India needs to make its public finance management system comprehensive, integrated and consistent at the earliest, a working paper by the New Delhi-based Centre for Social and Economic Progress has said.
“The case for public finance management reform has only become stronger in light of the disruptions and strains caused by the Covid-19 pandemic and its continuing effects, which have highlighted and exacerbated the existing fault lines in national fiscal architectures around the world,” the paper authored by Kevin James, Kandarp Patel and Anoop Singh, said.
“The pandemic has also highlighted the importance of building resilient public finance frameworks that can effectively manage and mitigate future crises.”
While Kevin James is a Research Associate at the Centre for Social and Economic Progress, Kandarp Patel is a civil servant and director at the Fifteenth Finance Commission. Anoop Singh is a Distinguished Fellow at the Centre for Social and Economic Progress and a member of the Fifteenth Finance Commission.
The working paper, titled Reforming the Public Financial Management System in India, complements the Fifteenth Finance Commission’s recommendations regarding building India’s fiscal architecture for the 21st century, and specifically, the key elements of PFM reforms that the commission identified, the authors said.
India’s existing PFM framework encompasses a wide canvas of provisions including constitutional provisions, legislations, rules and regulations, and other documents.
“Even though multiple reforms have been undertaken over the years, they have largely been piecemeal and driven by the need to incorporate developments in information and communications technology, such as integrated financial management information systems,” the paper said. "So far, reform efforts have not targeted the underlying PFM structure in any significant way."
Citing the example of countries around the world, the paper favours the trend of enacting overarching, comprehensive, and modern legislative frameworks for public finance management.
Moreover, for reforms to be effective, they need to be implemented at the union and state levels with careful integration and coordination.
“While the need for these reforms is urgent, it would still be advisable, and perhaps practical, to proceed incrementally and sequentially,” according to the paper.
As recommended by the Fifteenth Finance Commission, the finance ministry is best placed to take the lead in conducting extensive and wide-ranging stakeholder consultations on the issue, it added.
The gap between the broad public finance management structure as set in the Constitution and the operational public finance management norms needs to be bridged.
Apart from this, there are inconsistencies in public finance management provisions which were developed at different points in time and at various levels, and many provisions are outdated, the paper said.
There is thus a need to rationalise existing rules and regulations, make them internally consistent, and address any gaps and infirmities.
At the same time, there is a need to develop overarching, multi-level, binding standards that will increase consistency and accountability in governance across the tiers of government, the paper said.
Meanwhile, the crucial role of legislative oversight needs to be better recognised and enhanced.
“Essentially, governments need to be held accountable for their decisions regarding spending and revenue,” the paper said.
It is also essential to have common, comprehensive definitions and formulations of fiscal indicators and standard reporting across levels of government, it added.
The Fifteenth Finance Commission had recommended a range of public finance management reforms and had also cited a draft law, prepared by an expert group, that could potentially serve as a comprehensive, overarching legal framework.
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