Overseeing Public Funds - How to scrutinise state budgets
Oversight of government finances by state legislature
As representatives of citizens, Members of Legislative Assemblies (MLAs) have three key roles. They debate and pass laws that govern the state. They oversee the work of the state government to ensure effective governance. They ensure efficient allocation of public funds through the State Budget. With the objective of improving the quality of life of citizens, these public funds are spent across various sectors such as education, health, agriculture, rural development, social welfare, police, and infrastructure.
MLAs have a core role in examining how this money is being raised, how it is planned to be spent, and whether such spending would lead to desired outcomes. MLAs hold the state government accountable for use of public funds in two stages. Firstly, before the beginning of each financial year, they scrutinise and approve the budget which contains expenditure priorities, taxation proposals, and borrowing requirements for the upcoming year. Secondly, they examine audit reports on approved spending to see whether the allocation made in the budget was used effectively and appropriately.
This primer explains the mechanisms by which MLAs conduct financial oversight of the state government. It explains key terms used in budget documents to describe state government’s income and spending and the gap between the two as a surplus or a deficit. The primer also describes some of the documents presented in the budget and what information may be gathered from each of them.
Oversight through the State Budget
Oversight of public funds by state legislature broadly involves two functions: (a) scrutinising and sanctioning the government’s expenditure and taxation proposals through the State Budget; and (b) examining the utilisation of funds that have been allocated for various activities.
What happens once the budget is presented in the Assembly?
After the budget is presented, a general discussion is held in the Assembly. Discussion at this stage is limited to general examination of the budget and proposals of the state government. Following the discussion, the Finance Minister gives a reply. No voting takes place at this stage.
After the general discussion, detailed estimates of expenditure of departments, called Demands for Grants, may be sent for examination by the Committees of the state legislature. One of the functions of such Committees is to scrutinise the allocation of funds to the departments under their supervision. The Committees examine: (i) the amount allocated to various programmes and schemes under the department, and (ii) trends of utilisation of the money allocated to the department. Based on their examination, the Committees submit reports to the Assembly. These reports contain recommendations that are useful for MLAs to understand implications of proposed expenditure across departments. They also allow for informed debate in the Assembly before approving such expenditure.
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Preparation of State Budgets The process of budget preparation begins with the publication of a budget circular by the finance department of the state government. The circular is typically released 3-6 months before the presentation of the budget. It outlines the timeline within which various departments have to submit estimates of receipts and expenditure to the finance department. In some cases, state governments also conduct public consultations before finalising the proposals. |
What happens after the general discussion on the budget is over?
Typically, Assemblies decide to hold a detailed discussion on some Demands for Grants. The departments identified for discussion are decided by the Business Advisory Committee of the Assembly. This discussion is followed by voting. The demands which have not been discussed and voted on by the last day are ‘guillotined’, i.e. they are voted upon together.
During the voting on Demands for Grants, in some states, MLAs can express their disapproval through ‘cut motions’. If a cut motion is passed, it signifies loss of confidence in the government and the Cabinet is expected to resign. MLAs can move cut motions to reduce the grant amount for the respective department: (i) to one rupee to signify disapproval of the policies of that department, (ii) by a specific amount (an ‘Economy’ cut), or (iii) by a token amount of Rs 100 to express a specific grievance.
What are the final steps in the budget process?
After the Demands for Grants are passed, they are consolidated into an Appropriation Bill. This Bill seeks to authorise the government to spend money from the Consolidated Fund of the State, which consists of all receipts and borrowings of the state government.
After the passing of the Appropriation Bill, the Finance Bill is also taken up for consideration and passing. This Bill includes details of the change in tax rates, and imposition of taxes on various entities.
What happens if the government needs to spend additional money during the year?
During the year, if the government needs to spend money which has not been approved by the legislature, it can introduce Supplementary Demands for Grants. Supplementary Demands for Grants can be introduced in any session of the Assembly.
Oversight after the Budget is passed
Oversight by state legislature after the budget is passed is necessary to make sure that the amount sanctioned by it is being used in an appropriate manner. Financial Committees scrutinise and exercise legislative control over government expenditure and table reports in the Assembly.
Public Accounts Committee
After the financial year ends, the Comptroller and Auditor General (CAG) of India audits the income and expenditure accounts of the state government and tables its report in the Assembly. Since it is difficult and time-consuming for the Assembly to discuss each of these reports, the Public Accounts Committee (PAC) is entrusted with examining the findings of the CAG audit reports. The PAC scrutinises whether the government is spending money for the purpose for which the state legislature sanctioned the expenditure.
While examining the reports, the PAC interacts with officials from the CAG, different departments, and experts. The government responds to every report of the PAC by stating the recommendations that have been accepted or rejected by them. Based on these responses, the PAC prepares Action Taken Reports and tables them in the Assembly.
Understanding government finances
As part of the budget, the Finance Minister presents the Annual Financial Statement of the state government for the forthcoming year. The statement consists of estimates of the money the government expects to spend on various sectors, and how much money will be raised from different sources such as levy of taxes and non-tax means. The budget also gives an estimate of the borrowing requirements of the government and its overall debt. In addition, the statement also gives an account of how much money the government raised or spent in the previous year, in comparison to the estimates it had given to the Assembly.
This section explains the state government’s finances with the intent of providing a simple understanding of the key concepts and terms involved.
How does the government finance its expenditure?
Government receipts indicate the resources available with the government to finance its expenditure. These are primarily of three types: (i) receipts earned by a state, (ii) receipts from the Centre, and (iii) borrowings.
The state government earns money through taxes, fees and fines collected by various departments, and share in profits of state enterprises, among other sources. The state also receives funds from the central government in the form of the state’s share in central taxes and grants-in-aid for schemes and other purposes. Borrowings are required in case there is a shortfall in these two types of receipts as compared to the spending requirements of the state.
Receipts may be broadly categorised under revenue and capital receipts. Revenue receipts of the state government comprise state’s own tax receipts, non-tax receipts, its share in central taxes, and grants-in-aid from the Centre. The former two components form a part of a state’s own receipts, whereas the latter two are central transfers to the state.
A state’s own tax receipts primarily come from taxes and duties such as state GST, sales tax or VAT, state excise duty, land revenue, and stamp duty and registration fees. The state government also earns receipts from sources other than taxes. Such non-tax receipts include interest earned on loans given by the state, fees and fines, dividends from state enterprises, and royalties from mining activities.
The state government also gets tax receipts in the form of the state’s share in central taxes (also known as devolution of central taxes). These receipts come from taxes such as income tax, corporation tax, central GST, customs, and union excise duty. Receipts from central taxes are devolved as per the recommendations of the Finance Commission.
The other kind of central transfers are known as grants-in-aid from the Centre. Unlike devolution, central grants may be tied in nature. They could be linked to specific schemes and avenues of expenditure, based on which states distribute these funds among the implementing agencies for these schemes. Such schemes include centrally sponsored schemes such as Swachh Bharat Mission, National Health Mission, and Ayushman Bharat, which are funded by the Centre as well. Grants-in-aid also include grants given by the Finance Commission for local bodies.
Some receipts change the government’s assets or liabilities. For example, borrowings taken by the government increase its liabilities, whereas recovery of loans that were given in the past by the state decreases the government’s assets. Such receipts are called capital receipts.