Utilisation of public funds
What are Public Funds?
Public funds are financial resources that belong to the public; however, the state manages it as a custodian. A public fund is generated by the government and used to provide public goods and services to the general public. Allocation from public funds is provided to all levels of government, i.e. Union, State, and Local level governments.
The most important public fund is the Consolidated Fund of India (CFI), defined under Article 266(1) of the Constitution. All government revenues such as direct taxes, indirect taxes, money borrowed, and receipts from loans given by the government, flow into the CFI. All government expenditures are made from CFI, except a few items which are met from the Contingency Fund or the Public Account. No money can be withdrawn from this fund without the Parliamentary approval.
Apart from CFI, the Public Account of India (PAI) was constituted by Article 266(2). All other public money received by or on behalf of the Government of India is credited to the public account of India.
Under Article 267(1) the Contingency Fund of India is constituted. It is placed at the disposal of the President and used at the time of crisis in the nation for instance, a natural calamity, when money is required urgently to deal with it and there is not enough time to take parliamentary approval.
Important Dimensions in the Utilisation of Public Funds
Legal dimensions
Government bodies must follow the law and fulfill their legal obligations while spending money from public funds. The authority providing sanction of expenditure from public funds must ensure that it is the competent authority to provide the sanction.
Only after receiving approval from a competent authority, the public fund can be used. Furthermore, the funds must be used only for the purpose for which they were approved. Unauthorized spending will inevitably lead to mis-utilization and can be punished as per law/code of conduct.
Constitutional provisions
A budget is a proposal to get sanction from parliament to utilize money from public funds. The CAG is the constitutional authority that audits expenditures from public funds every year to scrutinize how efficiently funds have been utilized.
Legal provisions
The legal provisions that underlie the utilization of public funds include tax laws and other central and state governments’ laws related to expenditure from public funds or other financial provisions.
Other Laws such as the Right to Information Act, of 2005 provide for proactive disclosures of details of public funds utilization by different government agencies, thereby ensuring transparency in utilizing public funds.
Procedural dimensions
Principle of Transparency
Since the money in public funds belongs to the public, the public has the ‘right to know’ how their money is being spent. Only in exceptional cases, such as intelligence agencies and other security agencies, disclosure of information may be withheld.
For example, when the public in an area has details of funds sanctioned for a road construction project under PM Gram Sadak Yojana, they can ensure the quality of the project and the effective utilization of the funds sanctioned.
Principle of Efficiency
Efficiency refers to when maximum output is produced per unit of input used. It is determined by cost-benefit analysis. There are several competing demands on the public funds and it has to be spent on a variety of purposes ranging from health care to scientific research. The money should be spent on those demands which can maximize public welfare.
Therefore, the interests of different sections of society have to be balanced and every penny spent out of public funds must be efficiently utilized for the public good.
Principle of Accountability
The authorities spending public money must be held answerable to the public for the value derived from the expenditure. The responsibility should be clearly identified, subjected to review of performance, and enforcement of remedial measures in case of shortcomings in the performance.
Principle of Objectivity
It entails that public fund utilization decisions and policies are based on accurate facts and rigorous analysis rather than personal preferences or biases.
Ethical dimensions
Social Contract Theory
Effective utilization of public funds is vital to fulfilling the obligations of the state towards its citizens as per the ‘social contract’ theory. Citizens’ basic needs must be served in the best possible way and to the maximum extent possible by the state as per its financial and other capacities. Citizens must be confident that the effective utilization of public funds is promoted by law and that public institutions act by the law.
Principle of Fiduciary Responsibility
A fiduciary responsibility is an obligation that prevents the responsible person from acting in their own interest rather than in the interest of the public. This ethical commitment makes it possible for them to fulfill their aim of maximizing public welfare. It tests not only the legality of expenditure but also how virtuous the responsible person is. The person has fiduciary responsibility simply because he enjoys the authority to spend public funds.
Principle of Propriety
It refers to the application of wisdom and prudence by authorities while spending money from public funds. Government officials must exercise the same level of prudence in managing taxpayer funds as they would when handling their finances.
It also entails that the functionaries responsible for the utilization of funds, should not only follow the rules and procedures established by the government but also take moral responsibility for the efficient utilization of taxpayers’ money. Further, the expenditure should not be more than what the occasion demands. Public funds should not be spent for the benefit of a specific individual or group of people.
Challenges in the Effective Utilisation of Public Fund
“It is impossible to know when and how much water a fish drank, similar is the act of stealing government money by officials.”- Chanakya Niti
Former PM Rajiv Gandhi once said that out of 1 rupee spent by the government only 15 paisa is reaching to masses. It is often seen that public funds are subjected to:
- Mis-utilization: It includes expenditures that are made without proper authorization or that are unlawful or contrary to applicable legislation/regulations.
- Under-utilisation: It can be attributed to the institutional and procedural blockages in the process of implementation of Plan schemes.
- Misappropriation: It includes recommending projects that are not in the best public interest, unfairly choosing the implementing agencies, and resisting transparency/ accountability. For example, instances of MPs investing MPLAD funds in private trusts and societies created by them or recommending projects that are not in the interest of the public but in their own interests.
CAG reports, and other academic studies have revealed the following major challenges in the efficient utilization of public funds:
Political challenges
- Populist policies: The government sometimes adopts policies such as irrational freebies distribution, loan waivers, etc. for electoral popularity putting a strain on fiscal resources. Moreover, political competition sometimes leads to rivalry, undermining the cooperation required for the efficient use of fiscal resources.
- Poor Fiscal discipline: Due to this Fiscal consolidation measures are not implemented in letter and spirit such as FRBM Act. This leads to high revenue expenses and less expenditure on welfare measures.
- Politicized protests: Bandhs that are politically motivated result in the delays of public projects and mount loss of public funds.
- Regional bias in Development projects: Political parties may allocate more public funds for development projects in areas where they expect to have political leverage.
- Delays in Key policy decisions: Political parties are constantly in election mode including the ruling party e.g. organizing rallies and addressing the public in different parts of the country. This adversely affects the timely taking of key policy decisions and thus hampers fiscal prudence.
- Lack of adequate political will: Adequate political will is required to implement any transformative policy and to effectively implement public welfare schemes to realize fiscal efficiency. For instance, the MPLAD scheme was suspended for some time due to inefficiency and underutilization of funds.
Administrative challenges
- Red tape: Excessive emphasis on rules and regulations and paperwork makes the implementation of schemes and projects time-consuming, thereby hampering the efficiency of public funds utilization. For example, delayed construction of the Mumbai Trans Harbour Link due to time-consuming approvals and clearances.
- Lack of institutionalized social auditing: Social auditing can be a great measure to curb leakages in public fund utilization however it is not well developed in India. For example, In the MNREGA scheme, social audit is mandatory yet not fully institutionalized.
- Lack of public participation: Due to poor transparency, high illiteracy and ignorance citizens are unable to take benefit of welfare schemes devised for them. E.g. Exclusion of eligible beneficiaries from PDS, Ayushman Bharat, or other such schemes.
- Non-implementation of Citizen Charter: shortcomings in the adoption or implementation of citizen charter are a barrier to the effective use of public funds.
- Poor Internal Audit: The internal audit team is mostly understaffed/underfunded. Further, Internal auditors lack access to critical information apart from a lack of technical expertise. For instance, the CAG revealed coal blocks scam in 2012. The misuse of public money led to massive public and media outrage.
- March Rush: Generally large parts of funds are released in March to prevent the funds from being lapsed.
Systemic issues
- Poor Infrastructure Facilities: Lack of adequate infrastructure at ground level creates challenges in the implementation of government schemes leading to wastage of public funds. For example, in 2018, the Ministry of Health released 9,000 crore rupees to states for National Health Mission. However, most states could not utilize the funds due to a lack of infrastructure, human resources, etc.
- Issue of Corruption: Due to poor probity in governance instances of corrupt practices are seen. This leads to inefficient utilization, wastage, leakage, and diversion of public funds. For instance, the Commonwealth Games scam.
- Limitations at the state level: State Governments try hard to get funds from the Central government but give less emphasis on the quality of expenditure by them. For instance, in the case of Centrally Sponsored Schemes State governments focus more on meeting the conditions for receiving funds rather than proper implementation.
- Focus on Output rather than Outcome: authorities are more concerned with meeting the target of expenditure rather than the actual outcome achieved at ground level.
- Ineffectiveness of Public watchdogs: Bodies such as CVC, CBI, ED, and CAG lack adequate independence, resources, and powers. For example, the Central Vigilance Commission is merely an advisory body with no authority to file criminal charges against government officials.
Measures taken to ensure Effective Utilisation of Public Funds
The following measures have been taken by the government so far, to ensure the effective utilisation of Public Funds:
Legal and Institutional Measures
- Budgeting: The government adopted Outcome-based budgeting, zero-base budgeting, Gender budgeting, participatory budgeting, etc.
- Public Fund Management System: This is a portal for end-to-end digital payments, collection of receipts, accounting, reconciliation, and financial reporting. Besides, PFMS also provides a robust IT platform for more effective cash management through the “Just in time” transfer of funds and complete tracking of funds from their release to their credit into the bank account of intended beneficiaries.
- Citizen Participation: Measures such as Citizen’s Charters, Social audits, and Social accounting are introduced that evaluate and assess the social impact of government policies and programs on various sections of society.
- Audit mechanisms: Expenditures from all public funds are properly accounted for and audited by CAG.
- Parliamentary Oversight: Major public outlays are also examined by parliamentary committees (e.g. Public Accounts Committee, Estimates Committee, etc.)
- Outcome-Based Evaluation: It assesses the effectiveness of a program by examining its outcomes and not only output. For example, the National Rural Health Mission is evaluated by measuring its impact on infant and maternal mortality rates.
- Transparency: Measures such as the Right to Information Act empower citizens by providing information about government expenditures. It enables public oversight of expenditure and helps expose the cases of corruption and misuse of public funds.
- E-Governance measures: Measures such as the Central Plan Scheme Monitoring System, and PFMS are taken. CPSMS integrates thousands of schemes and implementing agencies and tracks fund movement, starting with the initial release from the Centre till the money is released to the beneficiaries. In addition, CPSMS is linked with State treasuries and State AGs to obtain real-time expenditure information for schemes for which funds are transferred from the Central Ministries to the States.
- Fiscal Prudence: Fiscal prudence refers to the judicious management of the government’s financial resources. FRBM Act was passed in 2003. It sets targets for fiscal deficit and debt-GDP ratio for the central and state Governments to establish financial discipline, improve the management of public funds, and strengthen fiscal prudence.
- Efforts for Fiscal Consolidation: Fiscal Consolidation refers to the policy measures taken by Governments at national/sub-national levels to reduce government expenditure and increase revenue (to reduce fiscal deficit and accumulation of debt stock). It includes measures such as better targeting of government subsidies, extending Direct Benefit Transfer scheme, Enhancing tax-GDP ratio by widening the tax base and minimizing tax concessions, Higher economic growth rate to help get higher tax revenues, etc.
Other Strategies for Efficient Utilisation of Public Funds
Transparency and Efficiency
Effective public fund management requires that citizens and stakeholders can ‘follow the money’ and track the movement of money including raising of taxes and actual spending. Thus, providing information in ways that are accessible, along with educating citizens about participation in decision-making making are crucial steps to ensure effective public fund utilization.
Increasing Accountability
Public spending is prone to waste and misuse. Having more measures to enhance accountability can ensure high integrity of public representatives and officials. For instance, measures like integrity pacts, social accounting, social audit, etc.
No Political interference
Public agencies and civil servants that are independent from political interference and have operational autonomy are more likely to be trusted to act in the public interest. This reduces chances of big-ticket collusive as well as coercive corruption and large scams such as fodder scam.
Performance Measurement
Government activities should be measured against expected outputs and outcomes and citizens should be able to judge the performance. This enables public feedback and continuous improvement. For example, 360-degree performance evaluation of civil servants.
Curbing Corruption
More measures to promote integrity and curb corruption are required. A climate of trust is created when citizens believe that the state is well-run and that political and fiscal risks will be managed effectively. It helps increase the legitimacy of government which enables it to channel public savings for spending on welfare measures.
For instance, Kautilya recommended appointing an officer (Guptehera) to curb corruption These officials used to work directly under King.
Ethical Work Culture
Ethical work culture encompasses principles of integrity, transparency, accountability, fairness, objectivity, and the motto of public service. It helps ensure public welfare and good governance. This can be best achieved by imbibing ethical values in all spheres whether it is society, politics, business, or public administration.
It requires an education system that imparts ethical values and not only knowledge; training in ethics; sensitization of all stakeholders; and motivating all stakeholders to act in ethical ways through proper rewards, recognition, and incentives.
Importance of Effective Utilisation of Public Fund
Economic Justice
Public funds are spent on schemes like Start-up India, Mudra Yojana, Stand-up India, PM Kisan Yojana, etc. Well-managed and effectively utilized public funds help realize the objectives of redistribution of income and reduction of economic inequality to make an egalitarian society.
Social Justice
Public funds are mainly spent by the government for the upliftment of weaker sections and provide for the basic needs of vulnerable sections like SC, ST, women, and old age. E.g. Sukanya Smridhi yojana, MGNREGA, PDS, Ayushman Bharat Yojana, PM Ujjawal Yojana, etc.
Economic growth
Efficient Utilisation of Public funds especially for Infrastructural development and promotion of industries has a multiplier effect on the Economy. E.g. PLI scheme, Niryat Bandhu scheme, PM Gati Shakti Yojana, etc. These will play a crucial role in realizing India’s aim of becoming 3rd largest economy globally by 2027 and a developed country by 2047.
Reduction in leakage and corruption
Most serious instances of corruption are mainly related to leakage of public funds and/or resources. For example, Adarsh Housing Society scam, illegal sand mining, Punjab National Bank Scam, NSE co-location scam, etc. Therefore, to prevent leakages of public funds it’s essential to curb corruption.
Decentralization of government’s functions to promote transparency in utilization of funds can help reduce leakages. E.g. Panchayat Banks for providing banking services at the Panchayat level and strengthening the decentralised service delivery.
Fulfillment of Constitutional mandate
It helps to better implement social and economic welfare programs, ensuring law and order, etc. that are crucial in realizing the constitutional mandate of making India a ‘welfare state’. The CM Office, Andhra Pradesh has launched a real-time Time Executive dashboard to monitor key Performance Indicators.
Implications of Poor Utilisation of Public Funds
There are serious implications of poor Public Fund utilization on public welfare, socio-economic development, sustainable development, and overall economic growth of the nation. The following are some major implications:
Adverse effect on economic growth
Mis-utilization or under-utilization of public funds negatively impacts the overall economic growth of the country and hamper the development of various sectors. For example, proper allocation of public funds is required for incentivizing investments and ensuring balanced development of all three sectors of the economy i.e. Agriculture, Manufacturing, and Services.
Inequitable distribution of resources
Mis-utilization of public funds hampers redistribution of income, leads to the inequitable distribution of resources, and further exacerbates Socio-economic inequalities. E.g. Only around 15% of the marginal farmers (with less than one hectare of landholding) have access to formal credit, so a loan waiver helps them very little.
Loss of trust and legitimacy
Mis-utilization of public funds can lead to erosion of the public’s trust in the government and public institutions. It results in reduced legitimacy of the government that hampers public participation in governance and enrolment in welfare schemes. For example, there are around 6 crore beneficiaries enrolled in Atal Pension Yojana. However, there are still a large number of underprivileged people who are not covered under any pension scheme.
Adverse Effect on Public Welfare
Mis-utilization/under-utilization of public funds in the social welfare sector negatively impacts public interests especially most marginalized sections of the society. For instance, in 2018 a woman named Lukhi Murmu of Jharkhand died due to alleged starvation as fingerprint mismatch denied her PDS ration.
Conclusion
Prudent and effective utilization of public funds is necessary for the delivery of minimal essential public services in a developing democracy like India. The vision of making India a ‘Welfare State’ in the Indian Constitution as enshrined in its Directive Principles of State Policy, is a concept where the state has major responsibility in the protection and promotion of the economic and social welfare of its citizens.
However, it cannot become a reality without effective utilization of public funds. Therefore, efficient utilization of public funds is the lynchpin to satisfy the basic needs of society.
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