The document discusses reforms to public financial management in India based on recommendations from the Second Administrative Reforms Commission. It outlines weaknesses in budgetary processes, resource allocation, and expenditure management. The reforms aim to strengthen financial management systems through improved revenue collection, debt and cash management, planning processes, oversight, and use of modern practices like accrual accounting. Core principles for reform include ensuring financial management is part of governance reforms and adopting transparency, flexibility, and a focus on results.

1. PUBLIC FINANCIAL
MANAGEMENT
A case for
reforms……

2. BACKGROUND……
 Second Administrative Reforms Commission was
constituted by the Govt. of India, Ministry of
Personnel on 5 August 2005 under the
chairmanship of Veerappa Moily.
 The purpose of its constitution is to prepare a
plan of action for a complete makeover of public
administrative system.
 Terms of Reference:- The commission will
suggest ways to make Indian public
administration more accountable, sustainable,
proactive and efficient

3. THE COMMISSION WILL INTER ALIA
CONSIDER THE FOLLOWING:-
 Organizational  Local self
structure of the govt. of government/panchayat
India raj institutions
 Ethics in governance  Social capital, trust and
 Refurbishing of the participative public
Personnel service delivery
administration  Citizen centric
 Strengthening of administration
Financial Management  Promoting e-governance
system  Issue of federal polity
 Steps to ensure effective  Crisis management
administration sat the
state level
 Public order.
 Steps to ensure effective
District Administration

4. FUNDAMENTALS OF FINANCE…….
 defined as the management of money or funds management.
 includes all those activities that includes the origination,
marketing and management of cash and money through a
variety of capital accounts, instruments and markets created
for transacting and trading assets, liabilities and risks.
 addresses the ways in which individuals, businesses and
organizations raise, allocate and use monetary resources
over time, taking into account the risks entailed in their
projects .
 it is conceptualized, structured, and regulated by a complex
system of power relations within political economies across
state and global markets. Finance is both art and science.
 Financial system consists of public and private interests
and the markets that serve them. It provides capital from
individual and institutional investors who transfer money
directly and through intermediaries to other individuals and
firms that acquire resources and transact business.

5. TYPES OF FINANCE….
 Three overarching divisions exist
within the academic discipline of
finance and its related practices:
 personal finance: the finances of
individuals and families concerning
household income and expenses,
credit and debt management, saving
and investing, and income security in
later life,
 corporate finance: the finances of
for-profit organizations including
corporations, trusts, partnerships
and other entities, and
 public finance: the financial affairs
of domestic and international
governments and other public
entities.

6. PUBLIC FINANCE…..
 Public finance describes  Public finance is the study of
finance as related to the role of the government in
sovereign states and the economy.
related public entities or  The purview of public
agencies. It is concerned finance is considered to be
with: threefold: governmental
 Identification of required effects on
expenditure of a public  efficient allocation of
sector entity resources,
 Sources of that entity's  distribution of income, and
revenue  macroeconomic stabilization
 The budgeting process

7. PUBLIC FINANCIAL
MANAGEMENT…..
 Collection of sufficient resources from the economy in an
appropriate manner along with allocating and use of these
resources efficiently and effectively constitute good
financial management.
 Resource generation, resource allocation and expenditure
management (resource utilization) are the essential
components of a public financial management system.
 basically deals with all aspects of resource mobilization
and expenditure management in government.
 an essential part of the governance process and it includes
resource mobilization, prioritization of programmes, the
budgetary process, efficient management of resources and
exercising controls.
 Rising aspirations of people are placing more demands on
financial resources. At the same time, the emphasis of the
citizenry is on value for money, thus making public finance
management increasingly vital.

8. GOVERNMENT
FINANCING….EXPENDITURE AND
RECEIPTS.
 Government expenditures are financed in two ways:
 Government revenue
 Taxes
 Non-tax revenue (revenue from government-owned
corporations, sovereign wealth funds, sales of assets, or
Seigniorage)
 Government borrowing
 Privatization
 How a government chooses to finance its activities can
have important effects on the distribution of income and
wealth (income redistribution) and on the efficiency of
markets (effect of taxes on market prices and efficiency).
The issue of how taxes affect income distribution is closely
related to tax incidence, which examines the distribution of
tax burdens after market adjustments are taken into
account. Public finance research also analyzes effects of the
various types of taxes and types of borrowing as well as
administrative concerns, such as tax enforcement.

9. TAXATION…..
 A tax is a financial charge or other levy imposed on an
individual or a legal entity by a state
 central part of modern public finance.
 significance arises not only from the fact that it is by far
the most important of all revenues but also because of the
gravity of the problems created by the present day heavy
tax burden.
 main objective of taxation is raising revenue.
 used as an instrument of attaining certain social objectives
i.e. as a means of redistribution of wealth and thereby
reducing inequalities.
 in a modern Government,it is thus needed not merely to
raise the revenue required to meet its ever-growing
expenditure on administration and social services but also
to reduce the inequalities of income and wealth.

10. GOVT DEBT…..
 Governments, like any other legal entity, can take out loans,
issue bonds and make financial investments.
 Government debt (also known as public debt or national
debt) is money (or credit) owed by any level of government;
either central or federal government, municipal government
or local government. Some local governments issue bonds
based on their taxing authority, such as tax increment
bonds or revenue bonds.
 As the government represents the people, government debt
can be seen as an indirect debt of the taxpayers
 Government debt can be categorized as internal debt, owed
to lenders within the country, and external debt, owed to
foreign lenders. Governments usually borrow by issuing
securities such as government bonds and bills.

11. GOVT BUDGET….
 A government budget is a legal document that is
often passed by the legislature, and approved by the
chief executive-or president
 The two basic elements of any budget are the revenues
and expenses.
 revenues are derived primarily from taxes.
Government expenses include spending on current
goods and services, which economists call government
consumption; government investment expenditures
such as infrastructure investment or research
expenditure; and transfer payments like
unemployment or retirement benefits.

12. FISCAL POLICY
 fiscal policy is the use of government expenditure and
revenue collection (taxation) to influence the economy
 It refers to the use of the government budget to
influence economic activity.
 The two main instruments of fiscal policy are
government expenditure and taxation. Changes in the
level and composition of taxation and government
spending can impact the following variables in the
economy:
 Aggregate demand and the level of economic activity;
 The pattern of resource allocation;
 The distribution of income.

13. FISCAL POLICY CONTD….
 Governments use fiscal policy to influence the level of
aggregate demand in the economy, in an effort to
achieve economic objectives of price stability, full
employment, and economic growth. Keynesian
economics suggests that increasing government
spending and decreasing tax rates are the best ways
to stimulate aggregate demand. This can be used in
times of recession or low economic activity as an
essential tool for building the framework for strong
economic growth and working towards full
employment

14. MONETARY POLICY.
 Monetary policy is the process by which the government,
central bank, or monetary authority of a country controls
(i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of interest to attain a set of
objectives oriented towards the growth and stability of the
economy.
 it provides insight into how to craft optimal monetary
policy.
 Monetary policy rests on the relationship between the rates
of interest in an economy, that is the price at which money
can be borrowed, and the total supply of money.

15. MONETARY POLICY
 Monetary policy is the tool by which the monetary
authority of a country controls the supply of money, often
targeting a rate of interest for the purpose of promoting
economic growth and stability. The official goals usually
include relatively stable prices and low unemployment.
 an expansionary policy increases the total supply of money
in the economy more rapidly than usual, and
contractionary policy expands the money supply more
slowly than usual or even shrinks it.
 Expansionary policy is traditionally used to try to combat
unemployment in a recession by lowering interest rates in
the hope that easy credit will entice businesses into
expanding. Contractionary policy is intended to slow
inflation in hopes of avoiding the resulting distortions and
deterioration of asset values.

16. GOVT REVENUE AND EXPENDITURE
 Government revenue is revenue received by a
government. Its opposite is government spending
and forms an important part of fiscal policy.
 Revenue may be from taxation or non-tax
revenue (such as revenue from government-
owned corporation or sovereign wealth funds).

17. REVENUE AND EXPENDITURE.
 Government spending (or government expenditure)
includes all government consumption, investment but excludes
transfer payments made by a state. Government acquisition of
goods and services for current use to directly satisfy individual or
collective needs of the members of the community is classed as
government final consumption expenditure. Government
acquisition of goods and services intended to create future
benefits, such as infrastructure investment or research spending,
is classed as government investment (gross fixed capital
formation), which usually is the largest part of the government
gross capital formation. Acquisition of goods and services is made
through own production by the government (using the
government's labour force, fixed assets and purchased goods and
services for intermediate consumption) or through purchases of
goods and services from market producers. Government
expenditures that are not acquisition of goods and services, and
instead just represent transfers of money, such as social security
payments, are called transfer payments. Government spending
can be financed by seigniorage, taxes, or government borrowing

18. GOVERNMENT EXPENDITURE……
 Economists classify government expenditures
into three main types. Government purchases of
goods and services for current use are classed as
government consumption. Government purchases
of goods and services intended to create future
benefits--- such as infrastructure investment or
research spending--- are classed as government
investment. Government expenditures that are
not purchases of goods and services, and instead
just represent transfers of money--- such as social
security payments--- are called transfer
payments.

19. PUBLIC FINANCIAL MANAGEMENT
 With reference to the recommendations of the
second report of the Administrative reforms
Commission….
 Why was the need for reforms was felt?
 What are the specific areas in which these
reforms are focused at?
 What do we want to aim at by focusing on these
grey areas?

20. ONE OF THE KEY TERMS OF REFERENCE OF
THE SECOND ARC IS STRENGTHENING
FINANCIAL MANAGEMENT SYSTEM WHICH
MEANS-----
 Capacity building in all levels of governance to ensure
smooth flow of funds for the programmes,proper
maintenance of accounts and timely furnishing of
necessary information.
 Strengthening of internal audit system to ensure
proper utilization of funds
 An institutionalized method of external audit and
assessment of the delivery and impact of programme.
 The commission is of the view that reforms in the
financial management system are an integral part of
the reforms in governance in general,therfore these
reforms are critical in achieving the national
developmental objectives.

21. WHAT CONSTITUTES GOOD PUBLIC
FINANCIAL MANAGEMENT?

22. ESSENTIAL COMPONENTS OF
PUBLIC FINANCIAL MANAGEMENT
SYSTEM…..

23. UNDERSTANDING THE PUBLIC
FINANCIAL MANAGEMENT,THEN AND
NOW…..
Old concept New concept
 Earlier in developing  Now, viewed as an essential part
countries like India, of the governance process
Public Financial involving resource mobilization,
Management was prioritization of
programmes,budgetory process,
viewed as a controlling
efficient management of resources
and regulating process and exercising controls.
over the spending  Defined broadly to include
agencies
taxation and other resource
 Defined narrowly and mobilisation,debt and cash
confined to budgeting, management, accounting systems,
accounting, monitoring information systems and internal
and evaluation and external audit.

24. THUS, REFORMING THE PUBLIC
FINANCIAL MANAGEMENT WOULD
INVOLVE:-
 Improving the collection of revenue
 Efficient management of debt and cash
 Develop and institutionalize planning process at
all levels of govt leading to effective planning and
allocation of resources
 Effective oversight and monitoring

25. WEAKNESS IN BUDGETARY
PROCESS RESOURCE ALLOCATION
AND USE…
 Poor planning
 No link between policy making, planning and
budgeting
 Poor expenditure control
 Inadequate funding of operations and maintenance
 Little relationship between budget a formulated and
budget as executed.
 Inadequate accounting system
 Poor management of external aid
 Poor cash management
 Inadequate reporting of financial performance
 Poorly motivated staff.

26. CORE PRINCIPLES FOR REFORMING
THE PUBLIC FINANCIAL
MANAGEMENT
 Reforms in financial management system should be
perceived of as part of overall governance reforms
 Sound financial management should be the responsibility
of all govt departments/agencies
 Prudent economic assumptions-tendency to be overly
optimistic has to be avoided.
 Need to shift from the traditional bottom up approach to a
top down framework
 Transparency and simplicity,availabilty in the public
domain
 Relaxing central input controls
 Focus on results
 Adopting modern financial management practices like
Accrual accounting,IT,Financial Information Systems etc.
 Budgeting to be realistic.

27. RECOMMENDATIONS MADE BY THE
GROUP-
 Reforms in budgetary system
 Plan and non plan distinction should be removed
 Accountability for programme implementation should be
incorporated in the canons of financial propriety.
 There should be a separate wing of financial management
comprising of staff and officers who are financial experts
and professionals having requisite experience
 Provision for an independent and professionally competent
internal audit
 Accrual accounting should be taken up in project mode and
implemented in specific timeframe.
 Standing committee attached to each department while
discussing the demand for grants must also discuss the
internal control framework of each ministry as well as
outstanding audit paras.

28. CONTD…
 FRBM may be amended suitably to incorporate provisions
relating to control over savings/excess expenditure and
avoidable supplementary grants and costing and concept of
programme budgeting.
 In the flow of funds to centrally sponsored schemes, one
size fits all approach wont work anymore rather there
should be enough flexibility for state specific variations
 State should be involved in scheme formulation.
 Expenditure tracking should include all funds of the local
bodies including their own resources
 Major lacunae found in proper expenditure
tracking/auditing is non-maintenance of accounts and non
closing of accounts on time by local bodies.

29. Thank you for listening to me so patiently………….
 Dr.Aashish Bariyar
Sr Deputy Collector
Purnea
9431220151
bariyar@gmail.com