forward it can be calibrated by KSAD based on field experience.

Encourage co-sourcing137: Co-sourcing means KSAD would
appoint a CA firm and share with them the audit methodology
and the required reporting requirements, based on which the
CA firm would provide the inputs to KSAD. Then KSAD can
use the CA audit reports, and if required KSAD can carry out
supplementary audit 138 , and then issue a combined report.
Under this system the final report will be issued by KSAD by
using the work of the CA firm. At the entity level KSAD can
categorize the risk ratings for the type of auditee entities. The
risk can be assessed based on the budget handled, transactions
carried out, audit arrears, seriousness of the previous audit
observations, and inherent risks of such organizations. Once
the risk is assessed KSAD can decide if some of the entities
can be audited through co-sourcing. Also in future, KSAD
can empanel the CA firms, who can work under their
supervision and guidance and produce reports are required
by KSAD which can be used by them for issuing a
combined report. In case of ULB, this practice is followed to
limited extent. While CA firms have been appointed to carry
out financial statements audit, KSAD carries out its own
transaction audit and issues a separate report. This could be
an ideal case for pilot testing.
Supplementary Audit: CAG
For Government companies CAG appoints the
auditor from an empaneled list of CA firm. These
firms carry out the audit in accordance with ICAI
standards and submit the report to the CAG. CAG
on perusal of the report either decides to carry out
the supplementary audit or accepts the audit
report in total.
CAG then issues the
supplementary report to the audit entities.
ULB Audits: Issue of Duplication
ULB audits are being carried out both by CA firms
(financial attestation audit) and KSAD (transaction
audit). The CA firms financial attest report is not
used by KSAD. KSAD carries out transaction audit
and provides a separate audit report which is then
consolidated and presented to the legislature. Going
forward, it would be ideal that KSAD issues one
audit report for the ULB covering both the
transaction audit and financial audit reports (using
reports given by CA firms)

Carry out ULB and GPs audit through computer: ULBs and GPs139 have implemented computerized accounting
system and are generating books of account from the software. Going forward manual records in these entities
would be withdrawn and only computerized accounts would be available. KSAD should use the accounting software
and start auditing these entities. As a first step KSAD should be trained on this software’s by the respective
departments and then KSAD can do pilot audits of some of the good districts for the FY 13-14. Based on the results
of the pilot this exercise can be rolled out to all the entities. From FY 14-15 all entities books and records should be
audited through the computer 140.

Carry out Financial Attest Audit: Financial141 (Attest) Audit means expressing an audit opinion on a set of financial
statements. It includes
a. examination and evaluation of financial records and expression of opinions on financial statements;
b. Audit of financial systems and transactions including an evaluation of compliance with only those applicable
statutes and regulations which affect the accuracy and completeness of accounting records; and
137
Uttarakhand Act provides provision for state government to conduct audit through outsourced agency
If the CA report is unqualified or does not indicate major issues, KSAD at its discretion can accept the report and may not carry out
supplementary audit. However if on the perusal of the audit report, KSAD opines to carry out additional testing then they can carry out a
supplementary audit.
139 ULBs and GPs represent 88% of the auditee covered by KSAD.ULBs have implemented e-gov financials while GPs have implemented
Panchatantra accounting software.
140 KSAD has already started working on this action plan.
141 Source CAG Financial attest audit manual
138
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c.
Audit of internal control and evaluation of adequacy of internal audit functions that assist in safeguarding assets
and resources and assure the accuracy and completeness of accounting records.
KSAD in the short term can carry out financial attest audit using co-sourcing model and in the next 3-4 years should
develop its capability to carry out financial attest audit. For that staff with adequate knowledge of commercial
accounting needs to be identified and trained to carry out his function.
Staffing and other interventions

One time reduction of audit arrears: KSAD audit arrears as on date is more than 2000 audit reports. KSAD should
analyze the reasons for these arrears into two major areas (a) where accounts have not been submitted; and (b) where
accounts have been submitted but audit has not been completed. In the first case, KSAD needs to submit the list of
defaulting entities to the administrative departments and agree on a time frame by which the accounts would be
completed. In terms of arrears of audit, KSAD should constitute special teams to complete the audit back log and
also hire CA firms to carry out audit on their behalf to reduce this backlog within the next two financial years.

Increase cadre strength: KSAD should rework the cadre strength based on the current workload of audits and the
expected new services to be provided by them to GoK. KSAD should carry out an extensive HR and skills mapping
exercise and prepare a revised organization structure along with the required staff numbers to carry out the accounts
and audit function both timely and efficiently. KSAD can also create policies on rotations and compulsory working
of staff in the audit wing to broad base their knowledge and capabilities.
5.4
LEGISLATIVE REVIEW – EXTERNAL AUDIT
342.
GoK has established a system of Legislative oversight over external audit reports through three Committees
of the State Legislature. These are the Committee on Public Accounts (CoPA), Committee on Public Undertakings (CoPU
also called the Public Accounts Committee or PAC) and Committee on Local Bodies and Panchayati Raj Institutions (CoLP),
each comprising of 20 members of the State Legislature. Each committee is constituted for a year and no Minister can
become a member of any of these committees. The CoPA and CoPU each are supported by two officials of the Indian
Accounts and Audit Services. In examining the reports, regular technical assistance is available from the State Accountant
General.
343.
The mandate and functioning of these committees are defined in the Karnataka Budget Manual and the business
rules of the State Legislature (summarized in Table 58). While the budget manual describes the roles and process to be
followed for these committees, the Karnataka Rules of Procedures and Conduct of Business in the Legislative Assembly
(amended April 2011) define their constitution, term, quorum and functions. The work of each of these committees is
mutually exclusive. The reports of the C&AG and the Karnataka State Accounts Department (KSAD) 142 once tabled in the
State Legislature are referred to one of the above committees based on their mandate. These committees examine the
external audit reports and seek response from responsible parties about the findings of the examination. The committee may
also recommend actions and sanctions to be implemented by the executive, in addition to adopting the recommendations
made by the external auditors.
142
KSAD has the mandate to audit Gram Panchayats, the third tier of rural local bodies while the C&AG conducts the audit of Zilla
Panchayats and Taluk Panchayats
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Table 58: Mandate of Legislative Committees for review of external audit reports
Committees143
Roles
Committee on Public Accounts – Examination of:
PAC (Rules 264 to 266):
 State’s Finance and Appropriation Accounts and other accounts laid before the
assembly
 Accounts of state corporations and autonomous/semi-autonomous bodies and
the reports of the C&AG
 Expenditure spent in excess of the amounts granted by the Assembly and
making recommendations
Committee on Public Undertakings – Examination of:
CoPU (Rules 270-271)
 Reports and accounts of public undertakings specified in Schedule III of the
Rules
 Reports of the C&AG of public undertakings
 In the context of autonomy and efficiency of public undertakings, whether their
affairs are managed in accordance with sound business principles and prudent
commercial practices
Committee on Local Bodies and
Panchayat Raj Institutions – CoLP
(Rule 266A)
Examination of
 Finance and Appropriation Accounts and other accounts laid before the
assembly for the expenditure of local bodies and PRIs
 Reports of the C&AG (pertaining to local bodies)
 Whether the local bodies and PRIs are performing their duties in accordance
with the law bearing in mind the autonomy of these institutions
Source: Compiled from the Karnataka Budget Manual and Rules and Procedures and Conduct of Business in Karnataka
Legislative Assembly, 2011
Note: The CoPU and the CoLP do not have the mandate to examine and investigate matters of major government policy,
day to day administration and in respect of which provision is made in any special statute. Detailed discussions on the
working of the Legislative committees are provided in Annex 11.3.
344.
The Committees undertake regular hearings for examination of the C & AG audit reports and action taken
notes submitted by the departments (see Annex 11.3). They have the power to make criticism or offer suggestions and
recommendations. The reports prepared by the committees are required to be presented before the Legislature and copied to
Administrative Department, the AG, Finance Secretary and the C&AG. Similarly, the action taken by the departments are
sent to the Legislature Department, AG and the Finance Secretary. The Committee can also send advance recommendations
for immediate implementation.
345.
In 2004, the biggest factors affecting the impact of the Legislative review were delays by departments in
providing to the PAC their responses to the audit reports and retroactive approval of expenditure that exceeded
approved appropriation. Action Taken Reports on the PAC’s observations were usually delayed, sometimes for years and
this still remains an area of concern despite clear and detailed rules and deadlines for follow up to address the outstanding
paras.
346.
The 2004 PFMA recommended measures to be taken to improve the effectiveness of the Legislative
committees and GoK has progressed well in implementing many of these measures. Besides, the GoK also constituted a
separate Legislative Committee for Local Bodies and Panchayati Raj Institutions in 2010.

The most significant achievement since 2004 has been regularization of expenditure in excess of Legislative
approval that had been pending since 1989-90. The issue of requesting retroactive approval of expenditures
Clause 65 of the Manual defines the “Public Accounts Committee” or “Committee on Public Accounts” as a Committee of the
Legislature constituted for the purpose of scrutinizing the Finance Accounts, the Appropriation Accounts and the Audit Reports thereon
and such other accounts laid before the Assembly as the Committee may think fit. There is no equivalent definition for COPU.
143
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that exceeded approved appropriations has been addressed by the PAC regularizing excess expenditure
aggregating Rs. 9575 crore up to year 2010-11 (Rs. 4782 crore regularized by January 2011 and Rs. 4793 crore
by February 2013). The C&AG reported no expenditure in excess of Legislative approval for 2011-12 and only
Rs. 494 crore for 2012-13, pending regularization indicating that budgetary provision had been made for all
expenditure.

The CoPA and CoPU have adopted the approach of taking up the latest reports first and simultaneously clearing
the backlog of the department taken up for hearings. Moreover, the selection of audit paras for hearing is now
done on the basis of materiality and risk and the seriousness and financial impact of the matter observed. There
is, therefore, more emphasis on taking up contemporary and relevant issues.

Data in respect of total recommendations issued by the CoPA and CoPU (but not the CoLB) and the action
taken by the departments are now captured on the online “Audit Monitoring System” – however the data is not
regularly updated.
Other recommendations like increasing tenure of PAC members and opening up of PAC hearings to the public are yet
to be implemented.
347.
While the provisions in Karnataka in respect of the Legislative Committees are elaborate and GoK has taken
measures to improve the effectiveness of the committees and casting more responsibility on the departments, yet there
remain some areas of concern.
a)
In spite of continuous follow up from Finance Department and instructions in the Budget Manual (clause
301), the number of unsettled audit observations continue to be on the increase and the Legislative Committees
have taken serious note of this situation.


In the first instance, the Administrative Departments are required to submit explanatory notes, on the
corrective or remedial action taken on the C &AG observations, within 3 months of the report being placed in
the Legislature. As of December 2013, in case of CoPU four departments had yet to submit explanatory notes
for 6 out of 39 paragraphs/reviews pertaining to the years 2009-10 to 2011-12.
In the next stage, compliance to Action Taken Notes/Reports with recommendations from the CoPA/CoPU is
to be furnished within six months of the report being placed in the Legislature. As of December 2013, in case
of CoPU 5 reports between Dec 2011 and Nov 2013 had yet to be complied. The CoPU reports that as of July
2013, 430 Departmental Notes were pending (since 1995-96) in respect of civil reports and 131 in case of
revenue (since 1992-93).The procedure for action to be taken on the reports of the CoPA and CoPU is
provided in one paragraph in a Handbook issued by the GoK (hosted on the AMS website) 144 . These
instructions neither provide timelines nor the consequences of non-compliance.
b) The workload of CoPA has increased as the single audit report has now been segregated into three reports. From
the financial year 2011, the single Civil Report (audit report on government departments) has been segregated into
three reports namely Civil, Economic Sector and General & Social Sector and this has increased the number of
reports to be reviewed by the CoPA (on the other hand, the CoPU and the CoLB have too review only one report per
year). Presently (May 2013), there are 45 paras on which the COPA has not received departmental notes (termed as
“external arrears”) and in respect of 161 paras, the PAC itself has not yet considered the departmental notes
submitted (termed as “internal arrears”). It is felt that staffing is presently not commensurate with the increased
144
Hand Book of Instructions for the Speedy Settlement of audit Observations, Inspection Reports, Speedy Disposal of Audit Paragraphs
and Timely Action on Matters pertaining to the Public Accounts Committee and Committee on Public Undertaking
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number of audit reports and roles for the CoPA resulting in increasing internal arrears. The CoPA in particular
needs additional human resources to cope with the increased workload and to clear the backlog.
The online “Audit Monitoring System” (AMS) managed by the Controller (Accounts Management), Finance
Department (http://ams.kar.nic.in) captures data in respect of total Action Taken Reports pending in respect of
reports of the CoPA and CoPU (and not the CoLB). The data in the online database is outdated and no change in
status has been recorded since May 2013 (when this study commenced). The data updated for CoPA and CoPU is
up to the 12th Assembly145 and only for number of paras issued by the CoPA and CoPU. The CoPA also maintains
its own standalone computerized database.
c)
d) Other issues include – (a) the current procedures do not mandate any timeline for review of the audit reports by the
committees; (b) The Action Taken Reports are not placed in public domain; (c) the Finance Department is required
to bring up-to-date an Epitome of the reports of the CoPA at intervals ordinarily of five years (clause 343), but this
has yet to be implemented.
348.
GoK’s current system for Legislative scrutiny of external audit reports, as described above, assessed against
the best practices under PEFA indicates scope for improvement.
Dimensions/Good Practice
Timeliness of examination of audit reports by the
Legislature
Scrutiny of audit reports is usually completed by the
Legislature within 3 months from receipt of the reports
Extent of hearings on key findings undertaken by the
Legislature
In-depth hearings on key findings take place consistently
with responsible officers from all or most audited entities,
which receive a qualified or adverse audit opinion
Issuance of recommended actions by the Legislature and
implementation by the executive
The Legislature usually issues recommendations on action to
be implemented by the executive, and evidence exists that
they are generally implemented.
Current Status
Examination of audit reports by the Legislative committees
usually takes more than 12 months to complete
In-depth hearings on key findings take place with responsible
officers from the audited entities, and covers many of the
entities (those selected by the CoPU
The Legislative Committees issue recommendations on the
audit observations to the Executive which are generally
implemented according to available evidence, though the
implementation could be delayed
349.
The following priorities have been identified for the 2014 PFM Reform Action Plan to improve the efficiency
and effectiveness of the Legislative committees
145
a.
The procedure for speedy reply to the reports of the Legislative committee should be strengthened prescribing
strict timelines and action for delayed or non-compliance. The Handbook should be further strengthened in this
area. Since the CoLB is now fully functional, all documents should also include the CoLB. The role of the IFA to
strengthen this area and as a focal point for coordinating audit compliance and response to the Legislative
committees could be increased (the role of the IFA has been discussed in section 1.4).
b.
Increase the technical human resources at the disposal of CoPA. This will enable timely examination of a larger
number of reports and Action Taken Reports submitted by the departments with the target of completing the
Legislative scrutiny within 12 months from tabling the audit reports in the Legislature. The resources provided
could be variable in tenure – short term to cope with increased workload when the audit reports are typically
available in December-January each year and longer term for clearing of backlog.
c.
The database in the Audit Monitoring System needs to be updated. The data on reports issued by the Legislative
Committees and the action taken submitted by the departments should be concurrently updated on the Audit
Subsequent to elections held in Karnataka in May 2013, the current Assembly is the 14th Assembly
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Monitoring System. The data of the CoLB too should be uploaded on the Audit Monitoring System. The
application used by the CoPA to maintain its own database could be integrated with the AMS.
146
d.
The General Rules and Procedures and Internal Rules of the CoPA are under review and revision by the Rules
Committee to strengthen the Legislative committees. This should be pursued and expedited to improve the
efficiency of these committees.
e.
Place the Action Taken Reports in public domain after they are laid before the State Legislature. Reports of the
PAC in Andhra Pradesh are placed on the website of the Legislature146
f.
An epitome of the recommendations of the Legislative committees should be published say once in 3 years. An
epitome is brought out by the Government of Odisha on the reports of the state’s CoPA and also by the
Government of India.
http://www.aplegislature.org/legislativeassembly-committees-publicaccounts1
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Section 6. THEME SIX: IMPROVING PFM IN LOCAL SELF GOVERNMENTS
6.1
LOCAL SELF GOVERNMENTS - OVERVIEW
350.
Local Self Governments play an important part in the State PFM environment as they handle funds up to
42% of net own revenue receipts of the GoK besides taxes and fee that they levy. Local Self Governments (LSG) are
constitutional bodies formed under their respective legislation. These entities have their own legal existence, have their own
Acts and Rules, have their own policy making process and are distinct from the state government and are often referred to as
the third tier of government. The executive functions of these Local governments are normally carried out by State officials.
In Karnataka there are two major types of LSGs – Urban Local Bodies (ULBs) 147 and Rural Local Bodies referred to
collectively as Panchayati Raj Institutions148 (PRI).
351.
Karnataka has 219 ULBs. These comprise of eight City Corporations (CCs) for the state’s largest cities, 44 City
Municipal Councils, 94 Town Municipal Councils, 68 Town Panchayats for smaller towns and 5 Notified Area Centers.
Unlike PRIs, ULBs are not hierarchical in nature and each ULB is independent of the other. The CCs are governed by the
Karnataka Municipal Corporations Act, 1976 (KMC Act) and the other ULBs are governed by the Karnataka Municipalities
Act, 1964 (KM Act). Each ULB has a Council that is comprised of the ULB’s own public (elected) representatives. The
Council is the policy-making and oversight body of the ULB. The executive officer of each ULB is a Commissioner or Chief
Officer appointed by GoK. The executive reports to the Council and to the State Government. The PFM requirements are
covered by the KMC Act and KM Act. ULBs report administratively to the Directorate of Municipal Administration (DMA)
under the Department of Urban Development.
352.
Karnataka established a three-tier Panchayati Raj Institutions (PRIs) system These comprise of 30 Zilla
Panchayats (ZP) at District level, 176 Taluk Panchayats (TP) at Block level and 5630 Gram Panchayats (GP) at Village level
in a hierarchical order with representation of the lower PRI in the body of the next higher PRI. The PRIs are governed by the
Karnataka Panchayati Raj Act, 1993 (KPR Act). Each PRI has an elected body and headed by a person nominated as
“Adhayaksha”, supported by standing committees. These committees are the policy-making and oversight bodies of the PRI.
All PRIs have executive officers from GoK - ZP has a Chief Executive Officer assisted by a Chief Planning Officer, Deputy
Secretary and Chief Accounts Officer; TPs have an Executive Officer supported by accounts officer; while GPs have a
Panchayat Secretary and/or a Panchayat Development Officer. The executive reports to the committees and the State
Government. The PFM requirements in PRIs are covered by the KPR Act, ZP (Finance and Accounts) Rules 1996, TP
(Finance and Accounts) Rules 1996 and GP (Budgeting and Accounts) Rules 2006. PRIs report administratively to the
Department of Rural Development and Panchayati Raj (RDPR).
353.
Local self-government, particularly PRIs, largely depend on the public funds as their own resource base is
low. The resource base of ULBs and PRIs are mainly from (a) own sources (tax and non-tax revenue149), (b) devolution/grant
in aid from state government, and (c) scheme funds provided by GoK and GOI. While all ULBs have power to collect
property taxes which forms major part of own source revenue (OSR), in case of PRIs, only GPs has power to levy taxes while
TP have very minimal OSR from non-tax revenue. 26 subjects (or functions) provided in the 11 th Schedule of the 73rd
Constitutional Amendment have been transferred to the PRIs based on Activity Mapping in 2003.
354.
The amount of devolution from the state to ULBs and PRIs has increased in the past decade. The Third State
Finance Commission (TSFC) recommended devolution of 10% of Non-Loan Net Own Revenue Receipts (NLNORR) of
GoK for ULBs and 32% of NLNORR of GoK for PRIs, which has been accepted by the GoK. The devolution to ULBs
ranged between 8-10% of the NLNORR of GoK - the government has agreed to gradually increase the devolution to 10% by
147
Created as per 74th Constitutional Amendment
Created as per 73rd Constitutional Amendment
149 Non-tax revenue includes rents, plan approval fees, water charges, etc.
148
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FY 2014-15150. The devolution to PRIs is currently 32% of the NLNORR of GoK which is as per the recommendations of the
TSFC. (Refer Table 59). GoK has introduced performance based allocation of grants for the ULBs as per the
recommendation of the XIII Finance Commission. Seven parameters151 have been identified by the GoK for grading and
providing the performance based grant to the ULBs which is a step in the right direction as it would encourage better
performing ULBs to receive more grants. Similar performance based grant should be introduced in case of PRIs.
Table 59: Financial assistance to ULBs & PRIs (Rs. in crores)
2001-02*
2007-08
2008-09
2009-10
2010-11
2011-12
560
2468
2339
2472
2976
4248
ULBs
4400
9122
10804
11406
12554
15211
PRIs
Source State Finance Accounts, Statement No. 8; * Source 2004 PFMA Report
2012-13
4009
18532
Brief of PFM arrangements for ULBs and PRIs and Issues
355.
The Karnataka Local Fund Authorities Fiscal Responsibility Act, 2003 though enacted is yet to be
operationalized. This is a fiscal responsibility act for the local bodies (which includes both ULBs and PRIs). The Act, aimed
at improving the fiscal and financial management framework of these bodies, though enacted in 2003 has not yet been
operationalized. As already recommended in section 1.2, the Act if operationalized and implemented at the local bodies
would help in improving the fiscal and financial management framework of these bodies.
356.
Budgeting : ULBs are required to prepare and pass an annual budget in the Council by 15th January and submitted to
the DMA for compilation and inclusion in the state budget. After the state budget is passed, each ULB is informed of their
respective allocations, based on which they prepare an action plan (within the approved outlay) which is approved by its
Council in April/May152. Similarly, the PRIs are required to prepare an annual budget containing detailed estimates of income
and expenditure for the ensuing year based on proposals from the executive authorities. The budget is finalized by the
Finance, Audit and Planning Committee and placed before the governing body not later than the tenth day of March every
year. The approved budgets are required to be submitted consolidated by the ZPs and submitted to RDPR for consideration
in the state budget153. On finalization of the outlay, the Council revises the budget.

While both the ULB and PRI Acts clear elaborate the budget preparation process, compliance is lacking and
needs to be strengthened. Finalization of the budgets by the LSGs is delayed thus hampering consolidation of the
budgets for consideration for the state budget. The respective departments should issue circulars and provide
training to the office bearers on the budgeting process and submission of timely budgets.

GoK from this budget have taken a policy decision to only transfer such amounts required for the filled up
posts 154 . For the preparation of Appendix B (Estimates of Salaries), the extant practice is to make budgetary
provision for salaries for the entire sanctioned posts, irrespective of whether these are planned to be filled up during
the year. Moreover, the entire allocation is released upfront. even for vacant positions not planned to be filled up,
which led to increased booking of expenditure in the state accounts and transferring the balance from consolidated
fund to the public account. There has been a change in this system – for instance, the Finance Department has made
150
Devolution was around 3% at the time of the 2004 SFAA
parameters are: (1) Collection on account of Property Tax; (2) Collection on account of Water Tax; (3) Expenditure on account
of 13th FC grants; (4) Expenditure on account of SFC untied grants; (5) Expenditure on account of Nagarottana Yojana grants; (6)
Expenditure on account of 22.75% SC/ST schemes; and (7) Conduct of General Body Meetings.
152 The state budget literature has a separate document “Budget Allocation for Urban Local Bodies”
153
The budget allocation for PRIs is made under the major head of the concerned department under minor heads 196, 197 and 198. The
state budget literature has four volumes (division-wise) “Budget Allotment for Zilla Panchayat” having details of budget for the PRIs. This
is a link document that give scheme-wise provision for each District under Plan and Non-Plan respectively under the different Major
Heads. The state budget codes are linked to the codes for PRIs.
154 This study has worked as a catalyst for this change. This has led to saving of Rs.220 crores for the GoK under this specific head
151Seven
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budgetary provisions of Rs. 100 crore and has authorized DMA to utilize this amount only when staff is actually
employed. This is a good initiative both in terms of budgeting as well as cash management. Going forward, this
provision is planned to be moderated from year to year depending on the actual need of this amount.
357.
Fund Flow: Funds to ULBs are transferred from the state treasury to the Personal Deposit (PD) accounts including
one for salaries and another for all other payments. All taxes collected by the ULBs are initially deposited in local bank
account/s and then periodically transferred to the PD Account. The balances in the PD accounts are not lapsable, but closing
unspent balance is considered for release of funds for subsequent year 155.
358. Fund flows to the PRIs are through a mix of transfer to the PRI Bank account or through the Treasury PD accounts.

In case of ZPs and TPs, Grants in Aid are provided by the State under minor heads 196 & 197 156 respectively
and transferred to PD accounts. ZPs and TPs have three types of fund accounts maintained in the Public
Account157: (a) Fund 1: Grants from GOI and State share of such schemes; (b) Fund 2: funds under State plan
schemes and (c) Fund 3: Own resources. While Funds 1 and 3 do not lapse at the financial year end, fund 2
lapses at the yearend (see discussion in section 5.1). ZPs and TPs use bank accounts only to handle CSS or
funds received directly for central schemes.

In case of GPs, all operations are carried out through bank accounts. Grants in Aid are provided under minor
head 198 and are transferred to the respective bank accounts. GoK has simplified the fund flow to the GPs and
now all transfers are directly sent to GPs Bank accounts through e-payments. Normally the SFC grants and
other payments are transferred to the GPs on a quarterly basis by the GoK. Own resources are also kept in bank
accounts.
359.
Accounting and Reporting: The KMC Act details the accounting and reporting requirements for ULBs.
Accounting in all ULBs, except Bruhat Bangalore Mahanagar Palike (BBMP), is computerized and double entry fund based
accounting system (FBAS) has been implemented. The Act mandates that accounts should be completed within 3 months
from the close of the FY. While there is delay in completion of accounts, presently there is no backlog and all ULBs have
completed their accounts for FY 12-13. The account statements and other financial statements are available on the
individual web site of each ULB which also has key statistics and other information required by the stakeholders from time
to time.
360.
Accounts of ZPs and TPs are up to date (significant improvement since the 2004 PFMA), but there is a
perennial backlog of accounts in case of GPs. In case of ZPs and TPs, the accounts are prepared as per the ZP Finance and
Accounts rules 1996 and TP Finance and Accounts Rules 1996. The KPR Act stipulates that annual accounts are to be passed
by the General Body of the PRIs within three months from the closure of the financial year. On an average, ZP/TPs take six
months to provide the accounts to AG for audit. While there is marginal delay in submission of accounts, there is no
pendency in case of ZPs and TPs. Computerization of ZP/TP has not happened over the years and the situation is the
same as it existed during 2004 report. ZPs and TPs still follow manual system of accounting but they have adopted the
Model Panchayat Accounting System (MPAS)158 , including the reporting formats. Bridge software has been created for ZPs
and TPs which downloads the data from the Treasury system Khajane and generates accounts for the ZPs/TPs. With this
report the ZPs and TPs have to incorporate the banking transactions to finalize the accounts and produce the financial
155
For instance, Unspent balances of ULBs as of Mar 31, 2013 (Rs. 125 crore) were adjusted while making budgetary provision for
2013/14
156 Based on 11 FC a new minor head was introduced for the TPs.
157 G.O. No. FD 07 ZPA dated 8th September 2004
158 MPAS suggests presentation of financial statements of the PRIs in eight formats. This has been prescribed by the C&AG for all PRIs
across the country.
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statements. The PRI Module proposed in Khajane II will cater to the accounting and reporting requirements of the ZPs and
TPs, including computerization.
361.
On the other hand, GPs follow double entry accrual based accounting system (DEAS) since 2007 and are required to
prepare the accounting reports following DEAS. However, both manual and computerized systems are currently being
followed in the GPs. In case of GP accounts, the pendency in the state is not encouraging - 220 GPs have not completed
and submitted their accounts for audit to KSAD as on 31-3-2014. Some of the GPs have not finalized their accounts for 2-3
years. RDPR needs to analyze these cases and work out a strategy with KSAD to bring these accounts up to date. The delay
in preparation of accounts would also affect timely completion of audits and submitting consolidated report to the
Legislature.
362.
For ZPs and TPs, accounting for their own expenditure is not a complicated one. However the inherent business
design creates lot of control issues in terms of accounting and reconciliation - managing DDOs of multiple departments under
their jurisdiction, transferring the budget to these DDOs, ensuring that expenditure is properly accounted for and is reconciled
on a timely basis. In terms of treasury controls over the budget there is an issue as the treasury maintains only overall
control on the fund account and there is no line item or entity wise budget control. This could led to over-drawal of
funds by DDOs and control on this aspect is not available in the current treasury system. This issue is being addressed in the
proposed KII design.
.
363.
External Auditing: KSAD is the statutory auditor for ULBs and GPs and the C&AG is the statutory auditor for ZPs
and TPs. Besides, GoK has entrusted the audit of ULBs and GPs to C&AG under the Technical Guidance and Support
module from the year 2011-12 159 . In case of ZP a separate audit report is issued for each ZP, and in case of TPs, a
consolidated audit report covering all the TPs is issued by the C&AG. The current pendency situation is as follows:


ULBs: As on 31-03-2014, 68 audit reports are pending to be issued by KSAD which represents 30% of the
state ULBs. While the accounts have been submitted KSAD is yet to take up the audit.
GPs: As on 31-3-2014, 1319 audit reports are pending to be issued which represents 23% of the state GPs..
The backlog audits are increasing; hence, KSAD need to work on a strategy to complete the audit at the
earliest.

ZPs and TPs: All audits have been completed up to FY 11-12. For FY 12-13 the audit of all ZPs and 140
TPs have been completed by C&AG. This is a significant improvement since the 2004 PFMA - the
pendency at that time ranged up to 4 years. The Act requires that the audit report should be completed
within six months of the closure of the FY. While there is delay in audit of around 12 months, there is
no pendency.
364.
Audit compliance and follow-up: There are no formal systems of audit compliance both in ULBs and PRIs. While
DMA and RDPR collect data on the accounts and audit status, no follow up on audit compliance is evident at the state level.

The completion of audit reports is followed up by the Joint Director (Administration) in the DMA. Details
in respect of audits conducted and pending, audit reports remaining unresolved etc. are readily not available
at the DMA. There is no system of concurrent audit in ULBs. DMA needs to have an audit cell to
monitor the progress of accounts, audits and the compliance status of audits across ULBs.
159
The C &AG have submitted report on local bodies covering ULBs up to 2011/12 which was placed before the Legislature on Jun 6,
2013
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
While IFA (RDPR) monitors the status of accounts and audit of the PRIs, the compliance is not monitored
at the state level160. Some of the issues highlighted in the audit report are systemic161 and has been repeated
every year by the auditors for non-compliance162. A separate audit cell should be constituted in RDPR
under the IFA to monitor the receipt of accounts, audit reports and submission of compliance to the
audit reports on a timely basis.
365.
Internal Audit: The Chief Accounts Officer (CAO) of ZP is required to carry out the internal audit of the TPs and
the line departments functioning under the ZP, while TPs are required to carry out internal audit of GPs. However, internal
audit is delayed and carried out only for a handful of units primarily due to shortage of staff. A study conducted under
an Institutional Development Grant (2013) has suggested creation of a separate internal audit wing to carry out the internal
audit of PRIs and an Internal Audit Manual has been developed. RDPR and the Finance Department now have to decide the
design of internal audit systems for PRIs, including the location of the internal audit function, taking into account the number
of such institutions as well as the amount of budget which is being handled by them. Similar study needs to carried out for
developing and implmenting internal audit in ULBs.
366.
Legislative Scrutiny: KSAD is required to submit a yearly consolidated report on the accounts and audit status of
ULBs and GPs to the Legislature and this need to be done within a time bound manner. This is in line with the amendments
to the Act and XIII CFC recommendations and augurs well for the accountability at the third tier of the government. KSAD
has submitted the first audit report for 2009/10 to the Legislature during the last FY 2012/13 – this is delayed, yet a start has
been made. A Committee on Local Bodies including ULBs and PRIs has been formed in the Legislature in 2010 which
would be reviewing these audit reports. Both the ZP separate audit reports and the TP consolidated audit reports are presented
to the Legislature every year – there is delay in tabling these reports and some reports are yet to be presented. The C&AG’s
Report on Local Bodies is also tabled for Legislative scrutiny – report for 2011/12 was tabled on June 6, 2013.
367.
Summary: Overall, GoK has carried out substantial improvements in the PFM arrangements in ULBs and PRIs
compared to status present at the time of 2004 PFMA report. Accounting reforms and computerization has been carried out
by GoK for ULBs and GPs; and ZPs and TPs prepare their respective accounts - these were the key recommendations of the
2004 PFMA and has been implemented by the GoK. Currently, accounts for all ULBs, ZPs and TPs have been finalized up to
FY 2012/13 and there is no pendency (in 2004, the backlog ranged from one to four years). Similarly, there is substantial
improvement in audit as well. Audit reports for all ZPs up to the FY 2012/13 have been issued while more than 80% of the
audit reports for FY 2012/13 have been completed for TPs; and nearly 50% of the ULBs audit has been completed. The key
area of concern is that GPs lag behind both in terms of completion of accounting as well as finalization of audits.
Internal audit and audit compliance needs to be strengthened as highlighted in the 2004 report. In conclusion, while the total
amount handled by ULBs and PRIs have increased manifold, the internal controls and strengthening of financial management
has not kept pace with the increased outlay.
6.2
URBAN LOCAL BODIES AND PRIS – COMMON ISSUES AND RECOMMENDATIONS
160 As of March 2012, 3,301 Inspection Reports (IRs) containing 11,949 paragraphs were outstanding in various ZPs.
161 Unreconciled expenditure with treasury, non-reconciliation of bank accounts, earlier write backs not reflected in accounts.
162 Audit report 2012: GoK in June 2007 withdrew the LOC system in Panchayat Raj Engineering Divisions and Forest Divisions and
cheque drawing powers of DDOs. The balances outstanding under suspense heads should be cleared after due reconciliation as the cheques
drawn are not valid anymore. GoK dispensed with (September 2004) the operation of TP and GP suspense accounts by ZPs in the annual
accounts. However, 16 ZPs had not taken any action to clear the suspense accounts. It was also observed that in respect of six ZPs, adverse
balances of `100.70 crore and `14.94 crore under TP and GP suspense accounts, respectively were exhibited in the annual accounts 2011-12
which was irregular and was fraught with the risk of misuse.
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368.
Strengthen collection, recording and reconciliation controls over revenue. Collection efficiency of ULBs and
GPs, particularly over property taxes which is the main own source of revenue, is low which affects the level of generation of
OSR. The collection of taxes is partly through banking system and partly through direct collection by revenue staff. The
weakness in the current system is that the assesse pays taxes, but most of these entries do not get reflected in the assesse’
accounts and the total collections are not reconciled to the party wise balances indicating weak internal controls with
potential for frauds and late credits to the assesse. Moreover, the local bodies do not maintain up dated Demand Collection
Balance (DCB) Register duly reconciled – hence, the actual dues are also not known fully. ULBs and GPs should improve
controls on the collection and remittance of revenue, and reconciliation of party accounts on a regular basis to reduce leakage
of revenue. GoK should move towards e-payments and collections through banks for all tax and non-tax revenue like CTD
to improve the collections as well as improve the internal controls. Daily collections must be posted automatically to the
assesse’ accounts and reconciliation should be carried out on a monthly basis. The accounting software should have
capability to issue online receipts to the assesse. ULBs/GPs should focus on preparation of Demand Collection Balance
register on a timely basis and reconciled every month. DMA/RDPR should issue a GO stating that all ULBs/GPs should
update and complete the DCB before 31st December 2014. Once the database is completed and finalized, balance verification
with the customers must be carried out by the ULB/GPs to correct any missing entries and finalize the DCB database which
would be then be the baseline for future demand and collections.
369.
Electricity dues are pending which needs reconciliation and payment. This issue was highlighted in the 2004
PFMA and is yet to be fully addressed. The fund flow and accounting treatment is in respect of electricity dues is different as
compared to other transactions. For instance, in case of ULBs an annual allocation for electricity dues is made in the budget,
the DMA submit bills for drawl to the Treasury which issues cheques to three designated banks and the proceeds are
transferred to the bank accounts of the ULBs for electrical payments. Since electricity payments are done at the State level,
the ULBs/PRIs are not in a position to account for this expenditure correctly leading to reconciliation problems DMA/RDPR
needs to evolve the accounting policy and procedure for electricity payments. The electricity payments as and when made
should be informed to the ULBs/PRIs which should account for the payments.
6.3
URBAN LOCAL BODIES –RECOMMENDATIONS
370. The following are the priority actions identified for the 2014 PFM Reform Action Plan:
a. A strategic plan needs to be worked out by KSAD to reduce the pendency of audits. KSAD need to analyze
the reasons for audit pendency in each of the ULBs and work on a strategy to update the audits to the current
year. Since most of the pendency is due to shortage of staff at KSAD, KSAD should nominate special teams or
employ external auditors to address the backlog of audits at the earliest and furnish the audit report.
b. Audit Cell to be constituted in DMA for audit management for which GoK has already provided the
sanction. This would be responsible for follow up on the completion of accounts, completion of audit and
compliance provided on the audit reports. This would help improve the monitoring of ULBs compliance in terms
of completing the accounts and audit. As a part of the audit cell, an MIS unit for consolidation of ULB finances
can also envisaged which would be helpful for monitoring of the finances of ULB.
c. DMA needs to review the issues in internal control systems highlighted by KSAD and AG and work with KSAD
to institute an internal audit function to cover key business areas like revenue collection and other areas
highlighted by the auditors.
6.4
PANCHAYAT RAJ INSTITUTIONS –RECOMMENDATIONS
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
371.
Significant improvements in PFM have been made since the 2004 PFMA, yet there are certain priority
actions which GoK needs to take to further strengthen the PFM System. The priority actions are :
a.
One time cleanup of old balances and suspense account: GoK needs to constitute a special team to address the
issue of old balance and suspense account highlighted in the audit reports which needs to be rectified in Treasury
and ZP accounts.
b.
A separate audit cell should be constituted in RDPR under the IFA to monitor the receipt of accounts, audit
reports and submitting compliance to the audit reports on a timely basis.
c.
GoK should implement the internal audit manual
prepared under the IDF study, set up an internal audit
wing and work on the strategy for creating and
implementing internal audit in PRIs. Finalize and establish
the Internal Audit structure for the Taluk Panchayats
suggested by consultants under the IDF Grant supported
Strengthening Public Financial Management and
Accountability of the Taluk Panchayats in Karnataka
Project.
Internal Audit Manual for Taluk Panchayats
An Internal Audit Manual for the audit of Taluk
Panchayats in Karnataka has been developed
(2013) – this provides a detailed framework for
conducting internal audit in the context of a
computerized environment.
d.
Account rules are to be changed to include creation of MPAS reports and reports on the banking
transactions in the financial statements of ZP and TP.
e.
A DDO level control on expenditure needs to be incorporated at the PRI level and this needs to be
developed as a part of the KII system. ZP and TP computerization including the banking transactions needs to
be developed as part of the KII system.
f.
A strategy and follow up plan needs to be worked out by KSAD and RDPR to reduce the pendency of
audits. RDPR and KSAD need to analyze the reasons for audit pendency in each of the GPs and work on a
strategy to update the audits to the current year. RDPR should nominate special team to follow up on the cases
and complete the accounting records so that audit can be carried out at the earliest.
6.5
ACCOUNTING REFORMS - URBAN LOCAL BODIES
372.
GoK has adopted and implemented Fund Based Accounting System for all ULB’s across the State. Based on the
National Municipal Accounts Manual (NMAM), the Karnataka Municipal Accounting and Budgeting Rules were enacted in
2006, and accounting manual has been developed and implemented across the State. This was one of the key
recommendations in 2004 report and has been carried out by GoK. GoK has created a dedicated Municipal Reforms Cell to
carry out the accounting reforms. E-gov financials a computerized financial system was developed and implemented across
all ULBs. GoK has issued a GO in 2013, requiring all ULBs to carry out accounting using the Municipal accounting
software. All accounts have been completed till FY 11-12, while financial audit is under progress.
FY
2006-07
2007-08
Target
Table 60: Accounts and audit report – Current Status
Accounts completed
Balance of
Audit Completed
accounts to be
completed
51
51
0
51
124
124
0
Balance of audit
to be completed
0
124
| Theme Six: Improving PFM in Local Self Governments
0
140
Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
2008-09
128
128
0
126
2
2009-10
213
213
0
208
5
2010-11
213
213
0
206
7
2011-12
213
213
0
139
74
2012-13
213
185
28
0
213
1155
1127
28
854
301
Total
373.
GoK should aim to complete the backlog of accounts for FY 2012-13 and FY 2013-14, before September 2014.
All ULBs have implemented E-Governance software (computerized accounting system) from FY 10-11, however the issue is
that these accounts are not yet audited. So as of now parallel systems (both manual and computerized) are being maintained
in the ULBs. KSAD and DMA needs to devise a strategy to finalize these audit at the earliest so that in future only
computerized accounts can be maintained. While most of the accounts are prepared in the computerized system, the
following issues are still persistent:
a. Party wise DCB is not being generated by the computerized system. The current accounts package deployed in the
ULB does not have a working DCB module. Without DCB, the entire accounting reforms would not yield the
desired results.
b. Audit of software: The e-gov financials have been developed and implemented over the past five to six years. The
software has undergone many changes and in terms of functionalities and modules implemented. The IT and
functional audit of the software needs to be carried out by GoK.
c. Linkage to KII: There is currently no strategy to link the ULB accounting software with KII.
d. Multiplicity of audits: The ULB audits are being carried out both by CA firms (financial attestation audit) for the
financial statements generated from the system and KSAD (transaction audit). Going forward, it would be ideal that
KSAD issues one audit report for the ULB covering both the transaction audit and financial audit reports (using
reports given by CA firms). (refer section on KSAD)
374. The following are the priority actions identified for the 2014 PFM reform action plan:
a. A strategy and action plan needs to be worked out by KSAD to audit the books of ULB through the system, and
thereafter carry out all auditing in the system only. KSAD needs to work with Municipal Reforms Cell to
understand the software and then carry out audit through the software for all ULBs. (also refer section on KSAD)
b. DMA needs to work with the KII team and MRC to ensure that the e-gov financials are linked to the KII so that
in future there is seamless transfer of data between the software’s.
6.6
ACCOUNTING REFORMS – GRAM PANCHAYATS
375.
GoK enacted GP (Budgeting and Accounting) Rules 2006, and has adopted double entry accrual based accounting
system for all GPs across the state with effect from April 2007. Karnataka is one of the few states who have adopted double
entry accrual based accounting system for GPs. Panchatantra – GP software which also covers accounting has been
implemented across the state. The software implementation started in 2010, and as on date all 5630 GPs accounts are
computerized. This was one of the key recommendations in 2004 report and has been carried out by GoK. The overall
progress as on date is summarized in the Table 61.
FY
Table 61: GPs Accounts Current Status in Panchatantra
Overall GPs
Total
2010-11
5630
Final Accounts Completed
August 2013
5630
Final accounts completed
by March 2014
5630
Pending
0
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
2011-12
2012-13
5630
5630
5622
4220
5630
5572
0
58
376.
The implementation has been carried out very well by the GoK and constant monitoring has led to reduction in
backlog of accounts. All GPs have implemented Panchatantra software (computerized accounting system) from FY 10-11,
however the issue is these accounts are yet to be audited. So as of now parallel systems (both manual and computerized) are
being maintained in the PRIs. KSAD and the RDPR needs to devise a strategy to finalize these audit at the earliest so that
in future only computerized accounts can be maintained.
377.
The GPs prepare accounts based on DEAS, receipts and payment account, balance sheet, cash book and other
ledgers as mandated by the rules are generated from the system. MPAS formats have been introduced for GPs from the last
FY and now GPs are also preparing MPAS formats along with the financial statements being prepared under DEAS.
378. The priority reform actions are :
a. GoK should ideally switch over to only computerized accounting from April 2015 and RDPR should devise a
strategy for the switchover. The state should issue a circular in this regard as issued by the Urban Development
Department (UDD).
b. The RDPR should work with KSAD to conduct audit of GP books through Panchatantra.
c. Audit of software: A software audit including both functional audit and IT audit should be carried out by a third
party or C&AG to identify issues and functional requirements which can be developed as a part of the future
versions.
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Section 7. THEME SIX: IMPROVING PFM IN STATE OWNED ENTERPRISES (SOE)
379.
GoK has a large number of companies and statutory corporations receiving substantial public funds.
Government Companies are incorporated under the Indian Companies Act 163 while the Statutory Corporations are formed
under a specific central or state statute (collectively referred to as SOEs). The SOEs handle substantial public funds by way
of share capital, loans and grants/subsidies besides the GoK providing guarantees for borrowings of these SOEs. Hence, these
SOEs should have a strong PFM system to account for and report on the use of public funds. A brief profile of SOEs in
Karnataka during the last two years is presented below in Table 62. Total turnover is presently about 7.2 % of the state’s
GDP, but is showing a continuous decline from over 10% in earlier years.
Table 62: Profile of SOEs in Government of Karnataka
Particulars
Number of SOEs
Turnover
Profitability
GoK Investments in SOEs164
2012-13
Working companies: 73
Non-working companies: 14
Statutory corporation: 6
Total: 93
Rs. 37,867 crore
Cumulative: Rs. 1,388 crore
Share Capital: Rs. 42,376 crore
Long Term Loans: Rs. 27,434 crore
Total: Rs. 69,810 crore
Budgetary Support
Share Capital: Rs. 4,661crore
Long Term Loans: Rs. 11 crore
Grants/Subsidies: Rs. 10,387
Total Funded support: Rs. 15,059 crore
Guarantee Commitment: Rs. 3,501 crore
Source: C A&G Report on PSEs 2012-13 and 2011/12
2011-12
Working companies: 70
Non-working companies: 14
Statutory corporation: 6
Total: 90
Rs. 34,491 crore
During the year: Rs. 1,126 crore
Cumulative: Rs. 1,369 crore
Share Capital: Rs. 37,515 crore
Long Term Loans: Rs. 29,197 crore
Total: Rs. 66,712 crore
Share Capital: Rs. 4,443 crore
Long Term Loans: Rs. 47 crore
Grants/Subsidies: Rs. 7,365 crore
Total Funded support: Rs. 11,854 crore
Guarantee Commitment: Rs. 3,354 crore
380.
GoKs policy on PSEs is detailed in the document Policy on Public Sector Enterprises Reforms in Karnataka of 2005.
This policy was originally conceived in 2001 and was titled Policy on State Public Sector Reforms and Privatization in
Karnataka165. Salient features of this Policy vis-à-vis PFM that also provides the intent of GoK are summarized below.
163
In which at least 51% of the share capital is held by the government and includes a subsidiary of such a company
85% of the share capital accounted for by 6 PSEs namely Karnataka Road Development Corporation, Karnataka Bhaghya Jal Nigam,
Karnataka Neeravari Nigam, Cauvery Neeravari Nigam, Karnataka Power Corporation and Karnataka Power Transmission Company
Limited
165 The policy was formed in the background of several PSUs becoming “sick” due to severe market competition and drastic change in the
purpose of these PSUs and a justification of investments in the public sector and relative priorities on investment to the social sectors was
recognized. The policy also recognized the need for appraisal of investments in PSUs from the perspective of privatization, rationalization,
restructuring, merger, winding up, closure etc. The policy was up to March 2008.
164
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Summary of GoK Policy on State SOEs (2005-2008)
 To encourage adoption of Corporate Governance principles for effective management including introducing best
practices in audit committees, independent directors, disclosure norms etc.
 PSEs to enter into Memorandum of Understanding with their respective Administrative Departments
 To introduce professionalism by having a fixed tenure of the Chief Executive Officers and an independent
selection committee inter alia to induce effective governance in the PSEs
381.
Institutionally, the PSEs are under the control of 18 Administrative Departments with overall control role
envisaged for the Department of Public Enterprises (DPE). Through a 2008 government order, the DPE was entrusted two
broad terms of reference –
a. All Administrative Departments to consult the DPE on specified proposals166 before soliciting the approval of the
Cabinet or otherwise;
b. The DPE will be an arm of the Government and function as an overseeing, coordinating and monitoring authority in
respect of matter relating to functioning of PSEs with a view to guide the PSEs in various issues
382.
In actual practice, the role of the DPE is much limited to organize training and coordinate studies and
primarily consultative on other matters The DPE has been declared the Secretariat for all PSEs and has policy making role
on two matters – one, general policy relating to privatization of the PSEs; and two, policy guidelines in the areas of financial
management, wage settlement, human resource and performance appraisal. Besides, DPE’s representatives are also appointed
as nominee directors on the Board. This role of the DPE envisaged is broadly in line with the roles of the DPE at the central
level, but not actually implemented.
383.
The governance and financial management framework of the SOEs are contained in the underlying statutes i.
e. the Indian Companies Act and the specific statute for the corporations. The main features of the framework are profiled
below.
166
Specified matters include investment of share capital, amendment to memorandum and articles of association, major restructuring,
increase in project costs of PSEs beyond a threshold, facilitating execution of MoUs between the Administrative Department and the PSEs
etc
| Theme Six: Improving PFM in State Owned Enterprises (SOE)
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Governance and PFM Framework of PSEs
 The relevant statutes mandate the management of the PSEs through a Board of Directors appointed by GoK (in
some cases the GoI is represented). The functioning of the Board is described in the statute including meetings,
powers and responsibilities including delegation, committees of the Board, reporting requirements etc.
 The Companies Act provides an elaborate and comprehensive framework of financial management including
maintenance of accounts on accrual basis, accounting standards to be followed, format of the financial statements
including disclosure, timelines for various functions, audit requirements including reporting powers and duties of
the auditors.
 Statutes of corporations also have similar provisions though not as elaborate as the Companies Act
 Audit of government companies is conducted by Chartered Accountants appointed by the C&AG. For four
statutory corporations, the C&AG is the sole auditor and for the other two, audit is conducted by Chartered
Accountants. The C&AG has the right to conduct supplementary audit including performance audits. Based on
the audit, the C&AG issues a separate report on the PSUs that is laid before the State Legislature
 An Annual General Meeting has to be held within six months of close of financial year inter alia to adopt the
audited financial statements
 The Annual Reports of the PSEs including the audited financial statements are tabled in the State Legislature and
examined by the Legislative oversight body – the Committee on Public Enterprises
384.
The 2004 PFMA Report highlighted major shortcomings in the working of the SOEs many of the
recommendations made have not been fully addressed and continue to be relevant. The key issues identified in the 2004
PFMA and the present status of each of the issue is presented in Table 63.
Table 63: PFM Issues in Karnataka PFM – Status of 2004 PFMA Recommendations
Issue in 2004 PFMA Report
Present Status
Annual financial statements not prepared timely (i. As per C&AG Report on SOEs for 2012/13 (2011/12), 36 (37)
e. within 6 months from close of FY)
working SOEs had not rendered accounts for audit for the years
28 of the 70 companies and all six corporations failed to 2010/11 and/or 2011/12. The point of concern is that the number
meet the deadline including major entities
of SOEs in arrears that had declined to 16 in 2006 is showing a
continuous increase from that year onwards.
The differences in stock and flows of shares and loans between
Unreliable and inconsistent public sector numbers
the PSE accounts and Government accounts continue to be
significant167.
Inadequate responses and follow up of C&AG’s Action taken on the statutory audit reports/the C&AG
report/Legislative reports has improved. More efforts need to
audit reports and Legislative Reports
clear the outstanding Inspection Reports - 2680 audit paragraphs
pertaining to 577 Inspection Reports issued by the C&AG
remained outstanding, the earliest being for the year 2003/04 and
70% outstanding Inspection Reports pertained to just two sectors
– Energy and Irrigation
Monitoring and enforcement of PFM requirements The areas of internal controls particularly internal audit continue
to exhibit weaknesses and shortcomings. Auditors observed weak
was weak
Issues such as timely audited financial reports and the or ineffective internal audit in several PSEs and have reported
follow-up on the weaknesses/qualifications indicated in cases of non-existence of internal audit besides Audit Committee
audit reports, e.g., on accounting, internal controls, not formed or not functional. The 2004 PFMA expressed concern
budgeting need to be monitored and enforced. Little or over the quality of accounts and that auditors had reported nonunsatisfactory
monitoring
by
administrative compliance with the prescribed accounting standards. These areas
departments; weak enforcement of PFM requirements continue to be remain weak as can be gauged from the number of
by the Board; state does not sufficiently hold the Board SOEs qualified audit opinions on their accounts (Table below)
accountable
167
It is pertinent to mention that the figures provided in the C&AG Report on PSUs also are not matching with the
corresponding figures in the Finance Accounts.
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Issue in 2004 PFMA Report
Present Status
Nature of audit opinion (no. of SOEs)
Unqualified Qualified Adverse Disclaimer
26
49
4
2
Issues of Governance
Considered as the factor underlying all the weaknesses
above; Board dominated by political or official
nominees; frequent intervention by the government in
operational management; frequent turnover and short
tenure of top management.
Financial
Year
2012-13
(81)
2011-12
10
45
2
1168
(58)
2010-11
12
45
3
0
(60)
In case of companies, the cumulative net effect of the audit
observations for 2012-13 resulting in decrease in net profit was
Rs. 324 crore and for 2011/12 was Rs. 1087 crore which was
almost three times that of the previous year.
The Board of Directors and the Chairperson continue to be
political or ex-officio appointees undermining the government’s
ability to fix accountability. GoK Administrative Departments
have a lot of say in the operational management of the PSEs under
their ambit – appointment of directors and top management
positions, borrowings, dividend, capital expenditure etc.
Independent directors being retired government officials have
been inducted on the Board, but there is an absence of functional
directors.
385.
Corporate Governance in Central SOEs is guided by the “Guidelines on Corporate Governance for Central
Public Sector Enterprises” that are mandatory since 2010. These guidelines issued by the Ministry of Heavy Industries
and Public Enterprises are considered model framework. The salient features of these guidelines are enumerated in Box given
below. Each CPSE submits quarterly and annual reports of compliance with these guidelines.
168
Karnataka Neeravari Nigam Limited 2010/11
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Salient Features of Central Guidelines on Corporate Governance
Board of Directors
 shall have an optimum combination of functional, nominee and independent directors
 number of functional directors (including CMD/MD) should not exceed 50% of actual Board strength
 number of nominee directors shall be restricted to a maximum of two
 For non-listed PSEs, at least one third of the board members shall be independent directors
 Board to lay down Code of Conduct for Board and senior management and annually affirmed
 Training to new Board members
Qualified and independent Audit Committee shall be set with terms of reference approved by the Board
 minimum 3 directors of which 2/3 shall be independent directors; Chairman shall be an independent director
 members shall have knowledge of financial matters of company and at least one member shall have good
knowledge of accounting and related financial management expertise
 shall meet at least 4 times in a year and not more than 4 months shall elapse between two meetings
Risk management strategies and their oversight shall be one of the main responsibilities of the board and
management.
 Board to ensure integration and alignment of the risk management system with corporate and operational
objectives
 risk management is undertaken as a part of normal business practice and not as a separate task at set times
 lay down procedures to inform board members about the risk assessment and minimization procedures
 Disclosure on risks and concerns shall from part of Director’s report.
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386.
Besides the continued relevance of issues identified during the 2004 PFMA, the following areas of
improvement emerge in governance and PFM in SOEs in Karnataka.
a.
A policy on Corporate Governance has not been developed and an assessment of the actual Corporate Governance
status in the PSEs has not been done. GoK’s intent is to encourage good Corporate Governance practices in SOEs. A
contemporary data bank is not available centrally in respect of such aspects as composition of the Board and its
functioning, convening of the annual general meeting, constitution of an audit committee and its functioning etc.
b.
Assessment of fiscal risks of the PSEs is done on a stand-alone basis by the concerned Administrative Department.
The methodology of the assessment is not documented and could be disparate inter se departments and the concerned
officer doing the assessment. The C&AG report provides some elements of the fiscal risks of the PSEs but that is
historical and available at least 9-12 months after close of the financial year. A contemporary data bank collating fiscal
risks such as contingent liabilities, cash losses, capital commitments etc. is currently not available.
c.
The present role of the DPE is limited to organize training and coordinate studies and primarily consultative in other
matters. The role of the DPE needs to be revisited and reiterated so as to make it a more proactive institution and in
actual practice a nodal agency for all matters related to PSEs.
d.
There are arrears of finalization of accounts that needs to be cleared. Presently, the backlog is for the two years
2011/12 and 2012/13 and hence not acute (relative to some states where companies have not rendered accounts for
several years) and therefore are capable of being cleared under a specified plan. Delays in finalization of accounts and
audit increase the risk of leakage of public money besides a violation of the Companies Act or relevant statute.
Moreover, delayed or non-completion of accounts and audit also affects the effectiveness of the Parliamentary oversight
body – the Committee on Public Undertakings – as their examination also is delayed.
e.
The quality of accounts of the SOEs needs further improvement particularly addressing the recurring or systemic audit
observations including continuous non-compliance with accounting standards. Although the value of objectionable
amounts (by auditors) had reduced in 2012/13, yet the amount remains high in terms of percentage of aggregate net
profits earned by the SOEs (and in fact the objectionable amounts were over Rs. 1000 crore in 2011/12).
f.
Internal controls including Internal Audit as essential element of PFM has not been accorded due importance. The
areas of internal controls particularly internal audit continue to exhibit weaknesses and shortcomings. Auditors observed
weak or ineffective internal audit in several PSEs and have reported cases of non-existence of internal audit besides
Audit Committee not formed or not functional.
387.
The above issues identified in corporate governance and PFM arrangements in SOEs can be addressed by
including the following priorities in the 2014 PFM Reform Action Plan. Recommendations made in the 2004 PFMA
report are still relevant and reiterated.
a.
Draw out a plan to clear the arrears in the backlog of accounts 169. This should be done in consultation with the state
AG. Depending upon the requirement, engage external help to complete the accounts and prepare financial statements.
b.
Enhance the role of the DPE as an effective nodal agency for SOEs in Karnataka. A larger role of the DPE was
envisaged through the 2008 government order, but in practice the DPE’s role is presently limited to organizing trainings
and engaging consultants for studies. Therefore, the role of the DPE as a nodal agency for all PSEs in Karnataka with
well-defined roles, human resources and budgetary provisions can be strengthened.
169
XIII FC has also recommended outsourcing preparation of accounts to qualified personnel.
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c.
Conduct specific studies on corporate governance and financial accountability. The DPE has initiated some studies in
respect of the working of the PSEs that would provide inputs for policy formulation. DPE should also initiate a study on
(a) corporate governance practices in Karnataka PSEs and best practices from other jurisdictions; and (b) the
observations made by statutory auditors and C&AG and steps for their adequate resolution. The objective of the studies
would be to provide an AS IS analysis (focusing on larger and critical SOEs) and recommend the way forward which can
be considered by GoK for deciding the course of action.
d.
GoK may consider application of the framework of corporate governance for central SOEs as framework for state
SOEs. This can be done in a phased manner – starting with the PSEs with share capital of Rs. 1000 crore and above and
then extending it to PSEs with share capital of Rs. 500 crore. The central guidelines are in practice for over a decade now
and have been framed according to the best practices.
e.
Review of Internal audit issues and audit committee. GoK should conduct a study to review the practices of internal
audit and the effectiveness of the audit committee in at least the major SOEs and take action to strengthen these critical
aspects of the SOEs.
f.
The recommendations made in the 2004 PFMA in respect of corporate governance are re-iterated for
implementation.
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Section 8. 2014 REFORM ACTION PLAN – SUGGESTED NEXT STEPS
This section contains the PFM Reform Action Plan, proposing the actions to be taken, and the suggested next
steps for implementation. The detailed analysis of the issues and the logic for action plan are provided in the
respective sections in the Report. Based on this, GoK may decide the actions to be implemented and their
sequencing.
Table 64: Action and suggested next steps for implementation
Priority area/
objective
Strengthen
fiscal
responsibility
legislation and
update core
PFM
documents
Revise and
update core
PFM
documents
Improved
compliance with
PFM
requirements
(Section 3.2)
Strengthen
institutional
capacity of
Internal
Financial
Advisors (IFA)
and Asset
Liability
Management
Cell
Strengthen
Budget Process
Action
Suggested next steps for implementation
Create awareness and ownership amongst
all departments towards Karnataka Fiscal
Responsibility Act (KFRA)
Operationalize the Local Fund Authorities
Fiscal Responsibility Act (LFAFRA)
Produce Report on Review of State
Finances on a quarterly basis.
Examine the need for broadening the scope
of the Escape Clause in the KFRA
Revise Karnataka Budget Manual (KBM),
Karnataka Financial Code (KFC),
Karnataka Treasury Code (KTC), Manual
on Contingent Expenditure
Fiscal Policy Institute can carry out capacity-building
measures, workshops, and provide fliers on compliance to
the KFRA.
Issue a Government Order to operationalize the LFAFRA.
Provide mitigating measures in case of any fiscal hardship
on account of implementation of the LFAFRA.
Carry out workshops and trainings to disseminate and build
capacity to implement the provisions of LFAFRA
This requires amendment to Section 6.2 of KFRA
Formalize and re-activate committee of experts constituted
to work on the revision of manuals.
Manuals to be based on changes planned in the business
processes envisaged under Khajane II.
KII team should be represented on this committee.
Disseminate revised and approved manuals
to all stakeholders through training and
workshops.
Include IFA roles and responsibilities in the
KFC and KBM so that Departments
recognize the role of IFA
Recruit IFAs mandatorily from KSAD


Initially issue GO for amending the KFC/KBM and
subsequently include them in the revised KFC and KBM
Suitable officers would need to be identified, trained and
groomed for the role of IFA. The IFA recruitment rules for
this purpose should be amended
Provide extensive training to IFAs
including computer skills
Provide staff and IT support to IFA
Pass the full budget before beginning of the
financial year.
Reduce the expenditure composition
Amend the Budget Manual to mandate this target and
exceptional use of Vote on Account.
Annual Budget Calendar also to recognize passing of
budget before commencement of fiscal year.
Analyze the reasons for variance in select departments and
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Priority area/
objective
Improve
predictability
of availability
of funds
Estimate
budget
provision of
salaries on
realistic basis
170
Action
Suggested next steps for implementation
variance, from the present high level, in
phases say over a two-year period
Establish Economic Intelligence Unit in
major revenue departments and Implement
a Revenue Forecasting Tool.
include remedial measures in the budget circular
Reduce the number of Supplementary
Budgets to at least two (from the present
three) and to one in the long term
 Prepare Supplementary Budgets which
are Fiscally Neutral and in accordance
with the KFRA
 Prepare and Present Fiscal Neutrality
table
Provide details of actual expenditure and
surrenders per demand in the
Supplementary Budgets
Revise the financial limits of delegation for
re-appropriation to contemporary
requirements
Identify reasons for high level of reappropriation orders and develop strategy
to control the rising trend
Organize refresher workshops to
disseminate rules and procedures of reappropriations
Issue circular authorizing release of funds
for any quarter prior to commencement of
the quarter
Organize Workshops to disseminate the
Delegation of Financial Powers (DoFP) onfund releases for better understanding
Issue DoFP as rules on the lines followed
by GOI and some states
Consider rush of expenditure as breach of
financial propriety and include provision in
KFC
Integrate Appendix B170 preparation with
HRMS/HRMS II
The first supplementary should be presented in
November/December coinciding with the tabling of the
Mid-Year Report in the legislature.
Avoid and moderate inclusion of large expenditure
commitments in SE
Full scrutiny of proposals/expenditure proposed in SE.
Estimate salary for actual filled posts based
on HRMS and posts expected to be
recruited during the year
Discontinue the practice of providing for
full vacant posts
CTD has engaged consultants to establish EIU and develop
a forecasting tool. Based on the results obtained similar
model could be replicated in Excise department.
Format for reporting by departments needs to be
developed.
This study should specifically include injudicious and
defective orders being reported by the C&AG.
Workshops should be held post completion of the above
study.
The workshops should explain the importance of
enhancement in the DoFP and its relation to year end rush
of expenditure.
Include data on sanctioned and filled posts in HRMS to
enable preparation of Appendix B from the same data
source.
Base estimation on filled posts and posts to be filled during
the year
Appendix B is the budget document that contains full details of sanctioned, filled and vacant posts and estimation of salaries
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Priority area/
objective
Action
Suggested next steps for implementation
Prepare Appendix E171 timely and submit
along with budget for legislative approval

Improve
budget process
and controls
over capital
works
Institute
system for
periodic
rationalization
of Schemes
Implement
Departmental
MTFP
Enhance
Legislative
scrutiny of
budget
Strengthen
Accounting
and Reporting
for enhanced
PFM
compliance
Prepare Appendix E on rolling forecast
model for 3 years
 Develop capability in project
management software (PMS) to
prepare Appendix E
 Introduce MTEF in PWD
Prepare Appendix E and include all works
covering all major heads, Externally Aided
Projects, and State Government Companies
Implement PMS in Irrigation Department
Consider adopting the Tamil Nadu model
for estimating civil works.
Mainstream PMS and integrate with KII
Review the process of schemes, merge
schemes and weed out nonexistent scheme
heads on a regular basis
Review if DMTFP can be adopted in
certain larger departments like PWD
Provide departments with more flexible
budgets
Implement the Departmentally Related
Standing Committee (DRSC) mechanism
Build capacity of the Legislative
Committee on Estimates and provide
adequate technical support
Devote more time on discussion and voting
of grants
Reiterate the requirements and rules of
KFC for areas identified in the report
Designate a central nodal office with
adequate staff to collate and monitor
compliance of submission of Utilization
Certificates (UC) with the concerned
departments and agencies
Plan a one-time exercise to clear and clean
PWD and Irrigation Department to work with the Finance
Department to analyze the bottlenecks in the timely
submission and adequate preparation of Appendix E as per
the budget calendar.
PMS can generate financial reports based on milestones for
the contracts already issued by PWD and this feature can
be used for resource scheduling for the next 2-3 years.
Review this requirement and modify Budget Manual to
explicitly include this provision if accepted
Provide priority in budget for payment of arrears, then for
completion of ongoing works and lastly for new works.
Every 3 years a comprehensive review of the schemes
needs to be carried out by the respective departments to
weed out the non-existing schemes.
A common code structure would apply to budgeting and
accounting, but the more detailed codes would be used for
accounting, and only the aggregate codes would be used for
budgeting.
DRSCs could be sub-committees of the main Committee
on Estimates. This may need amendment to the Budget
Manual and the Rules of Procedure and Conduct of
Business
Organize capacity building programs in the area of budget
scrutiny
Can be done through workshops, trainings and GOs.
The ALMC could be entrusted with this function
Constitute a dedicated team to study the underlying issues
171
Appendix E is the budget document that contains details of ongoing works and those planned during the year by the Irrigation and
Public Works Departments. Only works that are administratively approved are included
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Priority area/
objective
Action
Suggested next steps for implementation
up the backlog of public accounts,
reconciliation of expenditure, and UCs
Reduce the periodicity of submission of
UCs and reporting unencashed cheques
Implement
recommendatio
ns of the
Central Finance
Commissions on
disclosure
Resolve accounting issues such as
classification under miscellaneous heads,
operation of reserve funds, Alteration
Memos for lapsed cheques with Accountant
General
 Issue circular clarifying roles and
reporting requirements of GOI, GOK
and Implementing agencies in respect
of CSS funds routed through the state
budget; and
 Develop disclosure norms for
expenditure incurred by the
implementing agencies under CSS
funding routed through the state budget
Disclose grants released to and expenditure
incurred by urban and rural local bodies
(ULB/PRI) and PSUs
Take policy decision on fund II balance
treatment for Zilla and Taluk Panchayats
(ZP/TP)
Move CSS projects funds to Public Deposit
accounts instead of Bank accounts
MIS Cell to be constituted in DMA and
RDPR for collecting financial data
Carry out one time cleanup of bank
accounts and closure of inactive accounts in
ZP/TP
Prepare link documents using uniform
object codes
Develop a roadmap for transition from cash
based accounting to accrual accounting
Include all public sector entities in fiscal
reports as sub-sectors of GoK
and causes, suggest remedial measures and monitor the
exercise.
Constitute a dedicated team to study the existing timelines,
benchmark with other states suggest an appropriate
timeline and process.
Constitute an expert team to study the audit reports and
consult with the Accountant General for adequate solution.
Develop and implement a mechanism of reporting this
information by implementing agencies and designating a
nodal office for collating and compiling the expenditure.
This activity is to be carried out after GOI mandates
accrual accounting implementation.
GoK to develop a strategy for implementation of accrual
accounting including piloting across a sample of
departments, building functionality in Khajane II to
facilitate accrual accounting, capacity building and final
roll out.
External consultants may be engaged to provided technical
guidance
Set up mechanism for collecting, consolidating and
disseminating financial data on all public sector entities
(local governments, companies and corporations and SPVs
implementing CSS)
Provide object heads for segregation of
maintenance expenditure into salary and
non-salary components.
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Priority area/
objective
Enhance
Treasury
processes,
controls and
reports
through
implementatio
n of Khajane II
Action
Suggested next steps for implementation
Determine a benchmark rate of return for
investment in PSUs. Provide a list of PSUs
providing rate of return lower than the
benchmark rate in the Budget and Finance
Accounts.
Issue instructions to all departmental and
non-departmental undertakings to provide
an annual return of vacant land with area
and estimated market value and disclose
full information on vacant land in the
Budget.
Consider disclosing information on number
of employees in the Finance Accounts
based on the information collected for
Appendix B of the Budget.
Disclose implicit subsidies in the Finance
Accounts
Continue to upgrade Khajane I to Khajane
II (KII) with full computerization at the
level of Drawing and Disbursing Officers
(DDO)
 Develop a HR staffing plan, change
management strategy and training plan
for all DDOs, Chief Controlling
Officers and Treasury officials
 Review the number of DDOs and work
out a strategy for rationalizing them.
Develop and implement a data migration
strategy to capture legacy data in key areas
Develop a roll out plan for KII and cutoff
date for completing the switchover and
withdrawal of manual books
Build capability in Khajane II to
integrate/link the following software’s
 Budget Management Information
System
 Supplementary Estimate Information
System
 E-receipts System (CTD and ED)
 E-Procurement
 HRMS
 Project Management Software – PWD
 Beneficiary monitoring system of
departments
 ULB and GP software
Build Capability to develop the following
modules
 Contract management module
 Cash management and forecasting
Constitute an expert committee for this exercise.
ALMC could be entrusted with collation and consolidation
of this information
Information already appears in the Overview of the Budget
Review staffing structure at Treasuries and DDOs
Review the number of DDO and if there are synergies for
combining them
Prepare training modules and curriculum of training
Identify key areas where data needs to be migrated to KII.
Reconcile and validate legacy data for incorporation in KII
Carry out pilot as envisaged in September and attempt
switchover in April 2015
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Priority area/
objective
Action
Suggested next steps for implementation
module
Audit compliance management module
(link to Audit Monitoring System)
 Guarantees
 Investments
 Debt management
 Loans and Advances
 ZP/TP Module
 Carry out a study on cash management
practices and debt scheduling.
 Develop a cash forecasting model for
monitoring cash management and
integrate with KII.
 Integrate cash balance and forecasting
mechanism with debt scheduling
decision
 Link cash management projections
with the Monthly Programme
Implementation Calendar and
procurement plans
Create web-based information system for
tracking and monitoring of subsidies and
interlinked to KII
Carry out a study on cash management practices and the
amount of cash deposited with entities outside the treasury
and options on how cash management could be made
better. This study should also look at how the debt
scheduling is being pursued by the GOK. Review if the
cash parked with entities outside treasury could be reverted
back to the treasury. This study should be led by FD and
can be supported by external consultants

Improve Cash
Management
Enhance
controls over
Subsidies
Enhance
interface
capability,
scalability, and
integrity of the
Human
Resource
Management
System
application
Strengthen eProcurement
systems
Analyze C&AG audit report on HRMS and
prepare mitigation plan
Upgrade HRMS to advanced version of
HRMS II
Initiate a comprehensive payroll audit for
validating the database prior to migration to
and roll out of HRMS II
Develop and institutionalize a Disaster
Recovery Plan
Provide interface for transfer of Pay bill
electronically to Khajane
Roll out full transfer of Employee
payments through electronic mode
Provide web enabled access interface to
employees to view their master data and
propose rectifications
Analyze C&AG audit report on
procurement and prepare mitigation plan
for issues noted in case of violation of
KTTP/e-procurement
Consider changes to the KTPP as suggested
in the report
Conduct capacity building programs,
trainings and workshops for staff across
This will feed into development of HRMS II
GOK has already initiated steps for developing HRMS II.
Consultants to be engaged for carrying out the audit.
Additionally, provide web enabled interface to employees
to view their data and propose rectifications for
inconsistencies in their legacy data.
Payment of employee dues through ECS already initiated
in 4 talukas of 15 districts
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Priority area/
objective
Enhance Fiscal
Transparency
Enhance
controls over
Guarantees
Phase out Off
Budget
Borrowings
Strengthen
system of
Recording,
Consolidation,
Reconciliation
and Reporting
of the
Investment
Portfolio
Action
Suggested next steps for implementation
departments on KTTP and e-procurement
Prepare a user guidance manual and share
with the procuring entities working on
KTTP and e-procurement
Initiate audit of the e-procurement software
by CAG
Review Contract Management Module and
its implementation progress so that it can
be developed in KII
Provide adequate delegation of powers as
suggested by the departments
Enhance functionalities of e-procurement
software to include Online Bid Evaluation Process
 Issue of work order in the system (or
this function needs to be captured in
KII)
 Provisions for Expression of Interest
Disclose information on contracts awarded
on the e-Procurement website.
Develop a Government Guarantee Policy
Operationalize the Guarantee Redemption
Fund
Discontinue book adjustment of Guarantee
commission so as to be in compliance with
Guarantee Act
Strengthen guarantee database and
reconciliation efforts
Ensure that budgetary funds directed
towards debt servicing are utilized for the
intended purposes by the PSU/SPV. This
will ensure better cash management
Make adequate disclosure of OBB on
account of ULBs in the Budget document
and MTFP, include the amount outstanding
for the computation of Total liabilities
Develop Operational Guidelines, in
consultation with the AG to provide clear
norms for determination, timing of
accounting and reporting of investments
Strengthen efforts for identification and
reconciliation of differences between state
accounts and investee-company accounts
Request AG for an IT audit of the system
Initially this can be done voluntarily and later on mandated
in the KTPP Act.
Database to include details of Performance Guarantees, and
fields for capturing information such as due date for
guarantees and no dues from lending institution for deleting
expired guarantees
GOK to assess the uncommitted financial resources
available with the PSU/SPV prior to release of funds for
debt servicing.
.
Prioritize reconciliation efforts on “big ticket” items
pertaining to recent years
Expedite issue of necessary GO’s for corrective action
Engage external consultant as required
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Priority area/
objective
Institutionalize
Debt
Management,
Recording and
Reporting
functions
Action
Suggested next steps for implementation
Issue clear Government orders when
authorizing investment
Set up a combined Cash and Debt
Management Office for cash and debt
management recording and reporting.
Reconcile debt data with the AG on priority
Continue contribution to the Consolidated
Sinking Fund maintained by the Reserve
Bank of India
Examine alternate models for Debt
Sustainability Analysis (DSA) and adopt an
appropriate model
Disclose debt data and DSA on the website
of the Finance Department.
Develop and implement an application for
maintaining Debt data
Strengthening
and building
capacity in
Assets Liability
Management
Cell
Strengthen
system of
Recording,
Consolidation,
reconciliation
and Reporting
of Loans and
Advances
Copy all GOs authorizing the issue of
guarantees, sanction of loans and
investments directly to the ALMC
Address resource constraints in ALMC
through training and appointing finance
personnel from FD
Develop suitable application compatible to
KII for recording and reporting of
guarantees, investments and loans and
advances by ALMC
Reconcile and validate legacy data for
Guarantees/Investments/Debt//Loans and
advances for incorporation in KII Asset
Liability Management module
Strengthen efforts for identification and
reconciliation of differences between state
accounts and balance maintained by GOK
Institute Reporting System to meet Indian
Government Accounting Standards (IGAS
3) requirements in consultation with AG
Initiate a special audit of the detailed
records of Loans and Advances maintained
departmentally
Issue GO reiterating rules governing the
The GO must state whether it is investment or grant and
mention the correct head of account.
Adequately staffed office to be setup within FD
Constitute a dedicated expert team to identify the
differences and follow up to resolve the issues.
Provision to be made in yearly budget
Gujarat model for disclosure can be followed
This is to be done only when implementation of ALM
module in Khajane II takes more than 2 years.
Engage consultants in the short term
Augment staffing in the long term
This is to be done only when implementation of ALM
module in Khajane II takes more than 2 years.
Constitute dedicated team in ALMC for reconciliation and
engage external consultant as required
Prioritize reconciliation efforts on “big ticket” items
pertaining to recent years
To facilitate reconciliation GOK to direct all CCO
maintaining detail accounts to provide timely information
to the team
Formalize reporting system through issue of a GO
Constitute a dedicated expert team from KIPA or retired
audit officers from AG to carry out this audit
The GO should specifically cover the following aspects:
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Priority area/
objective
Action
Suggested next steps for implementation
sanction and monitoring of loans and
advances and ensure compliance
Decline in
stock of
Arrears of
Payment
Loans should be made only after the terms and conditions
have been agreed
No loans to be given when earlier loans are in arrears
Identify the reason for arrears
Develop a strategy to address the
significant arrears in repayments of loans
Provide a formal definition of payment
arrears for its due recognition
Institute a system for recording and
reporting arrears across GOK
The system should capture payments outstanding across all
departments and para statals distinguishing between current
outstanding and arrears
GOK to (a) determine strategy to clear payment arrears by
setting a time table, (b) make adequate budgetary provision
and (c) avoid buildup of further arrears Priority in budget
should be made for payment of arrears, then for completion
of ongoing works and lastly for adding new works
Develop a strategy for clearance of arrears
as on a cut-off date
Strengthen
internal
controls,
accounting,
reporting and
adjustments
over
Unencashed
Cheques
Institutionalize
Internal Audit
in GOK
Disclose expenditure payments outstanding
in the mid-year report and budget
documents.
Initiate a special study to identify the
underpinning causes of accumulation of
uncashed cheques to formulate a strategy to
clear backlog and avoid recurrence
Carry out a one-time special exercise to
clear the backlog of unencashed cheques
Reiterate instructions through GO to all
Treasuries and DDOs forthwith to follow
the procedure prescribed in the KFC
Reduce the periodicity of cancellation of
unencashed cheques to 3 months
Commence monthly reporting of lapsed
cheque to AG and finalize accounting
treatment of cancelled cheques
Conduct a situational analysis of current
internal audit arrangements in GOK
departments
 Develop risk-based strategy for
implementing internal audit function in
the State;
 Carry out categorization of
departments and initiate internal audit
in high spending departments and
implement gradually
Constitute a dedicated expert team from KIPA or retired
audit officers from AG to carry out this audit
Treasuries to identify cheques not paid for more than a
year, confirmation of non payment from DDO and submit
request to AG for alteration memo
Lapsed cheques should be reversed within the same FY.
This would require amendment to KFC.
Develop a process for reporting to the AG for issue of
Alteration Memos on a priority basis
Study existing organizational structure, skills and capacity
of existing staff, and current audit methodologies and
procedures and SWOT analysis.
Suggest institutional model for Internal Audit ; staffing;
implementation strategy; audit committees; capacity
enhancement; internal audit approach, methodologies and
procedures including reporting;
Could consider creating a high level Internal Audit Task
Force to spearhead the reform
Categorize based on budget spent, revenue earned, and the
risk perception based on earlier AG audit reports
Develop and implement Internal Audit
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Priority area/
objective
Improve
Responsiveness
to External
Audit
Action
Suggested next steps for implementation
Manual
Re-iterate the seriousness of noncompliance with audit paras and prescribe
action for continuous failure to take action
Clarify and enhance role of the IFA in
follow up of audit reports
Strengthen the institution of Ad Hoc
Committees at departmental level
Issue GOs and organize workshops
Organise training for follow up and use of Audit
Monitoring System
Meetings to be convened periodically and minutes of
meeting to be posted on the website of the concerned
department
Constitute a state-level Apex Audit
Committee to oversee the status of
compliance and working of the Ad Hoc
Committees
Take measures to ensure expeditious
recovery of revenue at least in cases
accepted by the Department
Mandate data input in the Audit Monitoring
System as compulsory and Controller to
monitor on a frequent basis
Enhance the functionality of the Audit
Monitoring System
Strengthen
Legislative
Scrutiny of
External Audit
Reports
Prescribe strict timelines for response to
reports of the Legislative Committee by the
departments, and action for delayed or noncompliance
Increase the technical human resources at
the disposal of the Committee on Public
Accounts (CoPA)
Integrate Audit Monitoring System with
database maintained by CoPA
Place the Action Taken Reports in public
domain after they are laid before the State
Legislature
Publish Epitome of recommendations of
the legislative committee every 3 years
Organize training for KSAD staff on
commercial accounting
Strengthen
KSAD to
improve PFM
services
Include aspects such as meeting of ad-hoc committee;
classification of audit observations and KSAD reports and
integrate with database of KLA.
The Handbook should be further strengthened in this area
which includes COLB.
Provide more technical resources so that larger number of
reports could be taken up for examination and action taken
submitted by the departments can be reviewed
expeditiously
Continue training courses which are being conducted
currently
Make rotations between audit and accounts compulsory to
broad base knowledge
Identify train and groom core group of
KSAD staff to take up role of IFAs and
enhance their PFM capabilities to take up
enhanced role to support FD
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Priority area/
objective
Action
Suggested next steps for implementation
Enablers for improving audit efficiency
 Enact KSAD Audit Act to provide a
legal status to KSAD
 Develop and implement a
comprehensive audit manual
Enhance audit capacity and capability of
KSAD staff through training
Monitor and improve compliance through a
Centralized Audit monitoring cell
Implement Audit management software and
IT infrastructure to increase efficiency
Introduce new audit practices
 Risk based audit
 Encourage co-sourcing
 Carry out Financial Attest Audit
Carry out audit of ULBs and GPs through
their computerized systems
Develop strategy and carry out one time
reduction of audit arrears
Increase cadre strength of KSAD
Improve PFM
in Local Self
Governments
Update Demand Collection Balance
Register to recognize own source revenue
Move towards e-receipts and collections
through banks for all taxes
Develop accounting policy and procedure
for electricity payments
Develop and implement strategy to clear
the backlog of accounts
Develop and implement strategy to clear
the backlog of pending audits in ULBs and
GPs
Constitute Audit Cell in DMA and RDPR
for audit management
Conduct audit of ULBs and GPs software
(e-gov financials and Panchatantra)
Carry out one time cleanup of old balances
and suspense account, bank accounts and
closure of inactive accounts in ZP/TP
Set up an internal audit wing and
This action has already been approved by FD
Study of risk,
Procedures and guidelines for carrying such audit to be laid
down in the audit manual.
Training to be provided carry out such audit
Train staff on the software’s of ULBs and GPs and audit
through computer
Carry out pilot testing for one district
Carry out full state audit after pilot.
Review internal and external arrears.
Agree with entities on a timeframe for completion of
accounts
Constitute a special team to clear back log either through
staff or consultants.
Carry out HR and skills mapping exercise; prepare revised
organization structure with staff requirements.
Engage external help to complete the accounts and prepare
financial statements
Engage external help to complete the audits
This action has already been approved in the budget for
DMA
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Priority area/
objective
Action
Suggested next steps for implementation
implement the internal audit manual
Finalize and establish the Internal Audit
structure for the Taluk Panchayats
Update Municipal Account Rules to
include MPAS reports and reports on
banking transactions in the financial
statements of ZP and TP
Build fund control in KII for PD accounts
related to ZP/TP
Ensure full migration from manual systems
of accounting and financial reporting to
computerized systems for ULBs and GPs
Strengthen
PFM and
Corporate
Governance in
State Owned
Enterprises
Develop and implement strategy to clear
the backlog of accounts
Enhance the role of the DPE as an effective
nodal agency for State Owned Enterprises
Conduct specific studies on corporate
governance
Consider adopting framework of corporate
governance applicable to central PSUs
Review the external audit findings,
including functioning of internal audit and
audit committee
Implement recommendations of 2004
report .
A cutoff date for switchover needs to be decided
All legacy date to be entered before cutoff date
GO to be issued clarifying the timelines and actions to be
taken
Engage external help to complete the accounts and prepare
financial statements
Operationalize the 2008 GO
Engage external help to complete the study.
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Section 9. ANNEXURES
9.1
Department/
Agency
Commercial
Tax
ASSESSMENT OF INTERNAL AUDIT FUNCTION IN KARNATAKA – C&AG
Functioning IAW
Adequacy of Audit
Staff
Compliance with
audit reports
During 2005/06 to
2009/10, IAW raised
506
observations
involving Rs. 33.79
crore. Only 8% of the
total
objections
cleared
during
2005/06 to 2009/10
Compliance is delayed
– settlement rate is
under 25%
Functioning up to 2004/05 but
abolished on introduction of
VAT and re-established from
June 2011. Offices actually
covered under internal audit
during 2011-12 were 5% and
2012-13 were 7%
Excise
Yes, IAW established. 104
offices out of 311 were
planned for audit during
2009/10 and 108 offices were
actually audited
Working strength of
only one Senior Audit
Officer
and
two
Assistant
Audit
Officers
Motor
Vehicle
Yes since 1960; Internal audit
was completed for about 94%,
82% and 73% of the offices
selected for audit during
2011/12, 2010/11 and 201213, respectively
3 posts of First
Division
Assistants
out of sanctioned 8
were vacant
Stamps
&
Registration
Fees
There is no IAW in the
department. GoK is yet to
decide on the proposal
submitted by the Department
in July 2008.
Fisheries
Exclusive
IAW
not
established; huge shortfall in
coverage of field offices in
audit during 2007/08 to
2011/12
Audit team from the
Directorate conducted
audit of the field
offices and reported
the findings to the
Director
Forest
Established
in
1977/78;
Internal Audit Manual not
prepared; out of 124 auditee
units in the department, the
shortfall in internal audit
ranged from 80 to 90% during
Internal audit was
largely non-existent on
account of vacancies
amongst key staff
What the C&AG
recommends
IAW should be made
functional
and
effective.
Action may be taken
to strengthen IAW and
increase the coverage
of audit, fix annual
target for coverage of
audits and settlement
of observations
Take appropriate steps
for speedy clearance
of
outstanding
objections, particularly
those pending for
more than five years
Effective action may
be taken by the
Department to settle
the
pending
paragraphs
Proposal made by C
&AG in 2009/10 to
expedite the setting up
of IAW is pending;
recommendation
reiterated in 2010/11
to 2012/13.
Non-establishment of
the IAW exposed the
Society to the risk of
financial irregularities,
if any, remaining
undetected
and
continued
nondetection
of
irregularities
Non-compliance
to
internal audit reports
reflects the inadequacy
and
lack
of
effectiveness
of
internal audit;
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Department/
Agency
Functioning IAW
Adequacy of Audit
Staff
Compliance with
audit reports
What the C&AG
recommends
Government
should
take necessary
action would be taken
to prepare internal
audit manual and to
fill up the vacancies
Internal Audit Manual
codifying the practices
and
procedures
relating to conduct of
internal audit may be
prepared
by
the
Department.
The
coverage of internal
audit may be enlarged
and timely compliance
ensured
As of March 2013,
12,283
paragraphs
with money value of
Rs.
96.38
crore
outstanding
for
settlement, of which,
Rs.
69.51
crore
pending for more than
5 years. Recoverable
amount aggregated to
Rs. 7.83 crore
Internal
control
ineffective as there
were
shortfall
in
Internal
Audit
coverage during 201011 and 2012-13 and
Departmental manuals
were not revised since
1954
2009 to 2012
Mining
Social
Welfare
Department
- Karnataka
Residential
Educational
Institutions
Society
Sericulture
Karnataka
State Drugs
Logistics and
Warehousing
Society
Bangalore
Water
Supply and
Sewerage
Board under
Urban
Development
Department
Karnataka
Building and
No internal audit of residential
schools/colleges
conducted
during t 2008/09 to 2010/11.
For 2011/12, against the target
of 542 schools fixed for
internal audit the achievement
was only 243 schools in 10
districts (45%).
For 2012/13, development of
Audit program is in progress
IAW functioning since 1984.
During 2010/11 and 2011/12,
shortfall in audit coverage
(number of offices not
covered) was 28% and 55%,
respectively
Shortfall in internal
audit to lack of audit
staff
No;
its
voluminous
transactions had never been
subject to any internal audit so
far
One post each of
Accounts Officer and
Accounts
Superintendent created
Shortfall in coverage
of Internal Audit to
inadequate staff
strength
Regular internal audit not part
of
the
internal
control
mechanism
No IAW set up in the Board
and hence no internal audit
The Board should put
in place an effective
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Department/
Agency
Other
Construction
Worker’s
Welfare
Board
Functioning IAW
Adequacy of Audit
Staff
conducted during 2008/13
Compliance with
audit reports
What the C&AG
recommends
internal
audit
mechanism to guard
against irregularities in
the implementation of
welfare schemes GoK
has
agreed
to
introduce a dedicated
independent IAW
Source: Compiled from Reports of the C &AG 2010/11, 2011/12 and 2012/13
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9.2
NOTE ON INTERNAL AUDIT PRACTICES IN GOI AND OTHER STATES
Central Government
Government of India, Ministry of Finance prescribes setting up of an efficient internal audit organization to ensure both
accuracy in accounts and efficiency in the operation of the accounts set up 172. The scope and function of internal audit
includes checking the initial accounts maintained in executive offices with a view to ascertain as to how far they are
following the rules in financial matters covering checking of all accounts records including those relating to fund accounts,
loan and advances and records of physical verification of stores, equipment’s, tools and plants, etc.
Internal audit at the central level is driven by the Internal Audit Division of the Comptroller General of Accounts (CGA).
According to its website, Internal Audit has been recognized as an aid to the higher management for monitoring the financial
performance and effectiveness of various programs, schemes and activities. Since 2007, the CGA seeks to change the
approach to internal audit in ministries and departments from a control focus to a management-support function, thus
recognizing a shift from compliance to risk based approach. A number of developments have taken place at the central
level for improving internal audit procedures and standards and bring them in line with international best practices and build
capacity of the internal audit staff.








Recommendations on strengthening internal audit made by the 14th Report of the 2nd Administrative Reform
Commission (April 2009) was accepted by the GoI
A decentralized model is being followed at the central level where internal audit is carried through the Internal Audit
Wings (IAW) in the Principal Accounts Office of the ministries/ departments under the Controller of Accounts, but
under overall guidance of the CGA
Guidance for Planning, Performing and Reporting on Internal Audit Engagements in the Government was issued in
August 2007.
Central ministries/departments have their own Internal Audit Manuals based on the above Guidance (e. g. Ministry of
Home Affairs, Ministry of Road Transport and Highways,
A Centre of Excellence for Internal audit was established in 2007 under the CGA with the objective to - (i) develop into
a repository of technical resource and guidance center for advising internal audit wings of line Ministries on effective,
independent and objective internal audit functions, procedures, and "best practices"; (ii) enhance the quality of internal
audit so that the result of internal audit become an input into the processes of planning, project formulation and
implementation and (iii) provide an assurance to the management that the "controls" in place provide adequate protection
against likely "risks".
An Internal Audit Report Template based on a risk based approach to internal audit engagements was issued in
December 2012
Greater emphasis is on training the internal audit staff
An Annual Review Report on the performance of Internal Audit Wings is brought out by some departments,
highlighting major irregularities observed during the course of internal audit. Ministries/departments such as Ministry of
Home Affairs and the Central Board of Excise and Customs have published their annual review up to 2011/12 and these
are available in public domain.
CGA is endeavoring to achieve a Level 4 as per the Internal Audit Capability Model (IA-CM), for the public sector
developed by the IIA implying that internal audit is undertaken so as to integrate information from across the organization to
improve governance and risk management
Rajasthan (centralized function as a Directorate under Finance Department; internal audit manual not developed)
The Finance Department has an Audit and Inspection Division that deals with amongst others Internal Audit, Special Audit
and Physical Verification Reports of the Director Inspection. Within the Finance Department, matters pertaining to the
Directorate of Inspection is examined by an Officer on Special Duty and disposed of by the Secretary Finance. There is a
system of rolling program of internal audit inspections and the audit program issued by the Director of Inspection are
published on the website of the Finance Department173. However, it seems that there is no internal audit manual or
guidelines defining the objective, scope, reporting requirements, duties and powers etc.
172
173
Chapter 12 of Civil Accounts Manual, Controller General of Accounts, Ministry of Finance, Government of India
http://finance.rajasthan.gov.in/grpresult.asp?grpid=24&grpname=INSPECTIONDEPTT
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Andhra Pradesh (centralized function in Finance Department; internal audit manual developed)
The state started strengthening its internal audit function from 2003 by constituting internal audit committees at the state and
district level, entrusting internal audit of some departments to the Director State Audit and creating a cell in the Finance
Department to oversee the activities of internal audit. An Internal Audit Manual has been developed 174 and implemented that
details the role of the function, planning and conducting the audit and reporting requirements supplemented by checklists and
questionnaires.
Delhi (centralized function as a Directorate of Audit; internal audit manual developed)
The union territory set up an internal audit organization in 1977 as one of the branches of Principal Accounts Organization.
In 1981, a Directorate of Audit was constituted as an independent entity headed by Principal Secretary (Finance) as ex-officio
Director of Audit and assisted by Spl. Secretary Finance and Controller of Accounts (Audit). The terms of reference of the
Directorate have been detailed 175 and an Internal Audit Manual was developed in 1989 and revised in 2008. 176 The
Directorate does not aim to cover 100% transactions, but makes a selective approach but does a random audit for a few
selected months, but efforts are made to cover all units at least once a year. Overall, the Directorate of Audit is guided by the
Chapter 12 of the Civil Accounts Manual.
Kerala (decentralized function under supervision of an Internal Audit Cell in the Finance Department; Internal Audit
Manual developed)
The state had established an Internal Audit Cell in the Finance Department in the 1989s to supervise and oversee the working
of the Internal Audit. Each department has an Internal Audit Wing under the head of department. An Internal Audit Manual
has been developed in 2008. The Government of Kerala reviewed the working of the Internal Audit Wings in 2003 and 2005
based on the observations of the State Accountant General and initiated a number of steps to strengthen the function. Internal
audit reports are submitted to the Finance Department.
West Bengal (centralized function)
An Internal Audit Wing under Finance Department was created 1998 subsequently re-named as Finance (Internal Audit)
Department and now functions as a Directorate of Internal Wing. West Bengal claims to be the first state in the country to
create an Internal Audit under Finance Department to improve financial discipline in various departments, local bodies and
Government undertakings.
Odisha (centralized function with decentralized audit units)
The internal audit system is called the Common Cadre Audit established in 22 out of the 38 administrative departments under
the control of the Finance Department. The Common Cadre Audit Organization consists of 114 Assistant Audit Officers and
359 Auditors. Besides, there is an Efficiency Audit Organization that conducts evaluation studies.
Uttarakhand (centralized function)
An Uttarakhand Audit Act, 2012 has been enacted and the responsibility of Internal Audit is placed upon a Director – Audit
under the Finance Department supported by a staff of about 100. All government agencies are covered under internal audit
and an ABC categorization has been according to the level of revenue earned or spending of each department and this
determines the periodicity of the audit –



Category A – revenue/expenditure over Rs. 300 crore – annual audit
Category B - revenue/expenditure between Rs. 200 to Rs. 300 crore – once in two years
Category C - revenue/expenditure less than Rs. 200 crore – once in three years
An audit plan is prepared each year and approved by the government. A Manual of Internal Audit has been prepared and
implemented. Audit observations are settled at the level of the head of department, Secretary and Chief Secretary Level
with representation from the Accountant General at all levels. Department-wise audit committees have been constituted.
174
By the Center for Good Governance
http://www.delhi.gov.in/wps/wcm/connect/doit_audit/Directorate+of+Audit/Home/Function+and+Services
176 By the Financial Management Research and Resource Society
175
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9.3
1.
NOTE ON LEGISLATIVE COMMITTEES
Committee of Public Accounts (CoPA)
a.
The Budget Manual (clause 300 and 334) describes that after the Appropriation Accounts, Finance Accounts
and the Audit Reports are laid on the table of the Houses of the Legislature, they shall be referred to the PAC.
The reports of the C&AG once tabled in the State Legislature are referred to CoPA of the Legislature. The
CoPA examines these reports, may recommend actions and sanctions to be implemented by the executive, in
addition to adopting the recommendations made by the external auditors. In addition, the CoPA examines
special subjects that are assigned to it by the Legislature (suo moto examination). The AG and Finance
Secretary (to render advise), Heads of Departments, Secretaries to the Government (for eliciting information on
any matter pertaining to their departments) are invitees to these committees. The concerned Secretary to
Government will have to appear as witness before the Committee when it examines the particular paragraph in
the Report (clause 332 of the Budget Manual).
b.
The CoPA may take up review of some audit reports and/or may take up only selected audit observations in a
particular audit report and selection of audit reports may not follow any chronological order. During 2008-2013,
the CoPA held 147 meetings, covered 502 paragraphs (audit observations), and issued 19 reports (see Table
below) containing 634 recommendations, which was tabled before the State Legislative Assembly. This review
covered about 15 departments. The State’s Finance and Appropriation Accounts have been reviewed from
1998-99 to 2010-11. The new CoPA of the 14th Assembly constituted in August 2013 (post elections) have held
14 meetings and is about to issue its first report. Disposal of Action Taken Notes for 2010-11 and 2011-12 is
under process (as of November 2013). In July 2011, the CoPU constituted a Sub Committee specifically for the
purpose of discussing Action Taken Report on the recommendations of the CoPU. The Sub Committee has
submitted to Legislature two reports on the ATR (Forest and Urban Departments).
Table 65: Year wise Number Reports issued by CoPA
Year
No. of Reports
Departments
Covered
c.
2009
5
 Forest, Ecology and
Environment
 Health and Family
Welfare
 Home






2011
10
Public Works
Finance
Irrigation (Minor)
Industries and Commerce
Revenue
Food and Civil Supplies
2012
3
 Forest, Ecology and
Environment (ATR)
 Urban Development
(ATR)
2013
1
 Finance
In depth hearings177 on selected key audit findings are held by the CoPA for examining the officers of the
departments whose audit reports are taken up for review (but not for all departments having audit observation).
Table 66: Year wise Number of Hearings held by CoPA
Year
No. of Hearings Held
2.
177
2008
2009
2010
2011
2012
11
22
37
33
34
2013 (up
to Jun)
5
Committee of Public Undertakings (CoPU)
Detailed procedure for appearance before the PAC is described in the Budget Manual (clause 332).
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a)
The CoPU was separately constituted for the first time in 1969 in view of the increased investments in public sector
undertakings and there was a call for specific committee to review their audit reports. The Secretaries of the
Administrative Departments are responsible to furnish replies to the CoPU and they and the Chief Executives of the
SOEs may have to appear in person before the Committee to tender evidence. The Accountant General, Principal
Secretary Department of Public Enterprises and the Finance Secretary are invitees to the deliberations of the
b) The CoPU has so far submitted 129 reports (since 1973) before the Legislatures. Reports of the C &AG up to 2008-09
have been examined while examination of reports for 2009-10 and 2010-11 are in process and 2011-12 is to be taken up.
In depth hearings are held by the CoPU for examining the officers of the SOEs whose audit reports are taken up for
review.
Table 67: Year wise Number of Hearings held by CoPU
Year
No. of Hearings Held
2008-09
2009-10
2010-11
2011-12
33
37
58
23
Up to Dec
2013
40
Jan 2013 to
Nov 2013
20
3.
Committee of Local Bodies and Panchayati Raj Institutions (CoLB)
a)
CoLB was first constituted in March 2010 to examine the C&AG audit reports on Municipal Corporations and
Municipalities and rural local bodies (the Panchayats). About 33 hearings have been held till December 2013 and the
CoLB is supported by officers from the secretariat, and of the Finance Department as required.
b) CoLB has completed the examination of audits reports for 2007 and 2008 and Action Taken Reports are to be prepared
and examination of 2009 report in under process (as of January 2014).
c)
KSAD is required to submit a consolidated report on the accounts and audit of the ULBs and GPs in the State. This
requirement is required from FY 2009-10 and KSAD has submitted the report for this period to the CoLB. CoLB would
be reviewing this report along with the reports on local bodies provided by the AG.
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9.4
1.
2.
NOTE ON IFMIS
Financial Management Information Systems (FMIS): Financial management information systems (FMIS) can be defined
as a set of automation solutions that enable
governments to plan, execute, and monitor the
budget by assisting in the prioritization,
execution, and reporting of expenditures, as
well as the custodianship and reporting of
revenues. Accordingly, FMIS solutions can
contribute to the efficiency and equity of
government operations. FMIS (refer chart) is
usually built around a core treasury system
which supports key budget execution functions
such as, accounts payable and receivables,
commitment and cash management, the general
ledger and financial reporting, combined with
budget
formulation
(multi-year),
debt
management
and
public
investment
management modules. The non-core PFM
systems linked with FMIS solutions are
personnel management/ payroll, revenue
administrations (tax and customs), market
operations/securities, public procurement, inventory and property management, and performance monitoring. When
FMIS and other PFM information systems are linked with a central data warehouse (DW) to record and report all daily
financial transactions, these offer reliable consolidated results for budget analysis, decision support, performance
monitoring and web publishing. Internationally, countries have moved beyond core treasury computerization and have
adopted the concept of implementing FMIS.
Approach & Timeframe: The development of integrated FMIS solutions is a major challenge in many developing
countries, including several large economies similar to India (e.g., Brazil, China, Indonesia, Republic of Korea, and
Russian Federation). The continuity of political commitment and leadership, the scale of investment on technology and
capacity building, change management activities, design and implementation methodology, and the duration of system
development and deployment are important parameters, affecting the successful completion of these initiatives. A
comparison of the IFMIS initiatives in selected APEC economies is also presented below:
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Government of Karnataka - Public Financial Management Reform Action Plan – 2014 – Appendix
Figure 5: Comparison of the initiatives for transition to integrated FMIS solutions in APEC (Nov 2012)
Source: Cem Dener’s presentation (“A tour around the world: Transition to integrated FMIS solutions”) - APEC FMIS
Workshop in Bogor, Indonesia (Nov 2012).
3.
4.
5.
Trends in FMIS ICT solutions: The type of information and communication technology (ICT) solution selected for FMIS
projects plays an important role in project implementation. Until the early 2000s, most countries developed their FMIS
ICT solutions as distributed database applications based on a client-server model, with application software, database
and servers installed in every office. FMIS applications run locally (off-line) and the consolidation of data is achieved by
replicating all databases at a central location on a daily basis through a network. This approach was abandoned after
2000, with the advent of centralized web-based solutions.
Starting from the early 2000s, FMIS projects were designed as centralized database applications based on web-based
solutions in parallel to the advances in telecommunications infrastructure and the expansion of broadband networks. In
web-based systems, application software, database and servers are located centrally, and online access is provided to all
users through a countrywide network. A backup center is established to replicate all central databases automatically.
Web-based solutions reduce the duration and cost of FMIS implementation providing effective centralized systems
supporting decentralized operations.
Regarding the type of application software (ASW) developed for FMIS needs; two main types of solutions exist. Until
the early 2000s, FMIS capabilities were implemented mostly through Custom Developed Software (CDSW) mainly
because of the technical limitations of commercial packages (originally designed for private sector needs) and also the
lack of adequate ICT infrastructure in many regions. Since the introduction of web-based applications after 2000, a shift
toward customized Commercial off-the-shelf Software (COTS) packages (tailored to public sector needs) began.
Nevertheless, no single package can provide all the FMIS functionality needed for country/state specific needs. Hence,
most of the new FMIS solutions designed after 2005 integrate customized COTS packages with specific CDSW modules
(including open-source software) to cover a broader spectrum of PFM functions. Possible country/state specific options
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(COTS / CDSW) for FMIS application software development need to be clarified based on a detailed system design and
realistic cost/benefit analysis (considering the total cost of ownership).
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