Public Account – A Continuing Conundrum
“Public account by its very structure has created a lot of distortions in the government accounting system. Being inseparable from the cash balances and also allowing the government to use these funds at their discretion, such distortions have jeopardized the management of public finances in India. This also has serious repercussions on the fiscal deficit as many of the public accounts are interest bearing and interest is always paid from the revenue account of the Government. Efficient management of public finances demands separation of public account from cash balances of the Government. That will be possible only when the public account is separated from government accounts, freed from government controls and their management is entrusted to independent professional trusts. Apart from making these funds self-sustaining, this would also enforce much greater discipline in the management of fiscal deficits and public debt.”
Part XII of the Indian Constitution deals with government finance which is organized under three funds:
| Consolidated Fund of India or of the State Under Article 266 (1) |
Public Account of India or of the States Under Article 266 (2) |
Contingency Fund Under Article 267 |
|---|---|---|
| All revenues received by the Government of India or any state, all loans raised by the issue of treasury bills, loans or ways and means advances, and all moneys received by the Government in repayment of loans. | All other public moneys received by, or on behalf of the Government of India or of a State. | Fixed corpus to enable the Government to make unforeseen expenditure without prior legislative approval (e.g., expenditure on relief after a natural calamity). |
| Control: Article 266 (3) states that no moneys out of any Consolidated Fund shall be appropriated except with legislative approval, that is from the budget, under articles 112 to 117 for the centre and articles 202 to 206 for the states. | Control: No such approval has been prescribed for withdrawing any money from the Public Account, which involves other public moneys that do not belong to the Government as such. | Later to be recouped from the Consolidated Fund under the usual legislative approval procedures. |
Indeed, we are continuing with the public account as a legacy from the colonial rule; outside the subcontinent, no other country in the world allows such distortion in the public financial system. It is also important to note that Public Account stands merged with the cash balance of the government which creates its own problems for the management of cash balances.
Government accounts, recording all transactions of the above three funds, are maintained in three parts as per provisions of the Government Accounting Rules, 1990:
| Part-I deals with the Consolidated Fund | Part II deals with Contingency Fund | Part III deals with Public Account |
|---|---|---|
| Divided into Revenue and Capital Accounts. Transactions are grouped into Sectors depending on the nature of receipts or expenditure. | Transactions are grouped into Sectors depending on the nature of receipts or expenditure. | Its constituents are clubbed with the cash balance of the government in the government account. |
Public account balances are practically inseparable from the cash balances. Further, the public account balances, which are the accruals in the public account net of withdrawals, are automatically available to the government to borrow regardless of need. When the net public debt or net borrowing in the consolidated fund falls short of the fiscal deficit requirements, public account balances are utilised to bridge the gap, and if they still fall short, then the cash balance is utilised. As we shall see, this arrangement creates serious problems in cash management, sometimes leading to over-borrowing while having surplus and idle cash balances.
Structure of Public Account
Public Account comprises funds that do not belong to the Government, but which the government holds in trust and manages on behalf of their owners who can be ordinary people or government contractors or anyone, and sometimes even the Government itself when it holds taxpayers’ money outside of Consolidated Fund. There are five major heads of accounts under the Public Account:
| (i) Small Savings, Provident Fund & Other Accounts | (ii) Reserve Funds | (iii) Deposits and Advances | (iv) Suspense and Miscellaneous | (v) Remittances |
|---|---|---|---|---|
|
• Government is liable to repay the moneys received or has a claim to recover the amounts paid. • Government acts as a banker, receiving amounts which it later repays and paying out advances which it subsequently recovers. • Constitute a part of the overall financial liabilities of the Government. |
Used only for adjustment purposes; all initial debits or credits to these accounts are made pending final adjustments and cleared eventually by mutual adjustments once their final destinations are traced. All governmental / inter-governmental / departmental transactions pending availability of the requisite details in corresponding vouchers / challans that would identify their final destinations. It also includes temporary investments of cash balances in short term loans or Government securities at nominal rates of interest. | Intra- and inter-Governmental cash remittances between its various departments / ministries and also between the Reserve Bank of India (RBI) and various governments and government departments. | ||
- Provident Funds: Include the Public Provident Fund (PPF) and State Provident Funds which include GPF, CPF, Defence, Railways and Other Provident Funds.
- Small Savings: Include National Savings Deposit, Post Office Savings and Recurring, Post Office Time Deposits, Post Office Monthly Income Account, Senior Citizen Savings Scheme, Sukanya Samriddhi Account, National Savings Certificates, National Development Bonds, Defence Savings Certificates, Post Office Certificates, etc. All these are put together into the National Small Savings Fund (NSSF) from which investments are made by way of issuing securities to the central and state governments.
- Other Accounts: Include Special deposits by retirement funds with the Central Government and Insurance and Pension Funds like Family Pension, CGEGIS, State Government Employees’ Group Insurance Scheme, Post Office Insurance Funds, etc. They also include securities issued in lieu of subsidies to the Oil Marketing Companies, FCI and fertiliser companies, as well as some other special deposits and accounts.
- Reserve Funds: Created by debit to the Consolidated Fund to create reserves which are assets, some of which are interest bearing.
“Reserve Funds are created by debit to the Consolidated Fund to create reserves which are assets, some of which are interest bearing.”
| Interest bearing funds | Non-interest-bearing funds |
|---|---|
| Depreciation Reserve Funds of PSUs, Sinking Funds for amortization of loans raised by the Government and for other purposes, Hindu Religious and Charitable Endowment Fund, Various Development and Welfare Funds, State Roads and Bridges Fund, etc. | Famine Relief Fund, National/ State Disaster Response Fund (SDRF), Guarantee Redemption Fund, Railway Safety Fund, Rural Employment Guarantee Fund, etc. |
The Consolidated Sinking Fund (CSF) and Guarantee Redemption Funds (GRF) are maintained by the States with the Reserve Bank as buffer for repayment of their liabilities.
“The Consolidated Sinking Fund (CSF) and Guarantee Redemption Funds (GRF) are maintained by the States with the Reserve Bank as buffer for repayment of their liabilities.”
The Government creates these funds out of taxpayers’ money and then pays interest to these funds again by using taxpayers’ money; it also controls the use of these funds through its administrators who are its own bureaucrats, but without any accountability to the Legislature, as these funds are maintained outside the Consolidated Fund. Many of these funds also remain inoperative for a number of years; CAG had pointed out earlier that Rs 1,674.75 crore was lying in 48 dormant reserve funds of the Government of India by the end of 2014-15. The number of such funds lying with the states run into hundreds.
The Deposit head under ‘Deposits and Advances’ includes sums deposited with Government in the daily course of business by members of the public:
| Interest bearing deposits | Non-interest-bearing deposits |
|---|---|
| Deposits made in connection with revenue administration, deposits made in civil and criminal courts, security deposits taken from government servants/ contractors when required, public works and earnest money deposits, deposits made by electoral candidates, deposits of local funds of municipalities and panchayats, electricity boards, housing boards, universities, etc. | They are mostly in the nature of security deposits or earnest money deposits for public works. |
| Civil Advances: Relate to interest free temporary advances including advances of a permanent nature held by Government officers to enable them to incur contingent expenditure in the day-to-day administration like the Permanent Cash Imprest. They also include the Departmental Advances given to the Departments of Forest, Telecom, Railways, Defence, etc. | |
Analysis
As mentioned earlier, there is a problem in the way the government accounts are presented. In the government accounts, Part III - Public Account has Cash Balance in addition to the 5 major heads of account mentioned above. So, it would appear that all individual components of Public Account stand merged with the cash balance of the Government. But the cash balance is actually a balancing item, and is affected by all the three accounts: Consolidated Fund, Contingency Fund and Public Account. Public Account balances, being shown to be merged with the cash balances of the Government, thus inflate them and also make the cash management of the Government fraught with risks.
It may be mentioned that balances in Suspense and Remittances are transitional in nature pending their final identification and clearance and do not actually constitute a liability of the Government; the FRBMA 2003 also recognises this and does not consider these as part of the “Other Liabilities” of the Government of India. It would thus stand to reason to club the Suspense and Remittances balances along with Cash Balance and treat this as a separate balancing item, instead of treating these as part of the Public Account.
The way these accounts are maintained, especially the interest-bearing ones, defies all logic. For example, there was one fund created in April 1999 under the Small Savings called the National Small Savings Fund (NSSF) to which all public deposits under the Central Government’s small savings schemes (PPF, NSC, KVP, etc.) are credited. States were obliged to borrow 80 percent from this fund initially (and hence pay interest to the Centre), with the option to go up to 100 percent. This borrowing, strangely, was based on availability rather than requirement. Since 2002-03, the net collections were being invested only in State Govt. Securities and thus States are forced to borrow the entire proceeds. But the responsibility to repay to the investors lies with the Centre and these schemes are linked to tax deductions under sec 80 C of the Income Tax Act 1961. They carry interest higher than the market rates and these rates are administered by the Centre.
Securities issued to NSSF used to be a major source of financing the GFD of the States till 2006-07 when the interest rates became more favourable to the market loans and the NSSF share had dwindled; excess NSSF flows before that were also responsible for the subsequent build-up of surplus cash with the State governments.1
Following the recommendations of 14th Finance Commission, since 2016-17, save Madhya Pradesh, Kerala, Arunachal Pradesh and the Union Territory of Delhi, all other states and Union Territories have opted out of the scope of borrowings through NSSF investments and hence, NSSF no longer finances their GFD. For the Central Government, however, borrowing from NSSF continues to be a source of financing its fiscal deficit and such borrowing was shown under public debt as these were part of the Consolidated Fund; these borrowings comprised the investments in Central Government Special Securities against collections net of withdrawals and reinvestment of proceeds of such investments therein.2 The remaining liabilities, (i.e. total liabilities of NSSF – such investments) are treated as Public Account Liabilities of the Centre in the Union Budget.3
Total liability of Central Govt. on account of NSSF as on 31st March 2021 = Rs 14.27 lakh crore
| Rs 4.16 lakh crore | Rs 1.26 lakh crore | Rs 78,524 crore | Rs 92,178 crore | Rs 7.15 lakh crore |
|---|---|---|---|---|
| Invested in Special State Government Securities | Invested in various Government Undertakings | Accumulated deficit of NSSF | Investment related to Post Office Insurance Fund made through Private Fund Managers | Net outstanding liability under Small Savings, Provident Funds etc. |
“Provident funds, the most important constituent of the Public Accounts of the states, are unfunded debt of the State Governments carrying higher than market rate of interest.”
Provident funds, the most important constituent of the Public Accounts of the states, are unfunded debt of the State Governments carrying higher than market rate of interest. The net proceeds are entirely available to the states and though the Centre has the ultimate responsibility to repay the amounts to the depositors, it has no control over the loans taken by the states or their ability to repay the same.
Also, prior to 2009-10, the balances under Small Savings, Provident Fund and Other Accounts used to be in the total outstanding liability of the state governments and other public account balances were excluded as they had the effect of distorting the actual liability carried by the States. These balances often did not represent any real liability; further, their effect would show up in higher cash balances of the state governments leading to a position where most states have surplus cash balances and yet resort to heavy borrowings, the surplus cash being invested under Cash Balance Investment Accounts.
Many of these Public Account funds are created by transferring taxpayers’ money from the Consolidated Fund, and kept at the disposal of the Government. The license to do so freely often allows the Government to devise ingenious ways to defeat the normal accountability controls. One such control is the “Rule of Lapse”4 of funds. One mechanism the Governments often use to defeat such statutory control is to withdraw these savings from the Consolidated Fund and park them in the so-called Personal Ledger Accounts (also sometimes called Personal Deposit or PD Accounts) maintained under the Public Account so that the funds can remain there at the disposal of the Government without any legislative scrutiny - an aberration made possible by the nature of the Public Account.
Table 1: Number of Personal Deposit Accounts in States
| State | Total Number of PD Accounts as on March 31, 2020 | Balance as on March 31, 2020 (₹ Crore) | Nature of Balance (Dr/ Cr). |
|---|---|---|---|
| Andhra Pradesh | 1491 | 25476 | Cr. |
| Bihar | 252 | 3811.3 | Cr. |
| Chhattisgarh (2019-20) | 223 | 1585 | Cr. |
| Gujarat | NA | 1004 | Cr. |
| Haryana | 164 | 1871 | Cr. |
| Himachal Pradesh (2019-20) | 112 | 3 | Cr. |
| Karnataka | 71 | 3989 | Cr. |
| Kerala | 815 | 166 | Cr. |
| Madhya Pradesh | 816 | 4963 | Cr. |
| Maharashtra | NA | 10806 | Cr. |
| Odisha | 811 | 7047 | Cr. |
| Punjab | 161 | 43 | Cr. |
| Rajasthan | 1928 | 14383 | Cr. |
| Tamil Nadu | 68 | 1153 | Cr. |
| Telangana | 198 | 177 | Cr. |
| Uttar Pradesh | 12 | 10 | Cr. |
| West Bengal | 160 | 3465 | Cr. |
Source: CAG Audit Reports on State Finance of individual states
Table 1 shows the number and balances of such accounts lying with the states, which are substantial and distort our public finances and internal control mechanisms in these states.
The interest liability of the Government of India during 2020-21 on its public account balances was Rs 58,419 crore, or 8.2 percent of its total interest liability. In all other countries, similar funds are managed by professional bodies that determine their investment in appropriate assets so as to earn commercial interests to make these funds self-sustainable, without forcing the taxpayers to foot their interest bills.
Problems Associated with Public Account
1. Paradox of Surplus Cash and Over-Borrowing
The Gross Fiscal Deficit (GFD) of the Government- the total resource gap in the economy- can be computed as the sum total of its revenue deficit, capital outlay and net lending which is equal to the total expenditure (revenue plus capital) minus revenue and non-debt capital receipts. It is financed partly by raising public debt through borrowing under the Consolidated Fund, partly by using the Public Account resources and the rest by drawing down the cash balances. The entire resources under the Public Account are available to the Government and often the Government is forced to resort to over-borrowing – such over-borrowing leads to building up of idle cash balances that earn very little from their investments in low-earning Treasury Bills, while the Government continues to pay much higher rate of interest on the borrowed funds. Most state governments resort to over-borrowing despite having substantial surplus cash balances that could otherwise be economically utilised to finance their fiscal deficits.
RBI is the banker to any Government and besides the State’s deposits with RBI, the cash balance of the State also comprises the investments held in the Cash Balance Investments Account, cash and permanent advances for contingent expenditure with Departmental officers plus the investments of Earmarked Funds under the Reserve Funds. Under agreements with the RBI, every State Government has to maintain a minimum cash balance with it (about Rs 2-3 crore). If the actual cash balance falls below the agreed minimum on any day, the deficiency is made good by taking normal and special ways and means advances/overdrafts and if there is any surplus above the specified minimum, it is automatically invested in 14-day Intermediate Treasury Bills (ITBs) of the Government of India. RBI also conducts weekly / fortnightly auctions of treasury bills for maturity periods of 91 days, 182 days or 364 days (Auction Treasury Bills or ATBs) that carry slightly higher rates of interest.
Negative Carry: But whether for ITBs or ATBs, the interest rate is significantly lower than that paid on the market borrowings by the governments and hence the interest paid constitutes a negative carry for them. Since surplus can be invested cash only in ITBs or ATBs, particularly for the states, they earn lower returns on these investments compared to the interest they pay on their market borrowings; ideally, they should then use their surplus cash balances to meet their GFD financing requirement and thereby curtail their market borrowings.
The surplus cash balance is the difference between the total financing raised by the government (net of all repayments and disbursements) through borrowing under the Consolidated Fund plus the surplus in the Public Account less their GFD requirements. While the borrowing under Consolidated Fund can be adjusted according to the needs, the surplus in Public Account is totally beyond Government’s control, and this is what leads to over-borrowing. In 2016-17, the over-borrowing by the Central Government was almost Rs 9000 crore, on which the annual average interest liability was Rs 620 crore calculated at the weighted rate of 6.9 percent, which was avoidable. However, the over-borrowing has come down in the succeeding years, and in 2020-21, it stood at Rs 7000 crore, significant considering the interest liability it imposes. Over-borrowing by the States as a whole, however, were not significant, through there would be individual variations within the states. Use of the Single Nodal Agency is expected to improve the cash management by taking a holistic view of the government transactions spread over many accounts.
2. Impact of Overborrowing
Over-borrowing will crowd out the private borrowers from the debt market whose cost of borrowing would necessarily increase resulting in higher prices for goods and services produced by them, besides carrying inflationary potential to the detriment of the economy.
But the most perilous and unpredictable consequence of this cash surplus would be its impact on the Union finances, because all cash surpluses from the States invested in treasury bills are automatically available to the Central Government and constitute part of its total financial liability. This is a huge reservoir of resources and temptation to indulge in populism at the cost of these funds is often irresistible, even if we have to ignore their inflationary potential. If these surpluses could be utilized pragmatically to finance the fiscal deficits of the States, the public finances in our country then would be a different story altogether.
3. Fictitious Liability
By its very structure, the Public Account creates a large number of distortions and anomalies in Government accounts. Its balances are included as Other Liabilities of the government besides Public Debt while computing the total Outstanding liabilities of the government. But some of these liabilities are fictitious rather than real in the sense that they do not represent taxpayers’ money but funds which the government receives as a banker, returnable after some time as, for example, in the case of earnest money deposits. These artificially inflates the government’s liabilities.
4. Loss to Government
Merging of the public accounts into the cash balance creates further distortions; these balances get invested in Treasury Bills with the RBI, earning nominal interest while the actual interest liability of the State Government on these accounts is much more, hence the Government loses money on that account. It is to be noted that interest liability is paid from the Consolidated Funds, even on public account balances in respect of all interest-bearing accounts. Hence public account creates a liability for the exchequer even though the legislature has no control over it, neither in respect of the balances nor in respect of the interest. It exercises very limited oversight in respect of utilisation of some of these funds.
5. Lack of Oversight
Often, funds are transferred out of the Consolidated Funds and kept in the Public Account, outside the constant watch of the auditor and the legislature. Thus, funds transferred from the Consolidated Fund to the Personal Deposit accounts in the Public Account avoid lapse, funds transferred to various reserve funds – many of whom bear interest, balances in numerous deposit accounts, many of which become inoperative over a period of time, continue to distort not only the accounts but also the public finances. No country outside the subcontinent has such a convoluted system of public accounting. These reserve funds are administered by Secretaries of concerned departments and are vulnerable to misuse also.
Recommendations
The above anomalies will continue to distort the Government account and public finances of the State as well as Union Governments until the public account is completely separated from the Government account. It is high time the Public Account funds are separated from the cash balances and their management entrusted to professional managers relatively free from Government control. That would need appropriate institutional and administrative mechanisms to be set up for the purpose, without perhaps any Constitutional amendment to be made for the purpose.
For this, the CAG, CGA, RBI must arrive at a convergence, in consultation with the Union and State Governments to consider separation of public accounts and taking it outside of Government control in a phased manner. This will make these funds self-sustaining and would not create any additional burden for the taxpayers.
It is important to appreciate that efficient debt management requires equally effective cash management which will not be possible till the time the cash balances are separated from public account. At the same time, since on many public account heads, the Government carries an interest liability, it is imperative that these funds be deployed in such manner so as earn the maximum return without compromising the safety of money that belongs to the public. Since these funds are not taxpayers’ funds, it is improper to make the taxpayers shoulder the burden of paying interest on these funds. These funds should be deployed in such a manner so as to make them self-sustaining in discharging their interest and other obligations.