Abstract

The cornerstone of modern democratic governance is financial management, which determines not only the allocative priorities of the state but also the operational credibility of public institutions. This chapter critically examines the architecture and evolution of financial management in India, focusing on its constitutional foundations, institutional frameworks, and policy instruments. Situated within the broader paradigm of fiscal federalism, this chapter explores how budgeting processes, financial oversight, and resource devolution mechanisms collectively shape the public finance ecosystem’s contours in India. The discussion begins by analysing the budget as an inherently political document—reflecting not merely fiscal decisions but also ideological preferences and redistributive choices. It further investigates the mechanisms of legislative control over public expenditure, the strategic role of the MFG in macro-fiscal governance, and the transformation of accounting systems through digital platforms such as PFMS and e-Kuber. The functional autonomy and systemic relevance of the Comptroller and Auditor General (CAG) and Controller General of Accounts (CGA) in enhancing financial accountability are given special focus. This chapter evaluates the performance and controversies surrounding the Finance Commission, the structural asymmetries in GST Council voting, and the underutilised potential of State Finance Commissions. Drawing from international best practices in public financial management—from Estonia’s real-time fiscal tracking to Brazil’s participatory budgeting—the chapter offers a comparative lens to interrogate India’s fiscal trajectory. It presents financial management not as a technocratic exercise but as a democratic commitment requiring ethical stewardship and institutional innovation with embedded theoretical relevance and field-level illustrations.

Keywords: Public Finance, Fiscal Federalism, Budgetary Governance, Financial Accountability, Public Administration

Introduction–Financial Governance as the Soul of the State 

The famed Arthashastra, penned by Kautilya over two millennia ago, opens its first chapter with a powerful maxim: “From the treasury comes the power of the state.” This ancient insight remains remarkably relevant in the context of modern public administration, where governments’ ability to govern is inextricably tied to their financial capacity and accountability.

Financial management is not merely a technocratic exercise of balancing receipts and expenditures. In a democracy, it is a dynamic process that reflects political choices, enforces constitutional norms, supports policy delivery, and enshrines accountability. In India’s parliamentary system, financial management is manifested in the Union and State Budgets, the working of institutions such as the Ministry of Finance, Finance Commission, CGA, and CAG, and the regulatory frameworks of Parliamentary control, federal transfers, and audits.

The foundations of financial governance are laid in Part XII of the Indian Constitution (Articles 264–300A), which details the financial relationship between the Union and States, the establishment of the Consolidated Fund, Contingency Fund, and Public Account, and the critical roles of institutions such as the Finance Commission and the CAG of India. These frameworks embody accountability, efficiency, and equity principles in resource allocation and usage.

Post-liberalisation, the financial governance landscape in India has undergone a significant transformation. The shift towards outcome-based budgeting, the introduction of Goods and Services Tax (GST) as a landmark in fiscal federalism, and the integration of digital tools like PFMS (Public Financial Management System) have modernised fiscal operations. However, populist budgeting, nonperforming assets, and weak state finance commissions continue to strain the public finance system.

Globally, nations such as Finland, Brazil, and New Zealand have pioneered participatory and technology-driven budgeting processes. India is now slowly integrating these innovations into its model of fiscal governance that is inclusive and accountable.

This chapter delves into the theory, practice, and evolution of financial management in India, equipping civil services aspirants with a deep understanding of how finance, politics, and administration converge to shape the nation’s developmental future.

The Budget as a Political Instrument

The annual budget is not simply a statement of government income and expenditure it is a fiscal political manifesto that lays bare the ruling government’s ideological inclinations, priorities, and strategic decisions. As Aaron Wildavsky famously argued in The Politics of the Budgetary Process (1964), budgeting is “not primarily an economic act but a political act.” This is particularly evident in parliamentary democracies such as India, where the budget reflects the dynamic interface of political mandates, developmental goals, coalition pressures, and fiscal realities.

Budget as a Resource Allocation Tool

In India, the Union Budget not only directs national expenditure but also symbolises the government’s response to prevailing socioeconomic and political challenges. For instance, the 2024–25 Union Budget allocated over ₹11.11 lakh crore towards capital expenditure, reflecting the government’s intent to boost long-term infrastructure growth while also continuing welfare schemes such as PM-AWAS YOJANA, PM-KISAN, and Food Security.

Decisions about where to allocate resources whether towards urban development or rural employment, defence or education are fundamentally political. They reflect choices that impact voter groups, electoral narratives, and regional balances. Here, budgeting transforms into policymaking.

Reflect  Respond: Explain how the budget can be used as a political instrument.

Contextual Trigger: The growing debate on pre-election populist spending 

Populism and the electoral calculus

In the run-up to general elections, India has often seen populist budgets. Examples include loan waivers for farmers, tax exemptions for middle-income groups, and large-scale employment guarantees. These measures, while beneficial in the short term, often come at the cost of fiscal stability, leading to higher deficits and reduced capital investment.

Such patterns are not unique to India. In Latin America, countries such as Argentina and Venezuela have faced long-term economic crises partly because of politically driven budgeting cycles. In contrast, countries such as Germany have implemented constitutional limits on populist spending through mechanisms like the "Debt Brake" (Schuldenbremse) a principle that could inform India’s future fiscal reform debates.

Gender Budgeting: The Politics of Equity

Introduced in India in 2005–06, gender budgeting is an explicit political effort to correct systemic imbalances. Ministries are required to assess the impact of allocations and spending on gender. While the allocations under Gender Budgeting were ₹2.23 lakh crore in 2023–24, the actual mainstreaming of gender outcomes remains limited. In contrast, South Korea and Sweden have integrated gender budgeting into all ministries, linking it to performance reviews.

Reflect & Respond: Gender budgeting requires  beyond allocations to become a powerful tool of gender mainstreaming.” Discuss.

Application: Gender budgeting is political both in its potential and neglect.

Contextual Trigger: The growing debate on pre-election populist spending vs. fiscal prudence

Political Economy of Budget Language

Even the language of the budget speech is political. A 2024 India Spend word cloud analysis of budget speeches from 2014 to 2024 revealed that terms such as self-reliance, startup, women empowerment, and digital economy have dominated in recent years, replacing earlier tropes of poverty alleviation or infrastructure bottlenecks. This marks a shift in political communication through fiscal documents.

Budget transparency and participatory budgeting

Transparency is central to the establishment of political legitimacy. While India has made strides in publishing budget documents and citizen summaries, models from Brazil’s Porto Alegre or Kenya’s Nairobi slum budgeting pilot show how local participatory budgeting improves public satisfaction and allocative equity. These approaches are yet to be institutionalised in India beyond select municipal-level innovations (e.g., Pune Municipal Corporation).

The budget is the most authoritative expression of the government’s priorities. This is where politics and public finance intersect. As future public administrators, civil servants must recognise that technical neutrality is a myth in budgeting. Every rupee allocated or denied is a policy decision with political roots and democratic consequences.

Parliamentary Control of Public Expenditure

In a parliamentary democracy, Parliament’s control over public expenditure is a fundamental principle of constitutional governance. Rooted in Article 112 of the Constitution, the process of budget approval, legislative scrutiny, and expenditure auditing ensures that the executive remains accountable to the people through their elected representatives.

The idea that “no taxation without representation” is operationalised through parliamentary powers to authorise the annual financial statement (the budget), control appropriations, and examine how public funds are utilised.

Budgetary Process in the Parliament

The Finance Minister in the Lok Sabha presents the Union Budget and subsequently goes through the following stages:

1. General Discussion: Allows members to discuss the budget’s broad outlines.

2. Vote on Account: Grants interim spending authority (usually for 2 months).

3. Demand for Grants: Each ministry’s expenditure demand is debated.

4. Appropriation Bill: Legal approval to withdraw money from the Consolidated Fund of India is granted.

5. Finance Bill: Enacts new tax proposals.

Although this structure ensures procedural clarity, in practice, limited time and political constraints often lead to a lack of debate in bulk approval. According to PRS Legislative Research (2023), over 94% of budgetary demands were passed without discussion in the last five years.

The Finance Minister in the Lok Sabha presents the Union Budget and subsequently goes through the following stages:

Figure 1

Committees: The Backbone of Parliamentary Oversight

India’s Committee system enhances budgetary scrutiny through the following:

1. Public Accounts Committee (PAC): Examines CAG audit reports and public expenditure irregularities.

2. Estimates Committee: Evaluates the efficiency of fund utilisation.

3. Departmentally Related Standing Committees (DRSCs): Review each ministry’s grant demands.

For example, the PAC’s review of the 2G spectrum allocation led to significant political accountability and criminal investigations showcasing the legislative scrutiny’s impact beyond mere procedure.

Digital Innovation and Gaps

To modernise legislative scrutiny, the Digital Parliament Initiative (2023) has introduced the following:

• The AI-based search in budget documents

• Real-Time Annotation Tools for MPs, and

• Committee dashboards to track the use of funds.

Despite these advancements, the following constraints persist:

• Time limitations during the budget sessions

• Party-line voting that often stifles dissent

• Poor follow-up of committee recommendations

Reflect & Respond:  to the Parliament in the domain of financial administration is secured through CAG reports. Discuss.

Contextual Trigger: Legislative control must align with institutional audit for full accountability.

Comparative Perspective: The UK and Canada

In Canada, the Parliamentary Budget Officer (PBO) evaluates fiscal proposals independently, enhancing transparency. In contrast, India lacks an independent budgetary evaluation office, relying instead on internal ministry documents and the CAG’s post facto audits.

The UK Treasury Select Committee conducts live hearings on budget plans, inviting economists, NGOs, and government officials practices that could inspire India’s reform roadmap.

In summary, Parliament’s control over public expenditure is not merely a constitutional ritual it is the guardian of democratic accountability. However, India must combine institutional mechanisms with technological innovation and citizen engagement to revitalise this control, ensuring that every rupee spent carries the sanction of scrutiny and the weight of responsibility.

Role of the Ministry of Finance in Fiscal and Monetary Stewardship

The Ministry of Finance (MoF) stands as the fiscal nerve centre of the Indian state. Entrusted with the task of economic governance, budgetary planning, resource mobilisation, and inter-governmental financial coordination, it exercises a pivotal role in shaping India’s development trajectory. Its decisions influence everything from inflation control and infrastructure investment to welfare spending and fiscal federalism.

In the intricate architecture of Indian governance, the Ministry operates not only as an administrative body but also as a strategic institution that balances economic realism with political aspiration.

Organisational Architecture

The MoF comprises five distinct departments:

1. Department of Economic Affairs: Oversees macroeconomic policy, international finance, and budgeting.

2. Department of Expenditure: This department controls government spending and implements PFMS.

3. Department of Revenue: Manages direct and indirect taxes (CBDT and CBIC).

4. Department of Financial Services: Supervises banking, insurance, and financial inclusion.

5. The Department of Investment and Public Asset Management (DIPAM): Handles disinvestment and asset monetisation.

Each department plays a coordinated role in maintaining fiscal balance, ensuring efficient use of funds, and promoting economic stability.

Table 1: Organisational Architecture of the Ministry of Finance, Government of India

Fiscal policy management: Balancing growth and prudence

Fiscal policy, the domain of taxation and public expenditure, is central to economic planning. The MoF drafts the Union Budget, estimates receipts and expenditures, manages fiscal deficit targets, and implements countercyclical strategies during economic downturns.

1. In FY 2023–24, the MoF successfully reduced the fiscal deficit to 5.8% of GDP, a marked decline from the pandemic-induced high of 9.5% in 2020–21. The target is ~4.9% as per Budget 2024–25.

2. The FRBM Act (2003) provides a statutory framework for fiscal responsibility, although exceptions are allowed under exceptional circumstances, such as the COVID-19 pandemic.

Reflect & Respond:  is an indicator of  which is reflected in the statement of income and expenditure. Discuss.

Application:  ensures that budgeting becomes a tool of macroeconomic stability, not just financial reporting.

Monetary Policy Interface: MoF and RBI

Although the Reserve Bank of India (RBI) is autonomous in formulating monetary policy, it works in tandem with the MoF for macro-fiscal coordination. The institutionalised Monetary Policy Committee framework (est. 2016) has formalised this relationship.

MoF provides fiscal cues for inflation targeting, interest rate adjustments, and liquidity management.

During the pandemic, the MoF-RBI synergy ensured liquidity infusion, loan moratoriums, and a targeted credit stimulus under the Atmanirbhar Bharat package.

Structural Reforms and Leverage of Strategic Policy

The MoF has been at the forefront of significant reforms: 

• Implementation of the GST (in coordination with States and the GST Council)

• Digitalisation of financial governance (e.g. PFMS and e-Kuber)

• Asset monetisation pipeline under the DIPAM

• SANKALP—a decision-support dashboard for real-time expenditure tracking

The “Digital Budget 2021,” a first in Indian history, demonstrated the adaptability of the Ministry in using technology to enhance transparency and citizen access.

Fiscal Federalism and the GST Council: Tensions and Cooperation

While the MoF anchors India’s centralised fiscal strategy, it also negotiates with states over fund devolution. The GST Council, chaired by the Union Finance Minister, embodies cooperative federalism but has also exposed asymmetries in decision-making.

Reflect & Respond: Even if all the States combine they cannot have their way in the GST Council the Union agrees to it. Analyse this in the perspective of federalism in India.

Contextual Trigger: The voting structure—1/3rd weightage to Centre and 2/3rd to  (with Centre holding veto via lack of consensus) has created tensions over revenue shortfalls, especially during the pandemic.

Global Best Practices: Comparison and Reflection

Countries such as Germany have introduced the “Debt Brake Rule”, ensuring long-term fiscal sustainability. In Indonesia, the localised fiscal councils of the finance ministry allow decentralised financial planning, enhancing responsiveness. India’s MoF can evolve similarly by integrating in select districts evidence-based budgeting, climate-linked fiscal forecasting, and citizen-prepared budgets.

To conclude this section, the Ministry of Finance is more than a custodian of funds; it is the institutional conscience of India’s economic sovereignty. As India strides towards a $5 trillion economy, the Ministry must innovate growth-oriented, inclusive, and constitutionally anchored fiscal tools. Future civil servants must understand its structure as a keystone in the architecture of democratic governance and not just an organ of the executive.

Budgeting and Accounting Techniques

The techniques used to prepare, present, and manage a government’s budget reflect not only financial acumen but also institutional maturity, transparency, and readiness for reform. In India, the evolution of budgetary and accounting techniques has shifted from traditional practices to more dynamic, technology-enabled, and performance-linked financial systems.

At its core, Public Finance Accounting involves recording, classifying, and summarising government transactions to ensure that expenditure is legal, authorised, efficient, and accountable.

Traditional Accounting: A Cash-Based System

India predominantly follows a cash-based accounting system, in which transactions are recorded only when actual cash is received or paid. Although simple, this method has several limitations:

• It does not reflect liabilities or unpaid obligations.

• It is less suitable for performance measurement, especially in welfare or capital-intensive projects.

The cash system offers predictability and is less susceptible to manipulation despite its limitations. It continues to be used under the Government Accounting Rules, 1990, which are aligned with Article 150 of the Constitution, empowering the President to prescribe accounting standards (on CAG’s advice).

Towards Accrual Accounting: Modernisation and Reform

Recognising global trends, the Government of India has initiated steps towards accrual-based accounting, where transactions are recorded when economic value is created, not merely when cash is exchanged.

Seminal Global Source: The International Public Sector Accounting Standards (IPSAS), developed by IFAC, advocate accrual-based systems to improve transparency and comparability.

Benefits of Accrual Accounting:

• Reflects true financial position (e.g., pensions, due subsidies, delayed payments)

• Improves long-term fiscal planning

• Performance audits and cost–benefit analysis

However, full-scale transition faces challenges such as a lack of skilled personnel, weak IT systems in states, and legal inertia. A hybrid system or modified cash basis is being explored as an intermediate model.

Technological Enablers: PFMS and IFMIS

The Public Finance Management System (PFMS), developed by the Controller General of Accounts (CGA), is a milestone in integrating accounting with real-time tracking of fund flow. It ensures:

• Real-time accounting across ministries and states

• Tracking of Direct Benefit Transfers (DBT)

• Integration with banks and Treasury portals

The Integrated Financial Management System (IFMIS) goes a step further, combining budget planning, expenditure control, payroll, pension, and treasury functions.

Case illustration: In Telangana, the IFMIS has enabled the biometric validation of bill processing, helping curb leakages and ghost entries.

Innovations and Pilots

• Blockchain Pilots: In 2023, the Rajasthan Treasury Department began experimenting with blockchain-backed audit trails for welfare transfers.

• AGAP in Kerala (2022): The Automated Governance Accounting Platform (AGAP) uses IoT-linked data to cross-verify physical and financial progress in MGNREGA and rural roads.

• e-Kuber: The Reserve Bank of India (RBI)-managed system provides core banking solutions for government receipts and payments, reducing float time and enhancing reconciliations.

Comparative Insight

• New Zealand, the first country to adopt full accrual budgeting (1994), links its budget to departmental performance goals and long-term liabilities.

• Ghana introduced a three-tier accounting reform model with gradual accrual integration at the local government level.

Table: 2: Cash vs. Accrual Accounting

Essentially, India’s budget and accounting systems are evolving to meet the demands of a digitised, decentralised and delivery-driven state. Future public administrators must understand not only how money is accounted for but also how it is connected to public outcomes, ethical governance, and citizen trust. As India moves towards becoming a $5 trillion economy, strengthening its financial accounting architecture is not just a technical imperative it is a governance necessity.

The Role of the Controller General of Accounts

In India’s vast and complex financial administration, the Controller General of Accounts (CGA) occupies a crucial position as the chief accounting advisor to the Government of India. Established in 1976 under the Department of Expenditure, Ministry of Finance, the CGA ensures the integrity, accuracy, and timeliness of government accounting, acting as a bridge between policy intention and financial record.

The CGA’s mandate is derived from Article 150 of the Constitution, which authorises the President to prescribe the form of accounts based on the CAG’s advice. While the CAG is responsible for audit, the CGA is responsible for maintaining the accounts of the Union government and supervising the accounting functions across ministries.

Core Functions of the CGA

• Preparation and consolidation of the Union government’s monthly and annual accounts

• Submission of the Union Civil Accounts to the President

• Development of Accounting Procedures and Internal Controls

• Payment, accounting, and pension services for Central Government employees

• Supervision of Pay & Accounts Offices PAOs under various ministries

• PFMS management and its integration with banking systems

Mandate as per Allocation of Business Rules, 1961: “The CGA shall be responsible for establishing and maintaining a technically sound management accounting system.”

Digital Transformation: PFMS and eLekha

The Public Financial Management System (PFMS), administered by the CGA, is a ground-breaking public accounting reform. It facilitates:

• Real-time Fund Tracking across Schemes and Ministries

• Just-in-Time Payments through a DBT-Linked Architecture

• Integration with more than 90,000 implementing agencies and banks

By 2023–24, more than ₹14 lakh crore worth of transactions were processed through PFMS, enhancing transparency in schemes like PM-KISAN, NSAP, and Mahatma Gandhi NREGA.

The CGA-managed e-Lekha portal ensures digital compilation of accounts, enabling monthly reconciliations and state-wise expenditure reviews.

Case Illustration:

In Jharkhand, the integration of state treasuries with e-Kuber and PFMS allowed real-time fund flow tracking to block-level education schemes reducing delays and leakages.

Reflect: & Respond: “The office of the Controller General of Accounts (CGA) is expected to strengthen public financial management in India.” Discuss its mandate.

Contextual Trigger: Asprants must understand that the CGA is not merely a technical functionary it is a guardian of fiscal credibility. Its digital interventions have enabled data-informed decision-making at the highest levels of governance.

Comparative Insight

• South Korea’s National Treasury Information System is a near-real-time ledger modelled on the PFMS.

• The UK’s Whole of Government Accounts (WGA) consolidates accounts across government agencies, much like India’s e-Lekha, but at an advanced accrual-based stage.

India’s model is still largely cash-based, but the CGA’s reforms have enabled a gradual shift towards performance-linked accounting, aligned with global public finance norms.

Challenges and the Road Ahead

Despite reforms, the CGA faces the following challenges:

• Capacity gaps in the local PAOs

• Limited analytics for expenditure effectiveness

• Lack of integration with physical progress tracking (except in pilot states)

Future pathways include the following:

• AI-powered anomaly detection in fund flows

• Geo-tagged expenditure reconciliation (e.g., roads and schools)

• Enhanced collaboration with the CAG for performance audits

In conclusion, the CGA is emerging as a technological vanguard in India’s public finance landscape. From a record-keeping role, it is evolving into a strategic actor in public expenditure management, fiscal transparency, and policy support. Understanding the CGA’s evolving mandate is crucial for future administrators to envision a governance model where every rupee is traceable, purposeful, and people-centric.

The Comptroller and Auditor General (CAG) Of India

The Comptroller And Auditor General (CAG) is one of the most powerful institutions in India’s democratic framework, mandated to act as the constitutional guardian of the public purse. Enshrined under Articles 148 to 151 of the Constitution, the CAG plays a pivotal role in ensuring accountability, transparency, and integrity in the executive’s financial operations.

Referred to by Dr. B.R. Ambedkar as the "most important officer under the Constitution", the CAG operates not only as an auditor but also as a sentinel of democracy exposing inefficiencies, misuse, and gaps in public expenditure.

The Constitutional Position and Independence

• Appointed by the President, the CAG enjoys security of tenure, and his conditions of service cannot be altered after appointment.

• Submits audit reports to the President/Governor, which are laid before Parliament or State Legislatures.

• Serves as an external auditor for institutions such as Unions And State governments, PSUs, autonomous bodies, and local bodies.

This independence is institutional and not merely statutory ensuring that CAG’s audits are unbiased and free from executive interference.

Scope and Audit Types

The CAG conducts three primary audit types:

1. Compliance Audit: Ensures adherence to financial rules, regulations, and transactions’ legality.

2. Performance Audit: Evaluates the economy, efficiency, and effectiveness of government programmes.

3. Propriety Audit: This audit scrutinises decisions for ethical soundness and public interest, beyond legal correctness.

Example:

The Performance Audit of Ujjwala Yojana (2022) by CAG revealed gaps in LPG refill cycles and targeting, guiding policy improvements, and public discourse.

Post-Facto Audit to Real-Time Insights

Traditionally a post facto auditor, the CAG is transitioning into a data-driven, proactive watchdog with the use of the following:

• AI-powered analytics to flag expenditure anomalies

• GIS-based auditing for rural development

• Cross-verification of Beneficiary Databases for Leakage Detection

The  Audit Diwas, initiated in 2021, symbolises a renewed commitment to citizen-centric auditing and policy impact.

Reflect: & Respond: “The office of the Comptroller and Auditor General of India stands on the pillar of autonomy. Discuss the major lacunae in the functioning of this constitutional body and also suggest measures for its strengthening.”

Contextual Trigger: This question invites aspirants to assess systemic challenges, such as:

• Delays in action on CAG reports

• Lack of real-time integration with PFMS or e-governance dashboards

• Underutilisation of audit findings in parliamentary debates

Despite these, the CAG has consistently produced high-impact audits—notably the 2G Spectrum (2010) and Coal Block Allocation (2012) reports, which led to far-reaching political and judicial actions.

Global Benchmarks

India’s CAG can be compared with other robust institutions as follows:

• The UK’s National Audit Office (NAO): Conducts Value for Money (VfM) audits and holds live hearings with parliamentary committees.

• The US Government Accountability Office (GAO): Reports directly to Congress and is embedded in policymaking.

• Australia’s Auditor-General uses a public dashboard to visualise real-time audit impact on service delivery.

India’s CAG is constitutionally stronger but can benefit from institutionalising a public feedback loop and real-time grievance auditing mechanisms.

Innovations and Future Potential

India’s CAG Vision 2040 Document outlines the following progressive reforms:

• AI-integrated audit trails

• Environmental, Social, Governance (ESG) compliance audit frameworks

• Integrated audit of digital assets and e-service platforms

Additionally, the CAG is piloting Concurrent Audits of DBT schemes enabling dynamic intervention rather than reactive assessment.

Field Example:

In Odisha, the CAG audited the PMGSY rural roads using geo-tagged photos and fund-flow data, discovering significant inconsistencies in reported versus actual work.

Essentially, the CAG is not merely a watchdogit is the moral compass of financial administration. As India advances towards ambitious developmental goals under India@2047, the CAG must be empowered through real-time data access, parliamentary responsiveness, and institutional follow-up mechanisms. Engaging with the CAG’s work is not optional for aspiring civil servants it is essential to cultivating an ethos of ethical governance and fiscal responsibility.

The Finance Commission and Fiscal Federalism

The Finance Commission (FC) is a constitutional body central to the functioning of India’s fiscal federalism. Envisaged as an impartial arbiter of resource distribution, the FC is constituted every five years under Article 280 of the Constitution to recommend the sharing of taxes, grants-in-aid, and measures to strengthen the financial position of states.

In a country as diverse as India geographically, demographically, and economically the Finance Commission plays a foundational role in harmonising vertical and horizontal equity, enabling cooperative federalism and fiscal justice.

Constitutional Role and Mandate

The President of India appoints the Finance Commission to:

• Recommend the distribution of net tax proceeds between the Union and the States (vertical devolution) 

• Determine the inter-se distribution among states (horizontal devolution)

• Recommend grants-in-aid of revenues, especially to deficit or special categories States

• Propose measures to augment the panchayat and municipality resources

The recommendations are advisory, but they are treated with great sanctity in practice, forming the basis of Union Budget allocations and state planning.

Figure 2

15th Finance Commission: Key Recommendations

The 15th Finance Commission (2021–26), chaired by N.K. Singh, made several important and sometimes contested recommendations:

• Recommended 41% of the divisible tax pool to be devolved to states (down from 42% to account for Jammu and Kashmir becoming a Union Territory)

• Introduced performance-based incentives for power sector reforms, solid waste management, and agricultural infrastructure

• Allocated ₹1.42 lakh crore as local body grants, a significant portion of which was performance-linked

Reflect & Respond: Critically examine the criteria adopted by the 15th Finance Commission for allocation of resources to States. What have been the major issues of contention since the 10th Finance Commission?

Contention Points: 

• Higher weight to population (2011 Census) over 1971 Census, disadvantaging states with effective population control

• Concerns over erosion of fiscal autonomy post-GST

• Challenges in ensuring timely and full release of performance grants

Fiscal Federalism and the GST: A New Architecture

With the introduction of Goods and Services Tax (GST) in 2017, the nature of fiscal federalism in India changed drastically:

• States surrendered their independent taxing powers in return for a share of the GST collections.

• The GST Council, though federal in structure, gives veto power to the Centre.

Reflect: & Respond: Even if all the States combine together, they cannot have their way in decision-making in the GST Council unless the Union agrees to it. Analyse this from the perspective of federalism in India.

Contextual Trigger: The shift has reduced states’ fiscal space while increasing their dependence on central transfers and compensation mechanisms, many of which have been delayed or partially honoured in recent years—especially during the COVID-19 period.

State Finance Commissions: The Weakest Link

Despite constitutional backing under Articles 243-I and 243-Y, State Finance Commissions (SFCs) are often neglected. Many states either fail to constitute them on time or ignore their recommendations.

Reflect: & Respond: Efforts to strengthen State Finance Commissions have faced apathy of State Governments over the years, which has also affected the successive Central Finance Commissions in recommending appropriate fiscal transfers to local bodies. Substantiate the answer with an example.

Contextual Trigger: Only 13 states submitted action-taken reports on their 5th SFC recommendations by 2021. This hinders the Central Finance Commission’s ability to make granular allocations to local bodies.

Performance Grants and Financial Accountability

The 15th FC introduced performance grants tied to the following measurable outcomes:

• Revenue collection efficiency

• Improvements in service delivery

• Timely audits and financial disclosures by municipalities

Comparative Lens: Lessons from Other Federations

• Germany’s Equalisation System balances tax capacities and expenditure needs via a rule-bound formula with strong constitutional safeguards.

• Australia’s Commonwealth Grants Commission adopts a “horizontal fiscal equalisation” principle, funded through the GST with performance-linked audits.

While India’s model is politically accommodative, it lacks institutional permanence and independent enforcement mechanisms. 

Table 3: Comparative Fiscal Federalism Models: India and Global Examples

This comparative table highlights how India’s fiscal federalism model contrasts with global practices in terms of institutional robustness, revenue sharing, and innovation. It underscores the need for stronger enforcement mechanisms and continuous reform. The Finance Commission remains the pivot of India’s fiscal federalism, but its effectiveness is constrained by executive discretion, political bargaining, and asymmetries in power and capacity. As India moves towards fiscal maturity, strengthening SFCs, institutionalising objective devolution criteria, and ensuring compliance with performance-linked grants will be critical. A fiscal federalism that is future-ready demands not just constitutional design but also administrative will and cooperative ethos.

Public Audit and Local Bodies-Strengthening Accountability

With the 73rd and 74th Constitutional Amendments, local bodies Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs) have emerged as the frontline agents of public service delivery. This transformation necessitated a corresponding shift in the financial accountability framework, particularly in the realm of public audits, to ensure transparency, compliance, and efficient utilisation of resources at the grassroots.

The Constitutional and Institutional Context

Articles 243-I and 243-Y of the Constitution mandate the State Finance Commissions (SFCs) to recommend mechanisms for devolving financial resources to local governments. As local bodies receive untied and scheme-based grants, the need for effective audit and accountability mechanisms becomes critical for

• Preventing Fund Diversion

• Promoting procurement transparency

• Ensuring citizen-centric outcomes

The Comptroller and Auditor General (CAG) was empowered in 2011 through administrative circulars and amendments to the DPC Act, 1971, to audit local bodies, especially those receiving Central funds.

Performance-Based Grants: Shift from Entitlement to Accountability

The 14th and 15th Finance Commissions introduced performance-linked grants for local bodies, tying fund releases to the following:

• Timely submission of audited accounts

• Transparency in budgeting

• Use of e-governance platforms

Reflect: & Respond: Performance grants devolved by Finance Commission of India have increased the financial accountability of the local bodies. Elaborate.

Contextual Trigger: 

• The logic is simple yet powerful: performance earns resources. This has pushed many urban bodies to digitise accounts and improve internal audits.

• These grants promote a shift from entitlement to accountability, incentivising better governance at the grassroots level. However, capacity constraints at local levels often limit their effective absorption.

Case Example:

In Madhya Pradesh, after complying with timely accounting disclosures and property tax digitisation, 18 municipal corporations received performance grants under the 15th FC.

Social Audit: Citizen-Led Oversight

Perhaps the most transformative innovation in grassroots accountability is the social audit a participatory tool that enables beneficiaries to verify the authenticity of government expenditure on public works and welfare schemes.

• First institutionalised in Andhra Pradesh for MGNREGA, social audits were later mandated nationally through the MGNREGA Audit Scheme Rules, 2011.

• In Jharkhand, social audits of housing and pension schemes unearthed significant ghost beneficiaries, leading to major clean-ups in beneficiary databases.

However, social audit units face challenges:

• Dependence on support from the state government

• Resistance from vested interests

• Limited institutionalisation in urban local bodies

Yet they remain a powerful tool of bottom-up accountability, giving real meaning to fiscal decentralisation.

Technology and Transparency: Emerging Frontiers

The use of digital platforms like:

• PRIASoft for Panchayat Accounting

• e-GramSwaraj Portal for Work Tracking

• Maharashtra’s TULANA dashboard for benchmarking expenditure

It is transforming how local financial data is published, audited, and analysed.

These platforms enable not only vertical audit oversight by state and central bodies but also horizontal accountability through citizen vigilance.

Global Perspective

• The Citizen Participatory Audit Project in the Philippines combines civil society groups with auditors to monitor local infrastructure projects.

• Kenya’s county budgets are open to public hearings, where citizen audit reports are submitted for legislative discussion.

India’s decentralised audit model is evolving, but greater institutional support and legislative backing for citizen-led audits can enhance their efficacy.

To conclude this section, as India’s democratic decentralisation deepens, financial accountability at the local level is no longer optional it is foundational. Strengthening public audits through capacity building, digital tools, and citizen participation will not only plug leakages but also foster a culture of fiscal discipline, transparency, and trust in governance. The future of accountable India lies not in its capital cities but in its gram panchayats and town halls, where every rupee spent directly touches lives.

Non-Performing Assets, Financial Inclusion, and Citizen Responsibility

A sound public financial system must ensure efficient resource mobilisation, responsible lending and equitable access to financial services. In India, the interplay between Non-Performing Assets (NPAs), the push for financial inclusion, and the fiscal burden on taxpayers forms a critical axis in the evaluation of both economic and administrative governance.

These themes are not isolated concerns they are interlinked in shaping how public money is utilised, who benefits from it, and who bears the risk when the system fails.

Non-Performing Assets: Public Risk and Private Failure

Non-Performing Assets (NPAs) represent loans or advances that are in default or in arrears. As per the Reserve Bank of India’s (RBI) Financial Stability Report (June 2024), the gross NPA ratio declined to 2.8%, though stress persists in sectors such as MSMEs and real estate.

• The burden of large-scale NPAs is often socialised through bank recapitalisation, where taxpayer money is used to restore the balance sheets of public sector banks.

• Between FY 2015–2021, over ₹3.1 lakh crore was infused into PSU banks by the Union Government under various recapitalisation schemes.

Reflect & Respond: The strategy to deal with the non-performing assets of banks may lead to overburdened taxpayers. Examine the role of government to protect the interests of both.

Contextual Trigger: The dilemma is stark bail out banks or punish borrowers. But a sustainable solution lies in strengthening credit appraisal, transparency in lending, and early warning systems, such as the CRILC platform (Central Repository of Information on Large Credits) maintained by RBI

Financial Inclusion: A Development Imperative

Financial inclusion refers to the delivery of affordable financial services savings, credit, insurance, and pensions to the underbanked and marginalised.

India has made the following transformative progress:

• Over 50 crore Jan Dhan accounts opened by 2023

• 90% seeding of Aadhaar in savings accounts

• Rise of DBT architecture for welfare payments (e.g., PM-KISAN and LPG subsidy)

• By March 2025, over 53 crore Jan Dhan accounts were opened, reflecting India’s push for financial inclusion.

Yet inclusion is not just about access it is about usage and literacy.

Reflect & Respond: “Financial inclusion needs legal backing it also requires increasing awareness become a reality.” Discuss.

JAM Trinity and Public Administration

The Jan Dhan–Aadhaar–Mobile (JAM) trinity has become the spine of India’s financial architecture. It is used for

• Eliminating the ghost beneficiaries

• Reducing Leakage in Welfare Schemes

• Enhancing the accountability of expenditure

Case Example:

In Rajasthan, the use of Aadhaar-authenticated DBT for the Bhamashah Yojana eliminated over 20 lakh ghost beneficiaries.

Despite this, many rural women report having accounts without understanding their usage a sign that financial awareness must accompany infrastructure.

Ethical Balance: Protecting Taxpayers and Expanding Access 

Public administrators face the following dual challenges:

• Ensure that NPAs do not erode fiscal discipline

• Guarantee equitable access to credit for entrepreneurs, farmers, and SHGs

A balanced financial ecosystem requires the following:

• Transparent borrower tracking systems (e.g., Account Aggregator Framework)

• Local credit counselling centres

• Stronger grievance redress systems (e.g., RBI Integrated Ombudsman Scheme, 2022)

Global LEARNING

• Bangladesh’s Grameen Bank pioneered microcredit without collateral balancing social impact with financial viability.

• Brazil’s banking correspondents (agents in rural areas) offer regulatory oversight of last-mile financial services.

India’s approach now involves FinTech-led financial inclusion, but regulatory vigil and citizen literacy must scale with digital penetration.

In a nutshell, the relationship between NPAs, financial inclusion, and taxpayer responsibility is a fragile equilibrium. As future administrators, civil servants must balance prudence with compassion, growth with justice, and digitisation with dignity. Fiscal stability is not just about balance sheets it’s about building trust between the state, the citizen, and the financial system.

Innovations, Best Practices, and Global Learning

In the 21st century, public financial management is undergoing a paradigm shift from manual record-keeping to AI-enabled auditing, from entitlement-based budgeting to performance-linked devolution, and from opaque allocations to citizen-led transparency. Innovations are no longer peripheral they are becoming central to India’s journey towards accountable, responsive, and future-ready governance.

As the fiscal architecture becomes more complex and interlinked, best practices from across India and the world offer important lessons for reform-minded public administrators.

Digital Public Infrastructure: India’s Pioneering Push

India’s Digital Public Infrastructure (DPI) led by Aadhaar, UPI, and PFMS has become a global case study. The integration of SANKALP, a dashboard-based decision support system developed by the Ministry of Finance in 2022, allows the following:

• Real-time expenditure tracking

• Performance analytics across the schemes

• Predictive trend modelling for fiscal forecasting

Complementing this is the e-GramSwaraj portal, which offers open access to panchayat-level budget and expenditure data, enabling citizen oversight of grassroots finances.

Case Highlight:

The “Mukhya Mantri Dashboard” in Haryana provides real-time fiscal alerts to the CM’s office, enabling intervention on underutilised scheme funds blending accountability with efficiency.

Global Best Practices: Comparative Learning

Several global models offer replicable insights:

• Finland: AI-assisted fiscal simulations are used to conduct multi-year outcome-based budgeting in education and health.

• Brazil: Institutionalised participatory budgeting in Porto Alegre, where citizens co-decide budget allocations a model now adopted in over 200 municipalities.

• Estonia: Fully digital treasury system with real-time audit integration, where budget proposals are tracked alongside performance data.

Although India has adapted components of these models, a comprehensive fusion is needed for holistic reform.

Grassroots Innovation in Financial Governance

• Kerala’s AGAP platform (Automated Governance Accounting Platform) combines IoT and fund flow monitoring for infrastructure projects.

• Maharashtra’s TULANA dashboard ranks municipal bodies on transparency and expenditure, creating a fiscal competition culture.

• Jharkhand’s e-Kuber–PFMS linkage at the block level has reduced fund float time in welfare schemes, improving delivery and audit alignment.

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