Recasting India’s Fiscal Architecture for Viksit Bharat 2047 | Part II
Public Financial Management System in India
Constitutional and Institutional Foundations
Public Financial Management (PFM) refers to the systems through which public resources are planned, authorised, spent, accounted for, and audited. In India, while the term itself is not used in the Constitution, its core elements are firmly embedded in constitutional provisions. Articles 112 to 116 require the presentation and legislative approval of the annual budget, ensuring that no expenditure occurs without parliamentary sanction. At the State level, similar provisions establish legislative control over public finances.
Independent audit forms the second pillar of PFM. Article 148 establishes the Comptroller and Auditor General of India, whose mandate includes auditing government accounts and reporting to legislatures. Together, legislative authorisation and independent audit form the backbone of India’s PFM framework, anchoring fiscal management in accountability rather than executive discretion.
Budgeting and Fiscal Planning
The Union Budget remains the primary instrument of fiscal planning and policy prioritisation. Over time, the budgeting process has expanded beyond annual expenditure approval to include medium-term perspectives through documents such as the Medium-Term Fiscal Policy Statement and outcome-oriented budget annexes.
Despite these reforms, official assessments consistently point to weaknesses in budget credibility and planning. CAG reports and parliamentary committee observations note that budgets often remain incremental, with limited linkage between stated policy objectives, allocations, and measurable outcomes. Frequent supplementary demands for grants, particularly late in the financial year, weaken the reliability of original budget estimates.
The Economic Survey has also emphasised that while budgetary priorities increasingly reflect strategic objectives such as infrastructure expansion, outcomes depend critically on execution capacity, procurement efficiency, and coordination across ministries and levels of government.
Accounting, Cash Management, and Treasury Operations
India follows a cash-based accounting system, managed by the Controller General of Accounts at the Union level and corresponding authorities in the States. This system enables close control over cash outflows but provides limited information on accrued liabilities and long-term fiscal commitments.
Both the Reserve Bank of India and the CAG have highlighted inefficiencies arising from fragmented cash balances across government accounts, even as governments continue to borrow. Weak cash forecasting and the proliferation of bank accounts have led to avoidable interest costs. Although efforts to improve cash management and consolidate accounts have progressed, implementation remains uneven across States.
The cash-based framework also complicates assessment of fiscal risks, particularly those associated with guarantees, public sector enterprises, and extra-budgetary resources. These concerns are repeatedly flagged in audit reports and Finance Commission analyses.
Audit, Oversight, and Accountability
Audit is one of the strongest elements of India’s PFM system. The CAG of India conducts financial, compliance, and performance audits, placing its findings before legislatures for scrutiny by Public Accounts Committees and Committees on Public Undertakings.
However, several official reviews point to gaps between audit findings and corrective action. Legislative committees often face time constraints, capacity limitations, and backlogs, reducing the systemic impact of audit observations. Moreover, emerging fiscal risks, such as public-private partnerships and special purpose vehicles, are not always fully captured within traditional audit frameworks.
Despite these limitations, CAG reports remain the most credible independent source of assessment of expenditure quality and procedural compliance in public finance.
A Framework for Evaluating PFM Performance
To assess public financial management systems in a structured manner, international practice often refers to the Public Expenditure and Financial Accountability (PEFA) framework, developed by institutions including the World Bank and the International Monetary Fund. PEFA does not prescribe fiscal policy choices or spending levels. Instead, it provides a diagnostic framework to evaluate how effectively public finances are managed.
The framework assesses PFM performance across four core objectives. The first is aggregate fiscal discipline, which concerns the credibility of budgets and adherence to approved limits. The second is strategic allocation of resources, which examines whether budgets reflect stated policy priorities. The third is operational efficiency, focusing on how effectively public funds are converted into goods and services. The fourth is transparency and accountability, covering fiscal reporting, audit, and legislative oversight.
In the Indian context, these objectives provide a useful analytical lens for interpreting findings from CAG audits, RBI studies, and Finance Commission reports.
Digitalisation and the Public Financial Management System
One of the most significant recent reforms in India’s PFM landscape is the rollout of the Public Financial Management System (PFMS), administered by the Controller General of Accounts. PFMS aims to track fund flows from the Consolidated Fund to implementing agencies and beneficiaries, particularly in centrally sponsored schemes.
Official assessments acknowledge that PFMS has improved payment efficiency, reduced delays, and enhanced transparency in fund transfers. It has also supported Direct Benefit Transfer reforms by reducing leakages and improving beneficiary targeting.
At the same time, CAG evaluations caution against overstating the role of PFMS. PFMS is primarily a transaction and payment platform and does not substitute for robust budgeting, project appraisal, or outcome evaluation. Real-time payment data, by itself, cannot ensure expenditure efficiency in the absence of strong departmental capacity and credible performance indicators.
PFM Performance in Practice
Viewed against the PEFA objectives, India’s PFM system presents a mixed picture. Aggregate fiscal discipline has improved relative to earlier decades, supported by FRBM-type rules. However, strategic allocation remains constrained by rigidities such as committed expenditure and fragmented scheme design.
Operational efficiency varies widely across sectors and States, reflecting differences in administrative capacity. Transparency has improved through detailed budget documentation and digital platforms, yet gaps persist in the disclosure of off-budget borrowings, contingent liabilities, and fiscal risks. These weaknesses are consistently highlighted in CAG reports and Finance Commission assessments.
Sectional Assessment
India’s public financial management system rests on strong constitutional foundations and a credible audit framework. Reforms such as PFMS and outcome budgeting have improved transparency and payment efficiency. However, official evaluations point to persistent weaknesses in budget credibility, cash management, and the linkage between spending and outcomes.
Strengthening PFM requires sustained attention to institutional capacity, legislative oversight, and expenditure quality. Without these improvements, further technological or procedural reforms will have limited impact on fiscal effectiveness.