Economic inequalities, exploitation and corruption

Regional imbalance is the disparity in economic and social development of two regions. One region/city/area is stronger than another region/city/area. Regions develop when investments are made to set up industries, service sectors, educational institutions, health care facilities etc.

Income inequality is the unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population.

The problem of regional disparities is a global phenomenon and, for India, up to a great extent, an inheritance from the colonial past. For example, in India, the historical factors have guided the development of the port towns of Bombay, Madras, Calcutta and these three cities have in turn worked as nuclei for the development of Maharashtra and Gujarat, and Tamil Nadu and West Bengal respectively which are at present the most industrially advanced states in India. On the other hand, the areas having natural advantages in the form of mineral resources, such as Bihar, Madhya Pradesh, Orissa and Rajasthan have lagged far behind in the process of economic development.

The most important indicator of regional imbalance and disparity among the different states of India is the difference in per capita state income figures. It is revealed from data in 2000-01, that the national average per capita income in India was Rs. 10,254. The states whose per capita income figures were higher than this national average include Punjab, Goa, Haryana, Maharashtra, Gujarat, Karnataka, Tamil Nadu and Kerala.

Among these nine states, Punjab, Haryana, Maharashtra and Gujarat have attained a high degree of agricultural as well as industrial development. Although West Bengal and Karnataka attained per capita income higher than the all India average in 1094-95 but it started trailing behind the all India average in recent years due to its poor rate of economic growth.

Various steps taken by Government to reduce it are:

1.Land Reforms and Redistribution of Ceiling Surplus Land:

In India, income inequalities are mostly resulted from the concentration of agricultural land in the hands of a few big landlords. The Zamindary system prevailing in our country has created a system of absentee landlords in the farm sector who appropriated a major portion of the agricultural produce by exploiting the farmers.

After independence, various legislative measures were introduced for abolishing the system of absentee landlords and other intermediaries and imposing ceiling on land holdings.


  1. Resource Transfer and Backwardness:

While making necessary award, the Finance Commission in India has been giving due weightage to backwardness of a state as an important criteria for resource transfer from the centre to the states.

Declaration of Backward states and special category states by the government to reduce the regional imbalances.

Under the present system of federal fiscal transfer, the transfer of resources from the Centre to States includes central assistance for State Plans, Non plan transfer as per the recommendations of the Finance Commission, ad-hoc transfer, allocation of fund for centrally sponsored schemes, allocation of both short-term and long-term credit from financial institutions etc.

The share of backward states along with special category states in the Plan outlay as well as in central assistance has been increasing steadily since the First Plan. Accordingly, the share of these states in the total plan outlay had increased from 46 per cent in the First Plan to 51 per cent in the Third Plan and then to 54 per cent in the Fifth Plan.

3. Special Area Development Programmes:

In order to develop hilly areas, tribal areas, drought- prone areas, specific plan schemes have been designed with full central assistance. Besides, other schemes of rural development formulated for the improvement of specific groups such as marginal farmers and agricultural laborers were implemented in the backward regions.

An area based approach of ‘Tribal Sub-Plans’ (TSPs) is now being implemented for the development of scheduled tribes located in the backward rural areas.

In this manner, different special schemes for particular target group located in the backward areas are being included for block level planning for attaining integrated rural development and considerable employment opportunities. All these programmes include SFDA, MFAL, Drought Prone Area Programme (DPAP), Crash Scheme for Rural Employment (CSRE) etc.


4. Incentives for Promoting Investment in Backward Regions:

In order to fight the problem of industrial backwardness of some backward regions and also to promote private investment in backward regions, various fiscal and other incentives have been provided by both the Centre, the States and other financial institution under public sector.

 5.Social Security Measures:

Social security measures for the workers are considered as an important step towards reduction of income inequalities. India has adopted some social security provisions for the workers engaged in the organized sector. Workmen’s Compensation Act for providing compensation in case of any injury to industrial workers, Maternity Benefit Act for women workers and Employees

Provident Fund Act for providing the benefit of provident fund to the workers and other employees engaged in organized industries.

6. Employment Programme and Wage Policies:

With the growing menace of unemployment problem in India, the Government of India has introduced some special employment programmes since the Fourth Plan onwards in order to provide some relief and scope for gainful employment to unemployed. These programmes include Crash Scheme for Rural Unemployment, the Drought Prone Areas Programme, Food for Work Programme, self-employment schemes for engineers, employment scheme for educated unemployment etc.

All these programmes were short lived and ad-hoc in nature. During the Sixth Plan period, the Integrated Rural Development Programme (IRDP) was initiated in 1978-79 and after that National Rural Employment Programme (NREP), Rural Landless Employment Guarantee Programme (RLEGP) were also introduced.

More radical socio­economic reforms seem to be in the offing in India. These are some of the measures that can be adopted to reduce inequalities. But inequalities can be reduced, they cannot be eliminated altogether. In fact, absolute equality is unattainable.


Additional Information


  1. A composite criteria for identifying backward areas (with the Block as a unit) based on indicators of human development including poverty, literacy and infant mortality rates, along with indices of social and economic infrastructure, should be developed by the Planning Commission for the 12th Five Year Plan.
  2. Union and State Governments should adopt a formula for Block-wise devolution of funds targeted at more backward areas.
  3. Governance needs to be particularly strengthened in more backward areas within a State. The role of ‘special purpose vehicles’ such as backward area development boards and authorities in reducing intra-State disparities needs to be reviewed. It is advisable to strengthen local governments and make them responsible and accountable.
  4. A system of rewarding States (including developed States) achieving significant reduction in intra-State disparities should be introduced.
  5. Additional funds need to be provided to build core infrastructure at the inter-district level in less developed States and backward regions in such States. The quantum of assistance should be made proportionate to the number of people living in such areas.
  6. The approach to all such funding should be outcome driven. The strategy should be to define acceptable minimum norms of human and infrastructure development that every block in the country should attain and funding should be driven by the consideration to achieve the norms so defined.

Challenges of corruption

Corruption is an age old phenomenon and can be seen everywhere now a days. It is like a cancer in public life, which has not become to rampant and perpetuated overnight, but is course of time. The word corruption means destruction, ruining or spoiling a society or nation. A corrupt society is characterized by immorality and lack of fear or respect for the law. It is the abuse of public power for private gain. Corruption comes under many different guises like bribery, extortion, fraud, embezzlement. misappropriations of public goods, nepotism (favoring family members for jobs and contracts) cronyism and influence pending. Corruption has been defined in many different ways, each lacking in some aspect. A few years ago, the question of definition absorbed a large praportion of the time spent on discussion of corruption at conferences and feelings. However like a elephant, even though it may be difficult to describe, it is generally not difficult to recognize when observeed. Unfortunately, the behaviour is often difficult to observe directly because, typically acts of corruption do no t takes place in broad day light.

Corruption is widespread in India. India has been ranked 79th out of 176 countries in Transparency International’s 2012 corruption perception index (CPI). Corruption has taken the role of a pervasive aspect of Indian Politics and Bureaucracy. The economy of India was under socialist. Inspired policies for an entire generation from the 1950s until the 1980s. The economy was shackled by extensive regulation protectionism and public ownership, leading to pervasive corruption and slow growth. Since 1991, economic liberalization in India has reduced red type and bureaucracy, supported the transition towards a market economy and transformed the economy with high growth rate. However, although the Indian economy has become the 4th largest in the world, the growth has been uneven across social and economic groups and poverty is still on issue. Endemic and deep rooted corruption is a major factor for most social and political ills. It is a serious threat not just to sustainable economic growth, but also to the sociopolitical fabric of the country.

In Indian civilization, corruption have caused maximum suffering to the humankind. In ancient Indian history the great Indian philosopher Kautilya says “just as it is not possible, not to taste honey or poison put on the surface of the tongue, so it is not possible for the government servant dealing with money not to taste it in however small a quantity.” On the difficulties of corruption detection Kautilya says “just as a fish moving under water cannot possibly be found out either as drinking or not drinking water, so government servant employed in the government works cannot be found out taking money.”

After the independence corruption is widespread in Indian bureaucratic and political system fill lust small point to apex. According to an international report, the much amount of Indian black money deposited in Tax Heaven Foreign banks, if which is come out in India. Then the annual budget of India can be made without tax lies to next 30 years. It is surmisal that the is how much widespread in present India after independence probably that high profile scandal was the jeep scam in 1948, when jeeps were required for the army operation in Kashmir. Other notable scandals includes the Mudgal case (1951), Mundra case (1957 – 58), Malviya – Sirajuddin Scandal (1963).

The governing climate in those days can be gauged from the many observations . A.D. Gorwala committee, set up to suggest ways to improve the system of governance. The Santhanam committee (1962) examine the problem of corruption observed in 1964 that “there is widespread impression that failure of integrity is not uncommon among ministers and that some ministers, who have held office during the last sixteen years have enriched themselves illegitimately, obtained good jobs for their sons and relations through nepotism and have reaped other advantages inconsistent with any notion of purity in public life.” In later years corruption will be gradually widespread in Indian society and no effective measures have yet been installed that curb the menace. The lokpal bill could not be passed in last decades, it speaks for the utter lack of political will in the country.

In recent years so many major scandals involving high level public officials have shaken the Indian public services. These scandals suggests corruption has become a pervasive aspect of Indian political and bureaucratic system. Some of them major scams are following:

  • Coal Allotment Scam (Cost – 186000 Crores)
  • 2 G Spectrum Scam (Cost – 176000 Crores)
  • Commonwealth Games (CWG) Scam (Cost – 70000 Crores)
  • Mega black money laundering Scam (Cost – 70000 Crores)

Nature of corruption in India

Under the Indian constitution, the government consists of three branches : the legislative, the executive and the judiciary with clear mandate for independent functioning of each branch. For the good governance it is compulsory that each of these units must function with integrity and efficiency. The legislators are elected representatives of the peoples and responsible for making laws. The executive branch consisting of ministers, bureaucrats and whole government machinery, which is responsible for the implementation of laws made up by legislative assemblies. The judiciary, acts as an impartial watchdog to see if the people are governed as per the law. It lakes the power to frame any law, it can only interpret the laws passed by the law makers under the constitutional framework and give its verdicts. But when corruption invades, governance begins to degrade implying loss of integrity and efficiency both. Now – a – days corruption is widespread in every segment of Indian government system and politics.

The behaviour of India legislators both at the union and in the state leaves a lot to be desired. Every time they act motivated by personal gain. Corruption in the assemblies as seen from this perspective implies floor crossing, case for vote taking money or other benefits to ask questions, framing rules under the influence of big corporate houses at the cost of common people. Criminalization of politics is yet another fact of corruption in the current parliament. These are over a quarter MPs with criminal records. Many with serious charges against them. It also highlights an area where electoral reforms is urgently needed so that criminals don’t enter in the parliament or state assemblies.

In the executive branch, ministers are placed at top of the hierarchy. They are responsible for the making policies for the public because the public trust on them and elected by votes to making government. In recent analysis we seen that the level of corruption in ministers is highest. 2G spectrum scam, coal allotment scam, commonwealth games scam, fodder scam etc. are the best examples of it.

In Indian parliamentary system, the responsibility of execution of the policies making by government at ground level is taking hand over to the bureaucracy. But the report card of the Indian bureaucracy is also not very flattering. Bureaucratic corruption in India thrives on red tape, complicated procedures and discretionary power. Governance in India is characterized by the lack of transparency in rules. Complicated procedures and a bureaucracy that enjoys broad discretionary power. According to a recent analysis of reports of bribery demands.

in India conducted by trace international was published in January 2009, 90% demand for bribe came from government officials of which over 65% for avoiding harassment, 50% bribery was for timely delivery of services to which the individuals were already entitled, about 10% were meant to provide any advantage. Bureaucratic corruption pervades the Indian administration system with widespread practices of bribery, nepotism and misuse of official positions and resources.

Causes Of Corruption In India

  • Emergence of a political elite which believes in interest oriented rather than nation oriented programmes and policies.
  • Artificial scarcity created by people with malevolent intention wrecks the fabrics of the economy.
  • Corruption is caused as well as increased because of the change in the value system and ethical qualities of men who administer. The old ideals of morality, services and honesty are regarded as anachronistic.
  • Tolerance of people towards corruption, complete lack of intense public outcry against corruption and the absence of a strong public forum to oppose corruption allow corruption to reign our people.
  • Vast size of population coupled with widespread illiteracy and the poor economic infrastructure lead to endemic corruption in public life.
  • In a highly inflationary economy, low salaries of government officials compel them to resort to corruption. Graduates from Indian institutes of management with no experience draw a far handsome salary than what government secretaries draw.
  • Complex laws and procedures deter common people from seeking help from the government.
  • Elution time is a time when corruption is at its peak. Big industrialists fund politicians to meet high cost of election and ultimately to seek personal favour. Bribery to politicians buys influences and bribery by politicians buys votes. In order to get elected, politicians bribe poor, illiterate people.

Recommandations to fight corruption

  • Foolproof laws should be made so that there is no room for discretion for politicians and bureaucrats. The role of the politician should be minimized. Application of the evolved policies should be left in the hands of an independent commission or authority in each area of public interest. The decision of the commission or authority should be challenged only in the courts.
  • Cooperation of the people has to be obtained for successfully containing corruption. People should have a right to recall the elected representatives if they see them becoming indifferent to the electorate.
  • Public awareness is must to combat corruption in India, for this it should be must to improve our education system because education is the best mean to understand fundamental rights and Right – Wrong conversation.
  • Corruption can be remed if people can understand and start to believe the value of ethics and morality in their life.
  • Funding of elections is at the core of political corruption. Electoral reforms are crucial in this regard. Several reforms like state funding of election expenses for candidates, strict enforcement of statutory requirements like holding in-party elections, making political parties get their accounts audited regularly and filing income-tax returns, denying persons with criminal records a chance to contest elections, should be brought in. Responsiveness, accountability and transparency are a must for a clean system. Bureaucracy, the backbone of good governance, should be made more citizen-friendly, accountable, ethical and transparent.
  • The prosecution of corruption cases should be conducted by a panel of lawyers prepared by the Attorney General or the Advocate General in consultation with Rashtriya Lokayukta or Lokayukta as the case may be.

United Nations Convention against Corruption


  • 2003
  • First legally binding international anti-corruption instrument
  • Obliges its state parties to implement a wide and detailed range of anti-corruption measures affecting their laws, institutions and practices
  • India ratified it in 2011



To check corruption


Institutional Changes

  • A single, empowered Lokpal needs to be established. It should be empowered to investigate and prosecute politicians, bureaucrats and judges.
  • While CVC and CAG are independent, they are merely advisory bodies to the govt. They need to be strengthened. CVC can be merged with the institution of lokpal

Major corruption cases exposed in 2010

  • Commonwealth Games
  • 2G spectrum allocation
  • Adarsh Society Case, Maharashtra
  • Land Scam, Yeddurappa, Karnataka
  • LIC Housing Scam
  • <Niira Radia tapes>

Proposition: Corruption exists and is high

  • Report published by Global Financial Integrity showed that corruption, tax evasion and trade mispricing have cost India hundreds of billions of dollars over the past several years
    • The study pointed out that the process had gained momentum after the opening up of the economy in 1991


  • Increasing nexus between corporate and politics: A rise in corruption could be attributed to this nexus. Corporates are trying to manipulate government in multiple ways to have their way in business <ref. 2G spectrum and Radia tapes>


Dealing with the issues

  • We need a truly independent CBI to get to the bottom of the cases.
    • Right now, CBI seems to be manipulable by the political masters.
    • In the 2G case, SC is directing CBI. One possibility could be to make CBI answerable to the judiciary instead of the executive to enhance its independence.

4th ARC report on Ethics in Governance has recommended a large number of measures which could enhance probity among public servants

  1. Amendment of the Prevention of Corruption Act
  2. Delegating powers to grant sanction of prosecution to an empowered committee
  3. Fixing time limit for trial of anti-corruption cases
  4. enhancing powers of the CVC
  5. Repeal article 311
  6. Creating a multi-member Lokayukta
  7. Simplifying disciplinary procedures
  8. Creating mechanism which can empower citizens to seek legal relief against fraudulent claims against the government
  9. Confiscation of property acquired by corrupt means
  10. Ensuring accessibility and responsiveness of government functionaries
  11. Adopting measures to protect honest civil servants

Serious Fraud Investigation Office (SFIO)

  • Under the ministry of corporate affairs
  • For detecting and prosecuting or recommending for prosecution white-collar crimes/frauds

Corporate corruption

  • Insider trading: Rajat Gupta, Rajaratnam
  • KG Basin: Reliance
  • Niira Radia tapes
  • Satyam

India’s Black Economy

  • In late 2010 and early 2011 there was a huge outcry regarding India’s black economy as news about secret foreign bank accounts of Indians started pouring in.
  • In addition, the Global Financial Integrity Report claimed that independent India had lost $462 bn due to illegal financial outflow
  • The government was pulled up by the SC to disclose the names of individuals who had funds stacked away in foreign banks
  • To deal with the issue, India inked Tax Information Exchange Agreement (TIEA) with five ‘tax-havens’ by March 2011. These are: Bahamas, Isle of Man, British Virgin Islands, Caymen Islands and Bermuda
    • Purpose of TIEA is to promote international cooperation in tax matters through exchange of information.
  • Wanchoo committee
    • 1971
    • Estimated the size of black economy
  • Reasons for Black money <can divide it into pre liberalisation and post liberalisation>
    1. Structure of taxation
    2. Price control policy
    3. Quota and license system
    4. Scarcity of commodities
    5. General election
    6. Share market
    7. Real estate
    8. International Activities
    9. Privatisation
    10. Police force
  • Impact of black money
    • May remain idle or often gets invested in unproductive activities
    • Deprives govt of the tax revenue
  • How to curb it
    • Special courts should be established to dispose the corruption cases
    • Pranab Mukharjee’s five pronged approach: joining the global crusade against black money; creating an appropriate legislative framework; setting up institutions for dealing with illicit funds; developing systems for implementation; and imparting skills to the manpower for effective action

Devil’s advocate

  • Some people argue that black economy also generates jobs and production
    • A lot of goods are bought in the market using black incomes, and that leads to increase in production and employment
    • Black economy generates informal sector employment and helps the poor
    • Some argue for bribes as speed money
  • There is some truth in these claims but the costs of black economy exceed its benefits.

Counterattack for those who justify black money

  • Speed money: In order to extract a bribe, the bureaucracy first slows down work and harasses the public. If work was automatically done, why would anyone pay bribes?
  • The administration becomes rundown since rather than devising ways to work efficiently, it is busy thinking of ways to make money by setting up roadblocks to efficient functioning.
  • Much of black economy in India is like ‘digging holes and filling them’. Activity without productivity.
  • Because of the growing black economy, policies fail both at the macro-level and the micro-level.
  • The flight of capital lowers the employment potential and the level of output in the economy
  • The direct and indirect costs are of policy failures, unproductive investments, slower development, higher inequity, environmental destruction and a lower rate of growth of the economy
  • At the social level, the cost is a loss of faith in society and its functioning.

Various committees on corruption


  • 1956: Kaldor Report
  • 1964: Santhanam Committee
  • 1971: Wanchoo Committee
  • 1979: Dagli Committee
  • 1985: NIPFP Report
  • 2002: Kelkar Committee

Movements Against Corruption

  • 1972: Nav Nirman
  • 2011: Anna movement

Lokpal Bill


Major differences between the Lokpal and Jan Lokpal drafts

Table 1

 Jan LokpalLokpal
Selection PanelTwo elected politicians, four serving judges and two independent constitutional authoritiesSix elected politicians (five from the ruling establishment), two serving judges and two officials.
Search committee <this is a body to ensure countrywide search and co-option in a transparent manner of the best talents in the country>10 members: 5 from former senior judiciary, CAG and CEC, and five to be co-opted from the civil societyNo such provision for accommodating the representatives from the civil society
InvestigationAfter a preliminary enquiry the accused is associated for questioning or interrogation as per the law – not prior hearings to share his defence or self-incrimination. He produces his defence before the judicial courts as is under the law.Enquiry – > report to Lokpal -> hearing of the accused -> investigation -> one more hearing before the final chargesheet.


Team Anna’s demands

  • Selection of the Lokpal be done by a committee as proposed in the Jan Lokpal bill
  • Provision of Lokayuktas in the states to deal with public servants of the state. <Creation of Lokayukta is within the purview of the state governments. For the parliament to pass a law to force them to do so, might seem to go against the principles of federalism>
  • Wide jurisdiction of the Lokpal
  • Put in place a grievance redressal system

There were six major areas of differences between the government and the Jan Lokapal bill

  1. Should one single Act be provided for the Lokpal in the centre and Lokayukta in the states? Would the states be willing to accept a draft provision for the Lokayukta on the same lines as that of the Lokpal?
  2. Should the PM be brought under the Lokpal? If so, should there be a qualified inclusion?
  3. Should judges of the SC/HC be brought within its purview?
  4. Should the conduct of MPs in Parliament be brought within the purview of the Lokpal?
  5. Whether Articles 311 and 320(3)(c) of the constitution notwithstanding members of a civil service be subject to enquiry and disciplinary action including dismissal by the Lokpal/Lokayukta, as the case may be?
  6. What should be the definition of the Lokpal, and should it itself exercise quasi-judicial powers also or delegate these powers to its sub-ordinate offices?

Report of parliamentary standing committee on Lokpal

<Nov 10, 2011>

  • Recommended
    • Exclusion of lower bureaucracy from purview of Lokpal
    • Parliament to decide whether PM should be included
    • Group C and D officers should be covered by the respective state Lokayuktas or by the CVC at the central level


Role of CAG


Following cases of scam were brought forth recently by CAG

  • 2G spectrum
  • CWG
  • Reliance KG Basin

In order to make the institution of CAG more robust, it has proposed the following amendments to the Audit Act 1971:

  • Amendment to ensure that the government departments reply to audit enquiries in 30 days rather than in the open-ended manner as of now.
  • CAG wants the statute to stipulate a clear timeframe for the tabling of completed audit reports on the floor of the relevant legislature.
  • Bringing the CAG’s legal mandate up to speed with the changes that have taken place in the way public money is spent. Because of ambiguities in its mandate the CAG feels unable to adequately audit all areas of public economic activity. <eg, the new institutions after the 73rd and 74th amendment, public-private partnerships after liberalisation>
  • Adapt audit approach to keep pace with the latest fiscal developments.
  • Types of audit
    • Regulatory Audit: CAG’s current function. Auditing whether the money used was legally available and spent through the right authority.
    • Performance Audit: looking at the economy and appropriateness of spending. Could the spending be done in a more efficient manner to get the maximum returns out of the expenditure?
  • Good opportunity for CAG to have a proactive role in many areas including:
    • Poor implementation of the FRBM Act 2003 and obsession with showing achievement of quantitative budget deficit with the help of revenue buoyancy and one time receipt like spectrum auction
    • 13th finance commission has suggested a review mechanism to be set up for evaluating the fiscal reform problems. CAG can contribute valuable inputs for this reform process.
    • Output and outcome budgeting: Need to move from the former to the latter. CAG can do some case studies of output/outcome budgeting and focus on the system defects for corrective action. Introduction of management accounting was one of the goals when audit was separated from accounts in 1976. This is still a paper goal and accounts are still considered by the ministries as a statutory nuisance.
  • Some examples of lack of transparency in government finances
    • Govt’s contingent liabilities shown in the budget document do not indicate the default position of the borrowers.
    • The figures of fiscal deficits need more amplification. Quasi-fiscal deficit should be explicitly stated. Many cases of understatement of expenditure are noticeable. For example, oil subsidies do not reflect the full annual subsidy payable by the government.

150 Years of CAG in 2010

An evaluation

  • 1860
  • The findings of Audit should not only be reported to the President and Parliament as close to the events as possible, but also made known simultaneously to the media and public, with some explanations to aid understanding
  • Several reports of the CAG have matters that have not been discussed. A way should be devised so that CAG reports are more effectively discussed
  • There is a criticism of overreach when Audit widens its horizons and attempts to examine efficiency or cost-effectiveness or propriety. The criticism is untenable because any meaningful audit must necessarily go into these aspects, and the supreme audit institutions of many countries do as a matter of course.
  • When faced with executive intransigence, the CAG does not have enough powers to compel cooperation. The CAG needs to take a lead in using the relevant constitutional provisions to make the institution stronger
  • The process of selection of such an important constitutional functionary should be open, objective and credible.


Beyond the spectrum

The enormity and complexity of government budget throw a special burden on CAG

The Comptroller and Auditor General of India (CAG) has been in limelight recently for his report on the irregularities and loss of revenue to the Central Exchequer in allotment of spectrum licences. Public awareness and appreciation of the role of CAG, especially in the media, is to be welcomed.

As the supreme auditor of the government, it is his responsibility to check that collection of revenue and spending of public money is done properly according to rules and regulations. It is a creditable achievement to unravel all the ramifications of this complex transaction and bring out a comprehensive report without fear or favour. This is time to recognise the wider role CAG can play in the larger context of economic development and fiscal consolidation.

On behalf of Parliament and the public, CAG is responsible to check that public revenue is collected and public expenditure is incurred in the most efficient and lawful manner. India is a welfare state and the government is implementing a number of schemes and projects under the five-year plans, resorting to borrowing. The enormity and complexity of government budget throws a special burden on CAG. The budget estimate of revenue receipts for the current year is Rs.6.80 lakh crore and total expenditure Rs.11 lakh crore financed through substantial borrowing. The CAG’s role extends to see that the budget is implemented to achieve the government’s objective of promoting development with fiscal prudence. Two areas for such non-routine audit can be identified — ouput/outcome budget and fiscal responsibility legislation.

One major factor in public expenditure of a modern welfare state is the wide range and complexity of functions, schemes and projects undertaken by the government to promote all inclusive economic growth. This has altered the budget formulation in a significant way. The budget is no longer a mere financial budget. Now the emphasis is on what is expected from the large scale spending. Efficiency and effectiveness became the key words. The physical output from the financial input is reflected in the budget. The country has followed this world-wide trend by introducing budgetary reforms. The annual performance budget was introduced to highlight financial and physical aspects of major schemes and programmes of all ministries dealing with development activities. Even after 25 years, this did not bring any significant improvement in efficiency and effectiveness in public expenditure. Presenting the Central budget for 2005-06, the then Finance Minister announced putting in place a mechanism to measure the development outcomes of all major programmes to ensure that “programmes and schemes are not allowed to continue from one Plan period to another without an independent and in-depth evaluation.”

Outcome budget

The output/outcome budget is a complex task. It involves the following criteria.

Defining and measuring the output and the outcome from expenditure.

The output refers to physical measure of production and the outcomes deal with the effect of the policy and impact (Example: assets from expenditure on irrigation projects are dams and canals and the outcome is the increase in crop production and the efficient use of water. School and hospital buildings are the assets to be completed within timeframe and cost estimates, but the outcome is the quality of education and medical care).

Realistic cost assumptions to link financial budget provision with targeted output/outcome;

Designing a suitable system of financial and physical data;

System for internal check, monitoring and corrective action when needed; and

Presenting an annual analytical statement — comparing the actual financial and physical performance with that of budget estimates and targets.

If the new outcome budget is to fare better than the earlier performance budget and become a practical management tool, a special CAG audit of a few select cases will throw up the problems in adhering to the criteria mentioned above and any system weakness.

Omission of substantial non-Plan expenditure such as operation of schools, hospitals, irrigation projects from the output/outcome budget is a major flaw.

Expenditure on public private partnership (PPP) and direct transfer of funds to non-government bodies do not come under this output/outcome discipline. CAG can marshal data to draw attention to this lacuna in expenditure management.

Fiscal prudence

Another important subject for the audit scanner is action or rather non-action to inculcate fiscal prudence in government expenditure. A historic landmark in fiscal history is the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, by Parliament. It prescribes targets and ceilings for the budget deficits and thereby borrowings by government to finance expenditure. This is a commendable and timely legislation to control spending on non-priority and non-productive areas by taking loans. It also calls for a long-term view of fiscal prudence and sustainable public debt through Medium Term Fiscal Plan (MTFP) beyond the annual budget. But the implementation of this Act suffers from serious defects. Achievement of quantitative deficit targets is taken an end in itself and not as a means for achieving fiscal prudence. Deficit management has been done with the help of buoyancy in revenue, especially through disinvestment and revenue from spectrum auctions, off budget items and other means. Reform in expenditure policy and management has been put on the backburner. The MTFP presented with the annual budget is not supported by disaggregated data on revenue and expenditure projections and the underlying assumptions. There is no road map based on identification of the numerous specific problems in budget formulation, revenue mobilisation and expenditure policy and implementation with a time-bound action plan. An in-depth special audit by CAG of the implementation of the FRBM Act will be timely. CAG has the power and access to data for doing this. The Comptroller and Auditor General can recruit any technical staff needed for this non-routine audit (already an officer of Indian Economic Service has been taken on deputation). If this audit is done with a proper perspective, it can dispel the mistaken negative impression of audit as only a fault finder of individual irregularities.


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Prelims Test Series and Notes

Prelims Printed Notes (With COD)

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