India’s public finance architecture is the real culprit in Gorakhpur and Bhagalpur
August has been a shameful month for India’s institutions. The beginning of the month saw 77 children die at a government hospital in Uttar Pradesh’s Gorakhpur. Merely a few days later, the Bihar government ordered a Central Bureau of Investigation probe into alleged diversion of Rs700 crore of public funds from the bank account of the district magistrate by Srijan Mahila Vikas Sahyog Samiti Ltd, a non-government organization in Bhagalpur. At first, these events seem unrelated, but they are both a result of India’s broken public finance management systems. While one resulted in a tragedy, the other constituted a diversion of funds from crucial social welfare schemes for the poor.
It is easy to dismiss Bihar and UP as outliers and blame the crises on weak state capacity, poverty or even corruption. What we saw in UP and Bihar is part of a much wider malaise that plagues public finance management systems in India. In fact, no state in India or even the government of India is immune from what happened in Gorakhpur or Bhagalpur.
In an age where institutions successfully use software and direct transfers to trace every rupee, it is a mystery why so many governments in India still shuffle files and paperwork to approve payments rather than rely on automated, pre-approved parameters. Even after payments are authorized, they are made via antiquated treasury systems and cheques instead of direct transfers from the consolidated fund of the state, preventing auditors from tracing the source and the recipient instantly.
To understand the process, take the (now disputed) explanation that Dr. Rajeev Mishra, principal of the Gorakhpur medical college, gave the Scroll website. He claimed that he wrote three to four letters to the state medical education department in July, requesting that the hospital’s budget allocation be released. Once the allocation was released by the state government on 7 August, the college sent a bill to the treasury which provided a line-item listing of its expenditures. The treasury then released a token for funds on 8 August to the hospital, which sent the token to the bank two days later. The token allowed the bank to transfer funds to the oxygen supplier but because the hospital does not use real-time direct bank transfers, funds reached the company on 10 August. By then, children had already paid the price for our antiquated public finance architecture.
Such systems of shuffling files, vouchers, and tokens back and forth made sense when one needed to check physical files to ensure accountability. But in digitizing India, one should be using workflow-driven, internet-enabled IT platforms that share data with the consolidated fund of the state and authorized officials to verify and automate payments. These platforms can ensure that funds reach the intended recipient, and do it within the day of the fund request, thereby eliminating the need for maintaining bank accounts at any level. Instead of allocating budgets through letters and files, authorization limits can be set digitally, ensuring that agencies can withdraw funds only up to the authorized limit. In fact, today there is no need for a pay and accounts office in the government of India, a state government treasury, or the most opaque yet essential of instruments—the utilisation certificate or UC, a statement verifying a total amount that has been spent, without detailed line-item expenditures.
Instead, platforms can contain withdrawal limits for each drawing and disbursing officer and once they are reached, the IT platform can automatically compile where funds were spent and send it to the auditors. IT platforms can be used to request authorization for more funds. Auditors can access such data digitally, allowing for instant verification. Instead of constantly requesting and following up on fund requests, public officials such as doctors in hospitals can then do what they are supposed to do, i.e. serve patients. Instead of an automated system, many government offices sit with piles of files to approve, make and track payments. It is no wonder, then, that a scam like the one that took place in Bhagalpur took 10 years to detect. Such auditing problems start with the first disbursal of funds from the centre to states for central and centrally sponsored schemes.
Fund releases from the centre to states are classified as “grant-in-aid” and are therefore reported as expenditure to Parliament, not disbursals or transfers. Consequently, ministries face pressure to disburse the entire budget. Given that funds are most often sent in two instalments from the centre to the state, a lot of disbursal often occurs in the last quarter of the financial year, leading to unspent funds sitting around in bank accounts, even though they could be used more productively elsewhere. According to the accounts of the Union government report published by the Comptroller and Auditor General in 2015, 35-39% of 2014-15 expenditure was incurred in the last quarter of the financial year. Such a system also means that Parliament rarely gets to know the actual audit-verified expenditure against the authorizations it makes while approving the budget.
Moreover, expenditures often do not get documented adequately, creating auditing hurdles. According to the CAG report, 50% of the total expenditure recorded under major heads of accounts was classified as ‘other expenditure’ in FY2014-15, creating opaqueness in how money is spent. Adding to such opaqueness is the reporting system, which asks implementing agencies to send UCs rather than machine-aggregated vouchers, which detail expenditures. UCs debilitate auditors, preventing them from checking how money is actually spent because the act of manually matching UCs to actual physical vouchers is cumbersome, time consuming, and prone to errors.
Moving from a convoluted, manually-driven system to an automated one that triggers just-in-time (JIT) fund release directly to beneficiaries, vendors, pensioners and employees has the potential to reduce India’s fiscal deficit by over Rs1.5 lakh crore, besides producing data analytics and transparency. In fact, based on recommendations of a group of secretaries coordinated by civil aviation secretary R.N. Choubey, NITI Aayog had written to all Union ministries to abandon the current use of UCs in 2016. Instead, they asked that advance releases be replaced with JIT payments, and UCs be replaced with machine aggregation of spending as shown in the actual vouchers. The ministry of rural development has made considerable progress in implementing this in the Mahatma Gandhi National Rural Employment Guarantee Scheme and Pradhan Mantri Awas Yojana; others need to follow suit.
Some states are also moving in the right direction. Kerala, Rajasthan and Karnataka, among others, have begun to put in place automated systems for public finance management. Though many functions remain to be transitioned away from manual processes—including data integration with auditing teams—greater transparency, zero float and reduced administrative burden by parametrizing payment decisions, means that there will be reduced opportunities for tragedies or fraud like we have seen in Gorakhpur or Bhagalpur. By fixing India’s public finance management system, lives could be saved and corruption detected when it does arise. It is time for all governments to get on board.
A.Santhosh Mathew is chairperson of the National Council for Teacher Education and Bhumi Purohit is a Ph.D. student in political science at University of California, Berkeley. Views are personal