GoI tracks the money trail: How PFMS will pull plug on spending slippages

Context: By midnight of March 31, the Controller General of Accounts will assess the spending in FY22 with help of the public money-tracking system known as the Public Financial Management System (PFMS).

Background of PFMS

The PFMS was conceptualized in 2009. But it became fully functional in a decade. PMFS was conceptualized because the Expenditure Management Commission in its 2016 report, showed that a lot of government money spent was not tracked. i.e., Over a trillion rupees goes undetected through government finances every year.

Also, Bose’s study suggested “quality monitoring” for all programmes of panchayats. For example, the direct benefit transfer and the payment of wages for the MNREGA has been a huge success. He also pointed out that when the money spent is not tracked, the weakest links, such as rural de­v­elopment, are hurt the most.

The World Bank has supported the switch and recommended African and other countries to emulate the model.

Thus, PMFS addresses the issue of slippages in government spending.

What does the Public Finance Management System (PFMS) do?

First, it is a key decision support system for the government. It tracks the flow of funds to the last beneficiary or implementation level. It also ensures the timely release of funds through the effective management of fund floats.

Second, it covers the Central Sector Scheme, Central Sponsored Schemes as well as other expenditures including Finance Commission Grants.

Third, it has been extended to all central government functions including payments, receipts, accounting, expenditure control, management of provident fund and pensions etc. It is integrated with the core banking system/solution and also with RBI and NPCI.

Fourth, the PFMS makes every agency using public money to route it through bank accounts. Since banks report to the RBI in real time, any fiscal stress now becomes apparent immediately.

What is the significance of Public Finance Management System?

It helps to make informed decisions regarding resource allocation and the implementation of policies.

It is important when the government needs to respond rapidly to black swan events, such as the Covid-19 pandemic.

Lastly, it has cut the diff­er­­ence between audited and un­audited public accounts data of the central government to less than one per cent.

How does it work?

As per instructions, a single nodal account for each centrally sponsored scheme is opened with a bank. Implementing agencies use the same account with clearly defined drawing limit.

As per PFMS instruction, it should be a “zero balance accounts”. i.e., government money along with interest earned on the sum should be transferred to the Consolidated Fund. This prevent funds from being misappropriated.

Some Deviations at different level

The Indian Railways is yet to board the PFMS.

States have the freedom to make decisions regarding exp­enditure from their own resources and the shared tax corpus (in which the Centre cannot interfere). Therefore, they have developed a different machinery to handle state funds separately. Therefore, it leads to some difficulty in the financial management system.

States are using both PFMS and their own integrated financial management information systems. There, it has resulted in some conceptual challenges that have to be overcome.

Source: The post is based on an article “GOI tracks the money trail: How PFMS will plug on spending slippages” published in the Business Standard on 15^th March 2022.