19 April 2017

State-level Public Financial Management Institutes in India

Mukul G.Asher makes a case for establishing State-level PFM (Public Financial Management) Institutes in India.

State-level PFM (Public Financial Management) Institutes have been long overdue, but has acquired even greater urgency due to changing economic, fiscal, social and political environment both domestically and globally. A suggested structure, and focus areas for PFM Institutes are also provided. These can be modified according to specific context and policy priorities of a given State. Some may prefer the term Fiscal Policy Institute. However, PFM Institute is preferred as it facilitates broader perspective of fiscal policy and public finances, particularly the emphasis on management aspects, traditionally not given requisite focus by policymakers and bureaucracy.

The 2008 global, economic and financial crisis has created a fragile macro-economic and fiscal environment. Technological factors, particularly role of disruptive technologies to impact currently existing types and location of economic activities, as well as sources and nature of livelihoods and employment have also become more complex. It is now increasingly recognized that fiscal risks could arise from unexpected sources; increasing the importance of prudent PFM in sustaining competitiveness.

What is Public Financial Management (PFM)?

In the literature, there is no standard definition of PFM but the literature does suggest that the PFM may be characterized as having five broad components.

These are:

· Generating financial resources for undertaking government expenditure which can be divided into Expenditure on Goods and Services and Expenditure on Transfers; and into Current and Capital expenditure. Revenue generation from both the flows of income and expenditure, and from assets (requiring good quality data of State’s Assets and Liabilities), as well as expenditure management to obtain desired outcomes have acquired greater urgency as conventional tax policy sources have become constrained.

· Budgeting (in a comprehensive manner including all public sector activities) and allocating these resources to obtain desired outcomes. Accounting and budgeting systems for obtaining desired outputs and outcomes from budgetary expenditure has become increasingly essential as importance of fiscal sustainability and management of fiscal risks have been increasingly recognized by the policymakers. This component includes assessing capacity of government organizations to spend less (involves procurement), spend well (obtaining given output with minimum resources), and spend wisely (meeting citizen’s needs for public services and amenities).

· Administration and control of resources. This involves administering taxes, levies, fees, and charges, and devising ways to generate revenue from unconventional sources. The control also implies better expenditure planning, including reforms in procurement practices. This component includes enhancing capacity and willingness to collect revenue at State, Urban, and Local levels.

• Reporting on the use of resources internally for management decision making. Poor quality and lack of timeliness of socio-economic and other data needed for policy making are the main focus of this component.

• Financial reporting and auditing. The current tendency is to move away from transactional auditing to Value- for- Money VFM) auditing. This focuses on the extent to which physical and financial resources entrusted to a government organization generate value in terms of outcomes improving citizen welfare. Citizen-centric nature is emphasized and not just transactional integrity.

Why Establish State level PFM Institutes in India?

As Prime Minister Narendra Modi -led government approaches completion of its 3rd year in office in May 2017, it is increasingly evident that while the Union Government will provide national level leadership on public policy issues, it is the individual States where the context-specific adaptation of national initiatives, and State-level innovations will need to be reflected in better amenities and governance affecting household welfare.

India is a low-middle- income Federal country, comprising the Union government, 29 States and seven Union Territories, and has a population of around 1300 million, ranking it as the second most populated country globally. The role of sub-national governments is quite significant in India. According to Reserve Bank of India (RBI), the States account for more than half of the combined Union and State government expenditure; and they have significant responsibilities for implementing various initiatives of the union government. Yet State level organizations for providing high quality, empirically-driven, and context-based policy inputs have traditionally been not accorded priority.

It is from the above overall domestic context, as well as global context noted earlier, that imperatives for States to substantially enhance the quality of their PFM arise. Such Institutes need to be autonomous, but undertaking policy relevant PFM research, capacity enhancement of officials, and related functions.

The first imperative is for the States to respond in context specific manner to the PFM initiatives of the Union Government. Selective examples are:

Ø Restructuring of Centrally Sponsored Schemes (CCS) which involve States in implementation and in some cases funding;

Ø Anticipated introduction of GST (Goods and Services Tax) from 1July 2017 which will replace inherently distortion prone and regressive taxes on domestic goods and services;

Ø A shift by the Union government from the 2017-budget to only current-capital expenditure (discontinuing planned-non-planned expenditure classification);

Ø Completing for the first time since the independence in 1947 all the budget processes in the Parliament BEFORE the beginning of fiscal year on April 1;

Ø There is a possibility of moving from current April-March fiscal year to calendar year as fiscal year by the Union government, which in turn will require States to adjust;

Ø Setting up of one–stop e-marketplace to enable government departments to directly purchase common use items from suppliers and winding up of existing procurement Department;

Ø The FRBM (Fiscal Responsibility and budget Management) Committee headed by Mr. N. K. Singh presented a Report to the Union government in January 2017. It has suggested a framework to govern future fiscal deficits and debt levels, both made more stringent, for managing future fiscal risks. It also suggests that State level debt ceiling be reduced. A new FRBM law is also recommended. (http://economictimes.indiatimes.com/news/economy/finance/expert-panel-suggests-central-and-state-government-debt-of-60-of-gdp-by-fy23/articleshow/58155706.cms)

The second imperative concerns matching responsibilities of States in a federal country with the quality of policy inputs needed for obtaining desired outputs and outcomes, and for infusing greater substance to the third tier of government, i.e. Urban and Local Bodies (ULBs) envisaged under the 73rd and 74th Amendments to India’s Constitution in 1992, a quarter of a century ago.

There is a need for continuity in monitoring management of ULBs, including effectiveness of their financing and delivery of key services, such as health, solid and liquid waste management, community safety, street architecture and amenities, etc. The PFM Institute could provide continuity in the type of work SFC undertakes, so time gap between need and initiatives could be reduced and good quality decisions and implantation could be undertaken. Accounting changes needed, including selective modified accrual accounting method; development of asset registry for the State, and ULBs; and improvements in treasury management and procurement systems and processes could also be undertaken by the PFM Institute.

The third imperative is the Cooperative Federalism initiative of the current government. This initiative also implies constructive competition among the States, an important component of which is the competence in PFM. Implementation of the 14th Central Finance Commission (CFC) to increase devolving of Union Government revenue from 32 to 42 percent to the States is an important initiative altering Centre-State relations.

Establishment of NITI (The National Institution for Transforming India) Aayog in 2015 (replacing the Planning Commission existing since the 1950s) is designed to transform India’s governance approach, a major challenge for any country. All States, particularly those that are land-locked and need to find new growth nodes, will require shaping and then adjusting to the transformative initiatives.

The fourth imperative concerns the need for empirical evidence based policies, design processes, and implementation decisions concerning PFM, which are also informed by experiences in rest of India and in relevant international jurisdictions. In this connection, the current practice of appointing the State Finance Commission (SFC) every five years, whose report is delivered after the relevant recommendation period has already begun, requires a fundamental change.

India’s experience with PFM Institutes

In India, Haryana represents an example of a State level PFM focused Institute. SJHIFM (Swarna Jayanti Haryana Institute of Fiscal Management), announced in the 2016-17 Budget is at early stages of being operational. It is expected to play a key role as a high quality think-tank on PFM issues for the Haryana government.

There are organizations at State level focusing on broad governance issues. Thus, Andhra Pradesh has established Centre for Good governance. (https://india.gov.in/website-centre-good-governance-andhra-pradesh). The website states its objectives as:

“The Centre for Good Governance has objectives to work with government departments and other stakeholders to analyze key issues in governance, identify solutions, help develop action plans, and support implementation of these plans and the reform agenda. Users can get information related to various activities of the Centre such as management, awards, clients, infrastructure etc. Information about the E-Development Cell, focus area, core group of Centre etc. is given. The Centre's working papers are also available”.

NIPFP: At a national level, NIPFP (National Institute of public finance and policy) was established in 1976, more than 40 years ago. (http://www.nipfp.org.in/home-page/). Its activities include research, training, and policy support on PFM related issues involving the Union, State, and urban and local governments. It has over 30 faculty members, with ranks of Professor, Associate professor, Assistant Professor, Economist, and Research Associate. It is instructive that NIPFP, a large organization, does NOT have a separate Director for administration. The NIPFP director performs this task as well. This makes for continuity in policies and procedures.

The Director has been a domain expert from outside the government, though some have held positions in the government in India as well as in global organizations, before assuming position as Director. The governing body of NIPFP, with a four year appointments, comprises of three representatives of the Ministry of Finance, one representative of the Planning Commission of India (interesting that this is still on its website as of March 10,2017, though the current nominee is from NITI Aayog), one representative of the Reserve Bank of India, three representatives of sponsoring State governments, three distinguished economists, three heads of sister research institutions, and members of other sponsoring agencies and invitees. At present, Dr. Vijay Kelkar, former Chairman of the Thirteenth Finance Commission, is the Chairman of the Governing Body (http://www.nipfp.org.in/about-us/governing-body/).

The NIPFP does generate substantial resources from commissioned research from the Union government, State governments, international agencies, and others.

The wide scope of NIPFP and its established position as a near monopoly in the area of PFM in the country give it unique advantages in intellectual networking, in attracting projects, in obtaining talent, and in other areas.

NIUA: The experience of the National Institute of Urban Affairs (NIUA), an autonomous institute set up by Ministry of Urban Development, is also relevant. Its weblink ( http://www.niua.org/vision-mission) states that it:

“… is a premier institute for research, capacity building and dissemination of knowledge for the urban sector in India. It conducts research on urbanization, urban policy and planning, municipal finance and governance, land economics, transit oriented development, urban livelihoods, environment & climate change and smart cities.

The Institute was set up to bridge the gap between research and practice, and to provide critical and objective analyses of trends and prospects for urban development. NIUA has assisted in policy formulation and program appraisal and monitoring for the Ministry of Urban Development, state governments, multilateral agencies and other private organizations. It contributed to the National Commission on Urbanization, participated in drafting the 74th Constitutional Amendment of 1992, prepared the Draft National Urban Policy and other documents for the roll out of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). It also guided the discourse on municipal finance by framing the Model Municipal Law.”

Its Governing Council has members from the sponsoring Ministry, but its Directors have been academic domain experts, and most of its staff has Ph. D. degree in relevant fields, or high level professional qualifications. No current serving government official is on its staff.

There is in general a consistent pattern that high quality recognized autonomous research and policy organizations have professional staff, but whose overall policy guidance and priorities are set by the Governing Board which includes Government sponsors, and other relevant stakeholders. But the role of current or past bureaucrats is at a minimum in both substantive academic activities and in Administration.

It is instructive that various government organization or State-based training organizations have in general not been able to provide needed support either in research or in contributing to meeting skill-based human resource gaps. There could be exceptions, but widespread justifiable perception remains that resources used on such training organizations have had high opportunity costs, particularly when their output and outcomes are matched against resources expended on them.

Suggested Guiding Principles of PFM Institutes

The suggested guiding principles of the PFM Institute are: autonomy (with accountability and transparency), focus on outputs to be delivered (to be specified), high level of competence, rigor, and integrity, and improving quality of literacy and data and empirical evidence based debates on PFM in the concerned State. Such an institute should aim to become a model for State-level Institutes of similar nature across the country (and globally), and network in a substantive manner with other similar organizations. It should be stressed that managing research and knowledge workers requires different set of skills and mind-set than traditional administration.

Concluding Remarks

In the current and prospective environment, States will obtain more resources but also increased responsibilities, with emphasis on transparency and accountability. This article has explained the rationale for setting up State level PFM Institutes, and their possible structure and tasks. Meeting India’s future growth and PFM challenges and meeting citizen expectations requires establishing such State-level Institutes, albeit to suit context and priorities of a given State.
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