PERFoRMANcE

Buocnrrnc ron Pr,enNEo DnvsLoPIvnNt

PERFORMANCE BUDGBTING FOR PLANNED DEVELOPMENT

S SASTRY

Centre

under the auspices of for Policy Research

RADIANT PUBLISHERS

fCopyright @ 1979 by K.S. Sastry

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information
storage and retrieval system, without permission in writing from the Publishers.

First Published 1979 by Radiant Publishers E-l55 Kalkaji, New Delhi-110019 Printed in India by Dhawan Printing Works 264' Mayapuri, New Delhi-l10064

To
the memorY
my

of

father

Kambhampati SambaYYa

(d.1e37)
who contributed his bit to the freedom struggle '

ONTENTS

List of APPendices

List of Tables List of Diagrams

Preface

x x

xi
xvi
2 6

List of Abbreviations I. BuocnnNc

household budget

Government budget

II. PleNrqrsc

AND BUDGETING

12

Resources of the

countrY 13 National income accounts 15 Planning for economic growth

15
18

Planning for economic development 18 Public expenditure in the national economy Budgeting-an instrument of planning 2I EfrciencY in budgeting 23
Income

distribution

24

III. PrnrorureNcr BuocnuNc The tndian context 32

The techniques of management 33
SYstems

27

aPProach

34
35

Linear Programming

Value analysis/Value engineering Performance budgeting-a total

management sYstem 38 Stages of Performance budgeting

Management bY objectives 36 CorPorate Planning 37

viii

PenronuaNcn BuocnrrNc

FoR PLANNED

Drvrr,opMnNr ^"

IV. Orrrcrrves I Conflict of goals and objectives 46 ls public expenditure justified? 53 V. Onrrcrrvrs

II

5g

Efficiency objectives 65 Setting efficiency objectives 65 Efficiency objectives in the agriculture

Objectives

Organisations and objectives 5g Objectives of individual programmes 60

of public enterprises

sector

66

70

Vl. Ara rvsrs I Criterion for selection gl Value Added to Capital Employed .g2 .A,nalysis of revenue programmes g6 Income distribution g7
Wages as benefit 93 Advanfages of the criterion 96

VII. AN,crvsrs II demand gg Vaiuation of benefits l0l Indirect benefits 103 Valuation of costs 107 Valuation of capital employed l0g Discounting costs and benefits 110 Shadow price for foreign exchange l15 Implementation 1 t g
Assessment of

gg

VIII.

Cr,asslrrcarroN
A new classification in India Demands for grants 127 Consideration of the budget
124
131

Dl

fX.

Oncn

NrslNc

133

Demarcation of roles 133 Organising for agricultural development 136

oNrBNrs
Problems of decentralisation 138

1X

Financial Powers l4l Accounting system 143 The ethos of performance budgeti:rg 145

X. Ever,uluoN
Evaluation

148

criteria

150 153

Management information system 154 Evaluation of public enterprises 157 Role of audit 162

PerformancerePorting

XL CoNcl-ustoN

166
1'66

Implementation

Planning as a management

system

168

Antyodaya

172

Urgency of the Problem 175 Appendices Select BibliograPhY Index

177

2tr
2r8

LIST OF APPENDICES
I Constitutional Provisions relating to Government
Budget

National Income Accounts 3 Principles of Commercial Accounting 4 Discounted Cash Flow Technique 5 A New Classification of Government Transactions
2

177 180
191

199

205

LIST OF TABLES
I Average Yield of Land, 1975 2 The Balanced Diet: Availability and Requirement 3 Consumption of Principal ltems of Food in India: A Comparison with other Countries 4 Capacity Utilization of Selected Industries in India.
1976177

14 48

49
169

Irrigated dwing 7971172-1975176 in some Selected Projects as a percentage of the area planned to be irrigated 6 Present Value Factors for Selected Discount Rates 7 Cumulative Present Value Factors for Selected Discount Rates

5 Average 'Area

170
203 204

LIST OF DIAGRAMS
1 Five Stages of Performance Budgeting 2 Decision-making Areas in the Management of the Economy 3 Age Composition of India's Population, 1971

+J L73
L75
188

4 Circular Flow of Financial Resources

PREFACE

would suffice to solve most of world's problems"'

'The difference between what we

do and what we could do'

Mahatma Gandhi

with budgeting of public expenditure' A public expehditure budget can be looked at from two perspectives' One is that it is an instrument of planned development' The other is that it is an instrument of management within the Government. We shall discuss how the budgeting system in Government can be remodelled keeping in view the objectives of planned development we have set for ourselves and the general feeling that the performance of public adrniuistration f,as fallen short ofthe expectations, even to the extent of calling into question some of the development objectives' Though performalce budgeting has been 'accepted' in our country ovei a decade back it has not received the attention that it ieserves for absorption and integration into the rvorking methods of budgeting. Meanwhile; there have been further developments in the country of its origin-the United States' and other democratic countries. The attempt is to graft the
Tsrs noor
DEALS

principles and techniques of management successfully employed in the private industrial sector into public administration' The new species are variously known as P'P'B'S', Programme Budgeting; Output Budgeting, etc. The book takes a synoptic view if ttre' exlsting state of knowledge on the subject' lt is' thus' a budgesecond generation attempt though the term performance ting itself is sufficiently meaningful and evocative' Ii considering the manner in which the budgeting systern in

our country may be lemodelled, on the lines ofthe above mind the mentioned lforts in other countries, we shall bear in

and 'cultural' differences (a) between a free enterprise economy have adopted in our country' a planned economy of the type we

xii

PnnronrraaNcr

BuocrttNc

FoR PLANNED DgvptopunNr

ing to the nuts and bolts as it were. While these ideas can be applied to both sides of Government budget, that is, to the taxation and public expenditure programmes alike, the need to do so is more urgent, the scope iarger and hopefully, the pay off greater in respect of public expenditure programmes. The book, therefore, will be confined to public expendrture pro_
grammes.

thorough-going analysis ofthe costs and benefits of programmes, and indeed, through proper management of programmes, attend-

and (b) between management in the private industrial sector and public administration The theme of the book is that efficiency in budgeting is a qT_str_on not of mere magnitudes of resources and outlays but of defining the objectives and priorities and that, at any given level of resources, efficiency can be improved through a more explicit definition of goals and objectives, through greater clarity and consistency in ordering the priorities, through a

It has long been assumed that budgeting is an accounting job, even as planning an economist's job and implementation an administrator's. That public administration in general and budgeting in particular need an inter-discipli_
nary appronch is yet to be universally recognised. Meanwhile, there is much mutual recrimination. Accounting is pedestrian; economics is pedantic: statistics is unreliable: plannine is unrealistic; audit js negarive. Administration, which cin bind these disciplines together, is myopic. Management, administra_ tion's younger cousin, is outlandish, politics, which should impart a sense of purpose to the process of development, is just a power game. A11 these reflect a partiai view ofthe lotal situation. Unless each discipline understands and appreciates the role of other disciplines and bends itself ro the common cause there can be no development. This approach runs through the book. The motivation for writing the book was provided by double dissatisfaction; one, rvith the way decision making is organised in Government. and, two, rvith what is offered by the academic community for improving this decision making. Wbile the first dissatisfaction is widely shared what is recommended for adoption in Government is, often, based on study of a single discipline, even a single slrand of a discipline, and is, therefore,

pnprlCn

xlll

unhelpful to the civil servant who, with a1l his faults' must the total situation. There is, thus, a felt need ui*uyt "oo.ia.r in the field of social sciences, as in the case for extension work of biological sciences. just an The book, then, is not a product of research' It is put across a extension effort, although we shall not hesitate to mechanism or a new approach where appnew insight, a new ropriate. Budgeting has generally been far too esoteric for most people connected with development one way or another' It is Lop.a tnut this book will enhance their understanding of the
subject.

cater, ;fe;ences and quotations have been deliberately restricted to the minimum. Again, at the risk of oversimplifying matters' the cpncepts and techniques have been presented in a rudimentary fashion. This course has been adopted because any attempt to deal with the concepts and techniques in all their complexities cannot but detract from the purpose of the book' Likewise, the data in the book, taken from a variety of sources, have been presented in a summary fashion to give an ideaof the broad magnitudes rather th'm a precise indication' It is difficult for a serving civil servant to write on a subject which he has been dealing with. He has to be objective enough to be convincing to the lay reader but cannot afford to be too critical ofthe existing practices and procedures' A balance has to be struck. This has been my attempt'
Acknowledgements

ieeping in mind the readership to which it is intended to

I am grateful to Sarvashri A'K. Roy, S' Ranganathan' A' Baksi and Gian Prakash, successive Comptrollers and Auditois provided General oflndia for the inspiration and guidance they A'K' Mukherji' during different stages of rny career' Sarvashri g.B. lnar, Y. Krishan, T. Rengachari, A'R' Shirali and B' Maithreyan are among the senior officers of the Indian Audit
my experiences along

and Accounts Services who moulded my thoughts and directed

Ministry of Finance, I received considerable encouragement from Dr. I. G. Patel, late Shri M'G' Kaul, Shri H'N' Ray' Dr. Ajit Mazoomdar, Shri M. Narasimham and Dr' Man Mohan Singh. I am deeply grateful to all of them' None of

lruitful channels' While serving in the

xiv

Prnronuexcr BuoctrtNc

FoR PLANNED Drvr

lopurNr

them, however, bears any responsibility for the views expressed in this book. I also think my other colleagues, too numerous to mention individually, in the Indian Audit and Accounts Department, in the Ministry of Finance and in other Deparrmentl with whom I came into contact in my professional capacity as -auditor, budget officer or otherwise. My acknowledg.-.oi i, also due to the Indian Institute of public Administration, the Institute of Secretariat Training and Management and the Universities and other institutions in India which I had occasion to visit to

am also thinkful to prof. H.R. Seshagiri Rao of the Institute of Public Enterprise, Hyderabad and professor Lakxmi Narain of the Osmania University for helpful discussions on the management of public enterprises. For providing me certain insights into the nutrition problems facing the country, I am thankful to Dr. S.G. Srikantia, Dr. K. Visweswara Rao antl Smr. B.V. Thimmayamma of the Natiooal Institute of Nutri_ tion, Hyderabad. I am especially thankful to my friend Dr. V.A. pai panandi_ ker, Director, Centre for Policy Research, New Delhi for offer_ ing helpful comments on the final draft and, more crucial, for undertaking to publish the book under the auspices of the

tion.

from the British Council. For the help rendered in writing this book I think my friend Dr. T.R. Rao of the r.r*ational lron Ore Board (formerly of the National Council of Applied Economic Research) and Shri p.S. Appu, now Additional Secretary, Ministry of Agriculture, both of whom had gone through the first draft, which demanded considerable patience, and encouraged me to proceed further. Dr. T.R. Rao helped me through successive drafts and has placed me under a debt of obligation. Another person who has gone through the successive drafts and made valuable contri_ butions is my nephew, Shri C.V.S.K. Sarma, a student at the Delhi School of Economics. He deserves my warm apprecia_

and the Institute of Local Government in the University of Birmingham in the U.K. which I visited under a fellowship

participate in seminars, lectures, discussions, etc. I also acknowledge my debt to my friends in the University of Manchester

Centre,

Last, but not least,

am thankful to my mother Suryakant_

Pnnrect

xv

my sons' amma, my wife Lakshmi, my daughter Sharada, .and me in many ways iurrrUutnotty and Krishnamurty, for helping of withdrawal uoa, -ot. important, for bearing with my moods sympathetically and cheerfully' during the uttJ'.u." despair, of years t have been actively engaged in writing the "oopf" addition to my official duties' book in
Hyderabad

24 lantary 1979

K.S. SASTRY

LIST OF ABBREVIA TIONS

PB PPBS MBO VACE IRR NPV MIS ROI

Programme Budgeting Planning, Programgfug and Budgeting Systen Management by Objectives Value Added to Capital Employed Internal Rate of Return Net Present Value Management Information Systems Return on Investment

CITAPTER I

BU DGETIN G

A suocrr ulv

be defined as an estimate of receipts and expenditur'e for a specifled future period' It can be a house' hold budget, a factory budget, an offce budget, a departmental budget, a Government budget or a national budget. The specified future period may be a month in the case of a household budget, a year in the case of a Government budget or five years in the case of a national budget. Whatever be the
budget, the concept is the same, namely, that we bring together the cash inflows and cash outflows. Preparation ofa budget begins with an estimate of receipts

and eipenditure for the future period. This initial estimate usually reveals a certain gap between receipts and expenditure, the estimated expenditure being generally more than the

estimated receipfs. Then, one takes a close look at the expenditure side to see whether any of the items can be reduced or

eliminated and at the receipts side to see how far the various' items can be augmented. If the gap is not eliminated altogether, it is met by borrowing, a pdvate loan in the case of a household, an overdraft from bank in the case of a factory,
or deficit financing with the Reserve Bank in the case of Government, Ultimately the two sides match. Thus, the ingredients ofabudget are the concept of looking ahead, the concept of numerical estimation and the concept of balancing the inflows and outflows'

strike the reader that the concept of a budget so need not necessarily relate to financial inflows andl defined -outflows. Indeed, it is not. For sxample, one can take a region in the country, and prepare a water resourco" natural

It will

Readers familiar with Government budgeting may find the treatment: in this chapter somewhat elementary and may like to skip this as welh
as the next chapter which deals

with the interface between Planniig;

and budgeting.

PTRFoRMANCE BUDGETING FoR PLANNED

DevTIopunnT

budget giving the total water resources available in the region from rainfall, surface run off of rivers and ground water resources on the one side, and consumption of water for industry, agriculture and domestic use on tbe other side. It will, then, be a water resources budget for the region. To take examples nearer home, every day, week, month or year is a {ime budget. This book will concern itself with Government budget. The oncept of a budget in Government is as old as the concpt of accountable Government. It was probably evolved about itwo centuries back, when the Executive, or the Monarchy as iit then was, became accountable to the Legislature consisting of people's representatives. The quintessence of thc latter's control over the Executive was thought to be and, in theory, continues to be the supreme prerogative of the Legislature to impose taxes on the people. ln order to justify the proposals for such imposition the Executive had to bring forth estimates of the items of expenditure which it intended to incur along with estimates of receipts from the taxes already imposed. Only then, would the Legislature consider any fresh proposal for taxation. Thus, the concept of budget originated in public administration. This is a comforting thought for those of us who work for the Government since most of the modern management concepts we will be discussing had their origin in ,the private industrial sector.
"4.

household budget

Let us examine the concept of budgeting a little more closely starting with something familiar. Let us take a household budget. If the income and expenditure ofa liousehold are set out in the standard format of a budget they will appear as shown in the table on the next page. Budget balances itself whether a household is spending more 'than what it earns or is saving. The reason is simple. A budqet is prepared on the basis of cash inflows and outflows. In case 'the receipts.are more than the expenditure, tbe surplus will 'be in the form of either regular savings or in ready cash-a .temporary saving, and will appear as such on the expenditure side as a balancing entry. There can be no temporary deficit -in the budget because expenditure cannot physically exceed

BuocrrtNc
INcoME
ExPENDITURE

Item Salary Rent Interest Dividend/Profit

Amount Rs.
300

Item Food

Amowtt Rs.
250 20 20

o
60 40

Fuel Clothing
Housing Household goods Education Festivals
Cinemas

40

l0

l0
10

Transport
,lO0

20 20

Saving

0
400

Tor.lr

the receipts.

Excess expenditure

has to be met by borrowing,

long term or short term, which will be reflected as a receipt on the income side. Budget has another characterstic fleature. So long as there is inflow and outflow ofmoney, even if we do not consciously budget for the household expenditure, certain relative valuation of what money is buying for us is automatically implied in the manner of our spending. For example, if we spend rupees two on a taxi to reach a place in ten minutes we may have

unconsciously ruled out a number of other alternatives like reaching by bus paying only twenty paise but spending half an hour. In spending the money on taxi we have valued the twenty minutes time we saved, and the extra comfo , ar one

rupee and eighty paise that has been spent extra. lf we want to improve our budgeting we must realise that money spent on an ltem has a number of alternative uses. Only if we fnd that the rupee and eighty paise saved has no better alternative use than saving us the rwenty minutes time we should resort to going by taxi. For this we would need to investigate and analyse the other possible alternative uses. We are not talking of parsimony; just that we should consciously consider the alternative ways of spending the limited money available and decide on that particular item which
would give us the maximum possible satisfaction. Thus, budgeting not only makes us think ahead but also think ofthe purposes of spending rroney. This is also the only way we can exercise some control over spending. We cannot, as we unwittingly permit ourselves to do in regard to Govern-

PERFoRMANcB BUDGETING FoR PLANNED DEvELoPMENT

even when the prices of foodgrains have doubled because we will then get only half the quanrity of foodgrains. There are certain "physical" dimensions to all items of spending. fn some cases there are immediate compulsions to take into account these physical dimensions, as in the case offoodgrains. In others, they may not be apparent. Nonetheless, when allocotions are made in the budget in money terms these physical dimensions are also simultaneously determined on the basis ofthe prices of respective goods and servioes. The question is whether we would like to consider these physical dimensions first and then make the money allocations or vice versa. While each item of expenditure has a physical dimension; the pattern of expenditure in the budget as a whole reflects certain objectives and priorities. For example, if we are spending rupees twenty on cinemas and rupees ten on education, it means that recreation is given a higher priority than education. If our objective is to impart good education to our children
are we justified

ment budgets, afford to mai<e arbitrary allocation to various items of expenditure. For example, we cannot say that we shall allo_ cate the same amount for the expenditure item .food' as earlier

Collection of such information no doubt entails some labour and, often, the data may be imprecise, But, the exercise of

pattern of spending automatically implies a set of objectives and priorities though they may not necessarily be consistent. The question is whether we should not consider the obiectives and priorities first, examine the physical dimensions neit and then make a conscious allocation of the money resources available in the budget. Establishment of objective-physical dimension-money alloca_ tion nexus not only requires advance tbinking but also additional information. For example, if the objective of the item 'food' in the household budget is to provide the best possible nutrition we need to kuow (1) the outritive values of different items of food like foodgrains, pulses, milk, eggs, meat, fish and vegetables and (2) the market prices of these commodities.

think about these objectives and priorities in advance of making the money allocations. If we refuse to do this advance thinking itis not as if we are not "deciding" on these objectives and priorities because each
Budgeting should make us

in according a higher priority to

cinemas?

BuocnrrNc collecting such information will lead us closer to the best nutri tive diet we can have within the budgetary resources available to us. As some one pointed out the other day, if only we know that the protein content of cashewnut is less tha:r that of an equal quantity of groundnut we may not pay twice the money to buy cashewnut in preference to groundnut. Likewise, if we know that guava (amrud) contains 200 times more Vitamin C than an equivalent (by weight) of apple our choice in the purchase of fruit may be different. We do not have to know the precise nutritive value of each food item and prepare an elaborate budget. But, we should know the broad magnitudes of relative lutritive values and the relative prices to enable us to make choices which will take us nearer the objective of the best possible nutrition within the limited budget. Even when rve do planning and budgeting at the macro level we should think of micro level choices and help adjust production and prices so that the choices are improved in the desired .directions. Otherwise, the individual households will base their decisions on the prevailing prices and availability' Macro level policies set the boundary conditions for micro level choices. While the normal monthly budget described above may be termed as the revenue budget, the household has also a capital .budget. The left hand side ofthe capital budget comprises the
accunrulated savings over the years and borrowings and the right hand side comprises the capital items of expenditure, as illus'trated below:

'

Receipts

Expenditure Land House

Accurnulated savings

Borrowings

Higher education
Marriage

While selection of items of expenditure, the inter se priorities f,or different items of expenditure, and allocation of resources (monthly income) as among them are important in the revenue budget, they become even more important in the case of capital budget. The accumulated savings and the money that one can

borrow at any time are not likely to be adequate to meet all the capital obligations. Suppose, on the left hand side, the.two

PERFoRMANoE

BuocmINc ron preNnro Dnvrr,oplrrnt

items- add up to Rs. 20,000 while the requirements for tbe individual items on the right hand side u.", ,uy, nr,-A,OOO fo, tt" land, Rs, 15,000 for the house, nr. fO,dOO foinighr eOucation and Rs. 12,000 for the marriage. The housebold Jannot, tnerefore, meet all these obligations at the same tim.. bUu;ourty, there is no point in undertaking all of them simultaneously. F_or example, it just does not make sense to make an arbitrary allocation of Rs. 5,000 for each ofthe four items on the right hand side. If the household does so, it will find itsetf in the piquant situation where ir would have advanced money fbr the purchase of land but has no money to complete the formalities and take possession, where the son is sent home by the college authorities because he has not paid the fees, where tie barat party has arrived but there is no money to serye them khanal No ons conducts his afairs so senselessly, but the point is worth noting because when the affairs of Government are conducted in a similar manner we are unable to prevent or even detect it. _ If there is proper phasing ofcapital expenditure, the house_ hold cannot only neet all the obligation, ,u"".rrfu|ly over a period of time but also enhance its ability to meet tbese obliga_ tions. For example, if Rs. 6 thousand is invested on the tand, it starts earning some revenue, which will appear on the left hand side of the revenue budget in the shape oi either rent from the share cropper or net income if one is cultivating himself. In any eve4t, the effect ofspending on the capital buJget item land is that the revenue surplus item in the ,auaooa bud-get is increased which will, in turn, go to increase the left hand sid-e of the capita} budget, namely, accumulated savings. The household can then turn its attention to acquire the second capital asset, namely, house. The revenue surplus item will then inciease further there_ by increasing the accumulated saviug item in the capital budget and further increasing the ability of the householdio meet the rem_aining capital obligations. Thus, a careful phasing oF capital expenditure enables the household to establish a proper nexus between objectives and physical parameters and between the latter and money resources.
Government budget

income in the household budgets which Govern."oi

. Government budget, in the simplest terms, is that portion of *op, up

BUDGETING

good' For example' the and spends on their behalf for comnton CentralGovernmentspendsaboutRs.2500crorespelannum al alerry: of about on1f," a.i"o.. of the country, this is'

;p;;; ;;;ty ;;il;;;;rtv

ri..
,fr"

per head, because individuallv the citizenscannot each of them spends ttre defence of the country even if ".'"^"ir. on purchasins a weapon or two' The defence to collect of the country is so complicated that it is necessary and orgapool ,ntr""t"*V from the household into a common education or alf"*e. Likewise, organisation of health'.

otherwel|aremeasuresormeasurestodeveloptheinfrastructure to iu.ifi i"t like power and transport need pooling of resources
be utilised for common good' -common pool of resources mdinly th;;gh i;;"t collected from the households' The relationship is illustrated below:

Aou.toa.ot buikls this

,
Hoasehold budget

I'

No rAx srruATloN

Recelpts TorAL Receipts TorAL lI.

400 ExPenditur" 4oo

@
4oo 0

Government budget

0 0

Public

ExPenditure
Ar
10%

GoVERNMENT IMPosEs AN INcoME TAx

or

TNCoMB

Household budget Receipts trers incorne tax

TOTAL

400
40
360

Expenditur

360 360

Government budget

ReceiPts from income tax

40 40

Public

ExPenditure

N
40

Torll

IIL

GoVERNMENT IMPosEs AN ExclsE DUTY AT 25%

oN ALL

GooDs

Household budget Recelpts

400

Expenditure
Excise levies included in the Prices at which goods and services are purchased

320,

400

80 400

PrnronuaNcr

Buocrtnc ron pr,eNxro DrvrroplrcNr 80 g0

Public

Government budget iReceipts from excise levies

Expenditux

EO

TorAL
Iess

80

Since excise levies increase the prices the household buys to the extent of the levjes. Thui the impact of either type of tax is to effectively reduce the private expenditure of households, that is, tbeir consumption expenditure, and provide revenues to the Government for public expenditure. The only diference is that in the case of direct taxes like income tax the transfer from the household budget to the Government budget is directly from income side to income side; whiie in the case of indirect taxes like excise levies the transfer from the household budget to the Government budget is from expenditure side to
income side.

respondingly put up its fare and incurs losses, the State Government concerned will have to bear them in some form or the other. If the State Government does not make up the Iosses through some other form of taxation it will have to get this money from the Centre in some form or the other. The Central Government can do so only by further raising the excise duty on motor vehicles and parts or some other commodity). Similarly, the truck operators who bring consumer goods to the town would also pass on to the consumers the extra taxes thev have to pay. So will all the firms producing goods and services who own or operate any kind of motor vehicle like pick up van or staff car. Thus, the excise and customs duties are, in general, paid by the common people. Only where the concer_ ned goods are finally consumed by particular sections, as in the case of alcohol or cigarettes, can it be said that the tax burden is not borne by the common man. The levies on even the so_ called luxury goods Iike petrol and air conditioners, used by

Bulk of the resources raised by Government are through indirect levies like excise, sales tax and custons duties which, barring a few exceptions, are passed on to the common man. Sometimes, the incidence may not fall directly on tbe common man. For example, the customs or excise duty levied on motor vehicles an.d parts is not directly payable by the man who does not own a motor vehicle. But, these duties increase his bus fare. (Ifthe local Road Transport Corporation does nor cor-

BUDGETING

firms producing goods and services will, ultimately, be passed on to consumers through higher prices charged for their
products.

In the case of direct taxes like Corporation tax also' in the passed on conditions obtaining in our country, the tax brirden is correspondingly higher to the consumers through charging prices for the goods and services. We should' thus, remember' thut, it effect, all of us are paying bulk ofthe taxes levied by 'Government. The efficiency and economy with which all tbese resources are deployed on public expenditure programmes' is, therefore, of vital concern to all of us. The attitude of the people towards Government on the eve .of Independence was conditioned by the memory of systematic .exploitation ofthe peasantry and the trade by the colonial Government. All revenue collection was seen as exploitation' All public expenditure programme were grudging concessions' not altogether free from ulterior motives' by the alien rulers' context' A11 public property symbolised oppression. In such a from the uuuding r.nanut or makiirg an easy rupee on the sly public expenditure programmes or wanton destruction of public property could be readily rationalised' A sea change in this attitude is a prerequisite for the success of development programmes financed through massive mobilisation of public
We have earlier seen how a h<jusehold can improve the efficiency in the allocation ofresources available in its budget through greater clarity of purpose and greater knowledge and information on what money can do to satisfy its needs' As many economists have ruefully realised man is not all that rational in his day-to-day behaviour. Tradition, sentiment and other human prejudices and emotions play a great part in the decision making on even such mundane matters as spending money. There is no suggestion that Governmeht can be un' mindiul of these considerations in the mental make-up of its citizens in taking decisions including those on budgetary allocations. But, since the resources placed at its disposal belong
resources.

to the entire conmunity it is incumbent on Government to enas sure that decision making in Government is as rational case, is not guided by the non-rational possible and, in any 'attitudes, if any, of members comprising it'

l0

Pm.ronuaxcs BuocrrrNc pon pr,eNnro

DEVELopMENT

with Government. It is the citizen,s responsibility to ensure that his representative in the Legislature brings toiear on the process of allocation of resources his objectives and priorities. This_is achieved, first,. by ensuring rhat adequate knowledge ald information are made available to the members of Legislature, and second, by himself gaining access to them and debating the issues involved publicly so rhat the presentation of such knowledge and information to the Legislature does not degenerate into a ritual.

The citizen too has a responsibility in this regard. He should help improve the efrciency in the allocation of iesources pooled

details in the Consititution or laws framed thereunder. This to be worked out from time to time through mutual goodwill and cooperation between the Legislature and the Execu_ tive. Wbat is really important is the acceptance of the philosophy ofsharing the knowledge and information relevant to the activities of Government to improve decision making all_
has

The Constitutional provisions relating to Government budget are detailed in Appendix 1. It may be seen therefrom that the Constitution adequately provides for the control of the Legislature over the Executive in the matter of both raising the resources and spending them. What is not provided is the kind of information and the level ofdetail that should be furnished in the budget documents. When the activities of Government have become multifarious and where the needs of the situation may change rapidly, it is also not possible to provide for these

round.

When the budget is presented to the Legislature it is not. enough if the legislators plead for inclusion of more pro_ grammes on the expenditure side or oppose the levy of fresh taxes, both of which they may do in the interests of the constituents they represent. They should also examine the efficiencies and economies implied in the budget proposals on the expenditure as well as receipts side. For this purpose, they will be well within their rights to demand that the various budget estimates should be properly analysed and presented to them. Thus, a legislator interested in more funds for the edu_ cation programme should concern himself not merely rvith that programme, but also with the economies and efrciencies implied in all other programmes. Only in tbe light of such an

BuPcnrtnc

ll

informed debate can he hope to get more tesources allocated to his education programme. The legislator interested in irrigation may like to plead that water should be supplied free to encourage highet agricultural production, but he must make out a case foat the benefits from such a programme of subsidising agriculture are more than the benefits from any other progiu--. on which an amount equal to the cost of supplying water free may be spent. Such an overall examinationof all the receipts and expenditure is clearly the purpose for which Constitution makers have made the provision for the submission of a comprehensive annual financial statement (popularly known as budget) incorporating estimates ofall receipts and all expenditure for the next financial Year. It is, thus, obvious that any improved budgeting system should not become either a mechanical or an esoteric exercise' The will and aspirations of those who give ultimate sanction to the budgets must be reflected in them. The objectives and priorities arrived at through organised political process must form the guidelines for the preparation of the budgets which, in turn, strengthen that Process. While efficiency is the touchstone of such a system, it must
be ensured that efficiency

criteria subserve wider social objectives. Efficiency is not an end but a means. Neither can it exist in isolation nor can it be a facade for exploitation. A11
enterprise

is

nothing but the result of exploiting others through shifting costs, buying at unremunerative prices, selling in sheltered markets, operating at liberal margins, or contriving deman$ through high pressurc advertising. Or an enterpising
group 6r region may flourish at the expense of less enterprising groups or regions. What Gunnar Myrdal called the "backwash" effect of development is both real and substantial. To arrive at genuine efficiency, such exploitation has to be subtracted.a
Efficiency is enterprise minus exploitation.

is not efficiency.

The efficiency claimed sometimes

*Besides denoting the elementary mathematical operation subtraction also refers to a common light phenomenon. Tbe selective absorption of colours by a transparent body to give the appearance of specific colours is also known as subtractive process'

CHAPTER

II

PLANNING AND BUDGETING Il l- opvrr,oplNc country, the twin objectives of optimum development of resources and their .qoitubl. distribution to satisfy the aspirations of the people cannot be easily achieved if decisions in these respects are left entirely to private indivi-

foreigo exchange; d) avoid wastage involved in excessive investments in the production of goods and services with low priority for the people at large; e) prevent avoidable lags between investments and returns through ensuring balanced growth in the economy as between different sectors and indus_ tries; and f) reduce economic inequalities as between different
regions and different income groups.

duals, not merely because some or many of them may be selfish but also because individuals or groups will not have all the knowledge and information necessary to see that their decisions do not conflict with those of the others_something which should be ensured even in their own interest. Some overall framework is necessary. This is provided by planning. Planning seeks to a) fully employ the human resources; b) quicken the pace of development of other natural resources: c) make the best possible use of scarce resources like capiia.l,

The instruments at the disposal of Government to achieve the objectives of planning include (l) legal and administrative controls; (2) monetary policy; and (3) fiscal.policy. Legal and administrative controls (sometimes called direct or physical controls) include licensing of investment and trade in specific goods and services, restrictions on possession of property, restrictions on movement of goods, regulation of wages, incomes and prices, rationing of goods, etc. Monetary policy is aimed at ensuring that the aggregate money supply and the pattern of credit flows subserve the overall economic and social objectives. Fiscal policy deals with decisions relating to taxes and borrowings on the one hand and public expenditure (including

PLANNING AND

BUDGETING

13

public investments) on the other. Fiscal policy as adumbrated in the budgets has been the main prop of our planning since Independence. It is through the annual budgets tha,t we have mobilised resources and planned for public expenditure programmes on a large scale' As someone said, budget is the cutting edge of the plan' Our purpose in this book is to sharpen this instrument, to explore
the directions in which improvements are possible'
Resources

of planning is to secure the optimum use of human and other resources available to the community, it can be undertaken only in the context of the resource base of the country. A word on the progress made in utilising the available resources is, thus, in order. Let us begin with a story. Suppose we want to go to a place 500 kilometres away in a car. We would like to reach it before night fall to avoid any untoward happening. The car is somewhat old, and is not in a very good condition. Unfortunately, the road is also rough. Keeping these in mind we start quite early in the day. But, rvith great difficulty we reach only 400 kilometres before it is dark. Have we made progress? Yes, quite a lot considering the odds against us' Have we reached the destination? No. This story should be prominently kept in mind throughout reading this book. There is no attempt whatsoever to belittle the achievements we have made or to spread cynicism. Quite the contrary is the purpose. The idea is to see whether we can do better and, somehow, reach the destination. Let us
proceed.
'

of the courfirY Since the basic purpose

People are our most precious resource. We are more than 600 million now. Of these, more than 20 milllon are wholly

unemployed.

Apart from this, on the most conservative estimation, over 30 per cent or about 200 million are said to be living below the poverty line for the reason that there is not enough work for the able bodied among them' Our human
resources are, thus, grossly under'utilised. Even land" which is acknowledged to be scarce

in relation to the size of human resources, is under-utilised. Of the total geographical area of 328 million hectares, the cultivable land

l4

PERFoRMANcE BuDGETINc FoR PLANNED

Drvtr,oprr.ratr

of the ultimate potential of 216 billion kilowatt hours per aonum. Against proved reserves of 25,000 million tonnes of coal and 150 million tonnes of mineral oil, thc two other pstablished sources of energy, the annual production is of the order of 100 million tonnes and l0 million tonnes respectively. Our reserves of iron orc at ZI,S0O million tonnes are stated to be about 25 per cent of world's reserves but our production of iron ore accounts for only 3 per cent. The list
can be extende d ad nauseam.

is reckoned at about 165 million hectares. The net sown area in anyyear is, however, only abot 140 million bectares. 'Only 40 per cent of our utilisable water resources, estimated at 870 billion cubic metres per annum, are put to use. The generation of hydro-electric power is less than 15 per cent

It

sources but also that the efficiency with which we work the tapped resources is low.

is not only that we have inadequately tapped our rederives

For a country 70 per cent of whose population

fustenance from agriculture the productivity ofland is woefully low as may be seen from the data below:

Avrucr

TABLE I

YrELD oF LnNo, 1975

(quintals
Rice Wheat

per

hectare)

Cotton (lint) Groundnut (in shell)

Saurce: Statistical Outline of Limited.

India 18.3 13.4 r.6 9.2

India,

Highest in the world

61.9 (Japan) 38'9 (France) 9.4 (USSR)

28.8 (USA)

1978, Bombay:

Tata

Services

Let us look at our animal wealth. Twenty-five per cent of world's cattle (cows and bulls) and 50 per cent of world's buffaloes live in India. Ilowever, the average milk production of our cows and buffaloes is only 300 litters per annum compared to the yields of 3000 to 4000 litters per annum obatined
in some of the "developed" countries. Despite the vast coastline

and several rivers, the catch of fish at about a million tonnes per annum is said to be only 10 per cent of the potential catch,

PleNullc .q.lo Buocrtilc

l5

One of the principal objectives of planning and, hence, of fiscal policy, should, therefore, be to secure a larger and a more efficient use of resoutces already available to the community. This will, in turn, enhance our ability to tap more resources because financial resources in real terms are nothing but an index of the level of development already attained in mobilising human and physical resources. National income accounts An inrportant branch of economics basic to the understanding of planning and budgeting is the national income accounting. also called social accounting. Appendix 2 explains the national income accounts. lt may be seen therefrom that these accounts are based on the concept of circular flow of financial resources-from consuming households to producing firms which, in turn, pay factor incomes to households enabling them to pay for their consumption. The reader is advised to grasp this concept well, if necessary by ref'erring to any standard book on the subject.
P

for economic growth When we plan for economic growth we expect the national income (please see Appendix 2) to increase from the present level to a desired higher level as illustrated below:
lanning
VALUE ADDED

sy DrrnnrNt Ssctons

(crore rupees)

Present Future level Increase Growth

Ievel

planned
7,810

Rate

Agriculture and
allied services ;Industry, mining, power, transport, Trade, Banking,
Services, etc.

27,0002

8r0
840 3,250

3.o%
8.O%

20,000 2r,600 1,600 18,000 65,000

18,840 68,250

Net Domestic
Product

4.7% 5 0%

^Ihe value added by each sector is the output or the value of production /ess the value of bought out raw.materials, power,

16

PERFoRMANcE BuDcETTNG FoR PLANNED

DrvnopurNr

components, services etc., bought out from other sectors. The value added by each of the myriad industries comprising a sector worked out similarly add up to the value added of that
sector.

preparing a national plan on a long term think in aggregative terms and plan for an overall growth rate. But, if we want to improve upon our past performance in planning what we need to do is to break up this overall growth rate into specific targers year by year, sector by sector, industry by industry, plant by plant, and instal a, management system whereby each of them does, in fact, produce what is targetted for it. Planning "models" postulate the relationship of the desired growth rate with a) savings or investment in the economy expressed as a ratio to the national income and b) efficiency of the investments expressed as the ratio ofoutput to capital. The growth rate is thus a function ofthe two ratios.r putting. in the simplest form, we can step up the national product either by increasing the capital equipment through additional investment or by improving the eftciency of the capital
basis we must necessarily

At the time of

product

equipment already installed. Suppose the present net domestic

of Rs.
of

65,000 crores

is

the result

capital stock

ing at Rs. 100 lakhs producing net output or value added of Rs. 32.5 lakhs in a year). If we continue to work at the same Ievel of efficiency, we can step up the value added by Rs. 3,250 crores (a growth rate of 5.0 per cent as desired) by
increasing the capital stock by Rs. 10,000 crores. Alternativeiy, by improving the efrciency of output of capital stock from 32.5. per cent to 34.2 per cent we can obviate the need for additional investment, In actual practice the arithmetic is not that simple. In anv case, we may have to step up both investment and efficiency. But, unfortunately, we have paid far too little attention to the latter, namely, the possibility of improving the efficiency of l One of the earliest and simplest growth models, called Harrod-Domar. model, is expressed as G:s X k where G is growth rate, s is the,
sayings ratio and

Rs. 2,00,000 crores in the economy producan average rate of 32.5 per cent (i.e. capital stock

of

aggregate.

k is the incremental outputlcapital ratio,

PLANNING AND

BUDGETING

t7

all the more regrettable because in a poor country the capacity to save and invest, that is to
existing capital stock. This is
step up the other ratio, is severely

limited'

indeed, one way

ratio is

efficiency ofcapital stock' Suppose, a thermal plant is operating: at 50 per cent ofthe optimum efficiency. In order to double the' thermal power we must first look into possibility of doubling:

to

of stepping up the savings or investment'' enlarge the national product through increasedi

the output ofthe plant already in operation rather than go inr for another plant and operate both the plants at 50 per cenf efficiency. The latter will only mean unnecessary addition to the capital investment to produce an output which could well be obtained through better operational efficiency. If we ignore the aspect of efficiency with which investments alrcady made are producing, and hence of the real resources they are generating, we will be settling for a lower resource base for current and future investments. Can we have economic growth, or growth in national income without any increase in real consumption? The answeris yes. There is no physical yaldstick to measure economic growth; we can measure the growih of a boy by the increase in his height in inches, the growth offertilizer industry by the additional quantity of fertilizer produced. But, we have necessarily to measure growth of the economy as a whole in terms of moneyThis can lead to two distortions: 1 When prices increase, that is, the same quantity of goods' produced or consumed carry higher prices, there is increase in the aggregate money value of national product or national' income. Hence it is necessary to measure growth, at constant prices, that is with reference to prices prevailing in a base' year, through the device of index numbers. 2. The second kind of distortion is less obvious but more sinister. Suppose we take a meal in a wayside dabha in a village' It may cost us rupees two at the most. In the national income' accounts its value will enter as rupees two, in the product account from the point of view of the dabha owner and in theconsumption account from our point of veiw because l.re has' produced and we have consumed. Suppose that we decide to' iake the next meal in a posh hotel in Bombay. Supposc further that our food habits are simple and we insist on taking foodr

18

PenronuaNcl BuocrrrNc ron pr,aNNto DnvrlopueNr

to pay rupees

-nters the national income accounts at twenty rupees,

of the same qrlality and quantity. Nevertheless, we may have twenty for the meal. The value of this meal

that

is,

ten times the value of the first meal, although the quanrity or quality of food has not changed at all. Thus, if everyone decides 'ito have his or her meals in pcAh hotels the output of the hotel ,sector will multiply ten times without any change in the eiutritive value of food or what it means to us in real terms. It is, therefore, necessary.to go into real contenl of production and consumption implied in the estimates of national income projected for the future.
Planning

is considered a wider concept than growth. Development incorpcrates the qualitative aspects of growth also. When we talk of growth, we can say, referring to the above example, that the output ofhotel sector has achieved a tenfold growth. However, if our concern is development we are boundto have serious reservations on the utility of such growth. In other words, there can be growth without development. Thus, whenever there is talk in terms of growth rates, we should demand a more precise statement of pattern and quality of growth implied by those growth rates. Development implies real improvement in the quality of life. In any civilised community, this is judged by the standards of education, medical care, public health, water supply, sanitation, recreation, cultural activitives, etc. Our planning effort includes considerable public expenditure outlays in all these fields.
Development
Public expenditure in the national economy From the point ofview of the economy, public expenditure is complementary lo private household expenditure as witl be clear from tbe following presentation relating to expenditure of households and Government in the field ofhealth.
Houqenoro BuocEr
Rece ill ts

for economic development

Rupees

Expencliture

Rupees

XXX

XXX

XXXX XXXX XXXX

Health

X
P

XXXX XX

XX

PteNNIuc elqo BuocrltNc

GovtnNMel,lr BUDGET
Receipts
Rupees

19

Expenditure

Rupees

XXX
XXX

X X
X

XXX
XXX

XXX XXX XXX XXX XXX

Health

X X X X X XXX

Total expenditure in the economy on providirg bealth services to the community is P+Q, where P is the private household xpenditure on health and Q is the public expenditure on health. All such 'consumption' expenditure, on food, shelter, clothing, ducation, health, etc. constitute the consumption sideof the national income accounts whereas the figures shown on page 15 represent the product side. (See Appendix 2) In the context ofplanned development, public expenditure national 'operates on a large scale on the product side of the no longer be conomy also, that is;'aJl public evpenditure can treated as common consumption expenditnre on behalf of the households. Public expenditure then becomes complementary to

the expenditure incurred by "firms"

(as distioguished from "households") which produce goods and services' The effect in ruch cases is to subsidise the cost production. When this happens the "firms" can either reduce the prices at wbichthey sell the goods and services or make extra prof,ts. Let us illustrate what happens when Government decides to grant lertilizer subsidy'
Flnl,Irn's Buocrr
(BEFoRE CovERNMENT DEcIsroN)

Price charged for produce

p
Frice charged for produee

Cost of fertilizer Other Costs Farmer's net income

B C

P:A+B+C

Fnnrratn's BuDcET (A!-TER GovennltlNr DEcISIoN) Ahernative I (.Farmer paises on the beneft to consumer)

P-X
P_X

Cost of fertilizer Olher costs Farmer's net income

A.X
B

P.X:A-X+B+C

20

PERFoRMANcE BuDcETrNc FoR PT,ANNED

DEvnopunNr

Alternalive

(Farmer does not pass on the beneft to rhe corsumer, Price charged for produce p Cost of fertilizer

II

Other costs
Farmer's net income

A-X
B

C+X p:A_f B_f c

questions will need collection of a lot more information than is presently available to Government. There is some cost involved in collecting such information. But, there can be no improvement

public expenditure will be inevitably low. What is more important is to look into the composition and ultimate beneficiaries of public expenditure. ln the ierminology of the economists, a ..disaggregated" approach is more relevant to developing countries. The questions to be asked are more specific and they should be asked in respect of each block of expenditure. There is littte doubt that answers to many of the

is obviously reiated to the resource base ofeach country and the degree of modernisation of the economy in the sense of large segments of activity coming under the organised sector. Where a large proportion of people are engaged L agriculture, which isfar from being an organised sector, the prolortion of

this book. There are no theoretical limits to the quantum of taxes to be collected or the quantum of public expenditure either in absolute terms or as a proportion of the national income. In our country, the proportion of expenditure to the national income is less than 20 per cent, although we have accepted socialism as a national goal. The proportion in some ofthe countries which do not glorify socialism as a national goal is higher. In the United Kingdom, for example, it is about 50 per cent. This proportion

of others. How much to collect and from whom are important questions much debated by economists. On what programmes and to whom the resultant incomes accrue are the-concerns of

Taxes are collected from the incomes of some; the moneys so collected when spent on different programmes add to the incomes

It will be obvious from the description hitherto of a Govern_ ment budget that whether a tax is imposed or an expenditure is incurred, in the final analysis, it is an jncome transfer operation.

PLANNING AND

BUDGETING

2I

in budgeting without in depth analysis based on such information. Further, such information and analysis should be shared with the public not only as basic requirement of a democratic form of Government, but also to elicit their approval, to encourage ,them to fulfil their part of the bargain in terms of sacrifices tbey have to make, and to avoid tlre possibility of mistakes if the .analysis were left to be made by a single agency.
Bud g e t ing-in strument of p lanning

medium term operational objectives and make allocation of

human, physical and financial resources to programmes designed to achieve these objectives most effectively at the least cost' However, in a vast country like ours there is a limit to the level 'of detail to which planning proccess can be extended by a centralised agency like the Planning Commission. Further' where objectives of planning are sought to be achieved through public ,expenditure, such programmes in our system of parliamentary control. as elsewhere, have necessarity to be incorporated in the annual budgets of different tiers of Government. Moreover, in a static view of planning, objectives remain .constants and optimisation of resource allocation gets prime importance, But, when resources are allocated to create resources' objectives often undergo quantitative and qualitative change' The earlier allocation then becomes sub optimal necessitating a revision. This is the dynamic aspect of planning. For imparting this dynamism to the process ofplanning it is necessary, among other things, to evolve a budgeting system which delineates the standards of judgement on the success achieved in implementing the planned activities, deviations from which call for a revisio'r in planning itself, and provides information on the attainment or otherwise of those standards. Without such an effective feed

Planning attempts to translate long term national goals into

back, planning process will remain static and will fall way

behind the exPectations aroused'

Thus, budgeting of public expenditure in the context of 'planoed development would need to i) preserve and reinforce ihe system of parliamentary control envisaged in the Constitution,ii; permit decentralisation of planning activity, and iii) provide an effective feedback to planning.

22

Prnronrr.reNcn

Buocrrrxc pon prennro DrvEr,opurNr

investment

all the new programmes included in a Five Year Plan for the first time in fields like education and health, even though they may not be investment programmes, are treated as .,plan,' programmes. On the otber hand, all
Besides, other expenditure including maintenance or continur.ng expen_ diture on,'plan" investment completed or .,plan,, prog;ammes terminated prior to the cument Five year plan are treated as

_ of the Five Year plans generally extends -to all programmes.

A_word on the coverage of plans and budgets. The coverage

"non plan" progr4mmes. This classification of expenditure as ,.plan', and .,non plan" has the built in disadvantage tbat as we go through more Five Year Plans the maintance or continuing expenditure on programmes completed in the earlier plans increases proportionately. However, in public mind all ,.non plan" expend iture is "non development" expenditure and even t-he inevitable and not at all undesirable, inorease in ,.non plan', expenditure is viewed with disfavour. This gives rise to a) lack of managerial attention to maintance of projects and institutions already built up, and b) denial of adequate funds for maintenance. The pitiable state of many of our irrigation systems, no! to speak of schools and hospitals, due to lack of resources and proper maintenance is proof of this neglect. It is, therefore, very important that there is no artificial distinction between ..plan" and "non plan" programmes. In any event, they should be considered together in the matter of allocatjon ofresources. dav
to day management, and evaluation.

The relative roles of planning and budgeting are not really that the former is primarily concerned with the plan or invest. ment programmes and the latter with the non plan or maintenance programmes but that, in relation to each sector of economic or social activity, the former is concerned with the resources consumed and returns obtained by Government as well ds non_ Government agencies, while budgeting is primarily concerned with only the activities, of Government. Both planning and budgeting should have a long term perspective.from the res_ pective angles. Likewise, both planning.and budgeting should be concerned with the investment and mainlenance progranmes
under each sector.

PLANNING AND

BUDGETTNG

23

itself vith the investFor example, budgeting should concern factories under Government ments in and maintenance of textile investplanning should take into its broad view the ;;;;i;;

entire *""i ""J _^rrt.nu*. policies and programmes of the. textile of public sector iei"tii;'l;dt."y. rrt"t' in respect of the central and state ;;;;;;.;;rh" "onc.rned Departments units' C.""t"-."" would function as decentralised planningannual through the

^ budgetarY

,.rp-titif

ity which they will discharge

Process'

EfficiencY in budgeting ""ii".""i. -"[:*ti*

Government in formulating publio as an instrument expenditure programmes ls to use the budget the economy' the foi prornotiog the overall developmen-t of in the allocation of resources in Govern-

of

".r"ipi "i.miiency *."iitag" gets widened on

two counts' First the expendientire community' ture incuried by and benefits accruingtothe considered' not merely the Government, would have to be benefits in Second, besides assesstng the expenditure .and, Iabour' water' nnuo"iul terms, physical resources like land' as a whole power etc. available or accruing to the community have to be taken into account' private ftt" metttoOology evolved and successfully used in the profits oo maximise their inOustriat sector by-individual firms to to then through a more efficient allocabenefits acciuing
other

tionoftheirresourcescannotthusbe..adopted''inGovernment maximise are ;;;;t"t. What the Government has tothose accruingnot the to the retuins ir benefits accruing to it but concerned A private producer ofsteel is ".*-""iVasawhole. makes' A Government'producing steel is ;t;;1t. profits he ;;;;t;.i with the benefits to the communitv' even as it must budget' To keep in mind the returns accruing to Government producer's o,ri'lt aif"r.otty, while the firm optimises from the fromthe to it;J;il;;ilif(not ni.*,Government has But'optimise ths- methodology its own) point of view' iooru-"ri' to suit the needs of Governme be "adapted" "un ".rtuinly a suitable definition of the "costs" (as incurred by i"ag.u"g bi (as accruing to the the Iommunity as a whole) and "benefits" communitY as a whole)' profit and To illustrate the point, let us look at a simplified

24

Psnponlraxcr Buncrrrsc ron pr.enrEo Dnvrropl,rrNr

iloss account of a firm. (The reader who would like to famili. ,arise himself with the principles of comnercial aicountl.ng, {nay see Appendix 3). To be consistent with the presentation of household and Government budgets we will showthe receipts on the lefr hand side and expenditure on the right hand side).

Sale value of the product

60

(in lakh

rupees)

etc. salaries Depreciation Interest Profit

services
Wages and

Cost of bought out rawmaterials, power, components,

ZO

14 10

4
12

60
12

50

value added which is counted in computing the national income aud wbich should concern the Government.

of Rs. 60 lakhs /ess the cost of bought out raw-materials etc. of Rs. 20 lakhs and depreciation of Rs. 10 lakhs). It is this

From the point of view of the firm, the ,profit' earned is Rs. lakhs. However, from the point of view of the economy the 'value added'by the frm is Rs. 30 lakhs (value ofthe product

with reference to all the capital resources employed from the point of view of the economy. We shall discuss in detail this riterion for judging eficiency from the point of view ofthe economy in the chapters on Analysis.
Income distribution Does the foregoing discussion mean that we are concerned only with value added in aggregative terms ? Far from it. When 'we speak of the community we should not forget, even for a

Further, while the private industrialist is concerned with maximising the profit with reference to the capital invested by him, Government is concerned with maximising the value added

:moment, that it consists of individual human beings. And, there are wide disparities in incomes accruing to different groups of individuals. The uneven distribution of incomes is only partly due to their unequal efforts or differences in individual efrciency. For the rest, it is the result of factors beyond thr control of individuals. A Government committed to wel-

PlaNNrNc eNo BuocnTtsc

fare of the community as

25

a whole must,' therefore, correct this

incomes and,

factors leading to such uneven distribution. We are, thus, concerned with the relative shares in the value added of profits, wages, salaries, etc. Indeed, we would like to know more grrecisely the income groups to which these incomes are flowing. There is yet another aspect. Flow of factor incomes and the value of the product are two sides ofthe same coin, as we know from the national income accounts' Given the consumer needs, a particular pattern of income distribution can result only in a certain pattern of demand for goods. Thus, there can be no question of increasing the output of any product without a corresponding change on the income side. For example, under the present pattern of income distribution in the country there is not enough demand for foodgrains which we are now producing because certain people do not earn enough incomes necessary to buy the foodgrains they need. Increasing the production of foodgrains further without altering the income distribution is, therefore, meaningless unless we are planning for export of foodgrains. However, tbe concept of circular flow of incomes also means that there catr be no redistribution of incomes independently ol tbe pattern of production of goods and services. If incomes areto be redistributed, therefore, pattern of production will also have to be changed by reallocating productive resources to those industries and activities which will result in the desired pattern of incomes ard produce goods and services that will be demanded by those to whom incomes accrue as per revised pattern. This is where comprehensive planning and budgeting ,come in, The income required to meet the basic minimum needs of an individual was worked out by an Expert Committee as rupees 20 per mcnth (at 1961-61prices). The average monthly income in 1977-78 was rupees 30 per month (at 1960.61 prices). Thus, ,even at the existing low levels of exploiting our resources, we rare not poor, Only some of us are poor even as others are rich. If 30per cent of the population are below the poverty iine and are having incomes below rupees 20 per month, the balance 70 per cent are having monthly incomes much above

uneven distribution

of

if

possible. correct the

26

PERFoRMANcE BuDGETING FoR PLANNED DrvsropNlnNr

rupees 30

However, such a redistribution of incomes may not be a practicable proposition in lhe existing social and political environment. And, in the context of public expenditure, we are really talking not of redistribution of incomes bfi of distri' bution of incomes arising out of the public expenditure progrdmmes. We, therefore, need to explore ways of ensuring that the programmes improve the income distribution to the desired

(at 1960-61 prices). Goinga step further, ifthe 30 per cent who are poor today are assured a monthly income of rupees. 20 (at i960-61 prices) each, through an appropriate policy of redistribution of incomes, the balance 70 per cent can still have an average monthly income of more than rupee s 34 (at 1960"61 prices), that is, 70 per cent higher than the individual income required to meet the basic minimum needs.

extent. It must be ensured, at the very minimum, that income distribution with <iifferent blocks of public expenditure programmes will not be worse than income distribution without src}r' programmes. Programnes may be justified on the basis of benefits accruing to the community as a whole. But, if they are taken up regardless ofwho benefits from them there can be increasing pressures to undertake programmes that will benefit the more powerful groups leading to adverse economic! social and political consequences.

CHAPTER III

PERFORMANCE BUDGETING
THr rrnu rERFoRMANcE Budget was originally coined in the United States by the' First Hoover Commission in 1949, when it recommended the adoption of a budget based

upon "functions, programmes and activities". When it was first applied in the U.S. Department of Defence it involved "(a) casting budget categories in functional terms as opposed to objects of expenditure and (b) providing work cost measurements to facilitate effcient performance of prescribed activities reducing, as far as possible, the work cost data to discrete measurable units". It was designed to be areflection of what the Government was doing, how much, and at what cost. Attention was focussed on the ends to be served by Covernntent
rather than the amount of money spent. In his book Government Bwlgeting (1956), Jesse Burkehead defined performance budget as follows: "A performance budget is one which presents the purposes and objectives for which funds are requested, the costs of programmes proposed for achieving these objectives, and quantitative data measuring

the

accomplishments programme."
Preparation

and work performance under each

how much money to raise, from what sources, and what are the items on which the money so raised shall be deployed, that is, to derermine the allocation of budgetary resources. As we have seen, we can improve the efficiency in this allocation if we take into account not merely the fiuancial magnitudes but also the physical aspects ofvarious items in the budget. Theoriginal concept of performance budget emphasised this linking of physical and financial aspects of programmes and is, certainly, very relevant even today when we are dealing with budgets of various organisations, whether a household, firm or a Government department or agency. Nothing written in this book

ofa

budget

in

its bare essentials is determining

28

PEnronulNcr

BUDGETING

ron PrlNNro

DEvELopMENT

should be construed as minimising the importance of tbis

approach. However, when we are dealing with budget at the level of Government as a whole mere linking of physical and financial aspects, while still very necessary, is not adequate. A household or a firm may not make an explicit statement of its objectives

and priorities. But Government needs to for the reason that Government does not have needs and aspirations of its own. Rather, Government budget will have to reflect the needs and aspirations of all the people who are governed. Moreover, the amount ofmoney raised by Government, the sources
from which it raises the money, and the programmes on which it spends the money have wider implications because of both the magnitude and the comprehensiveness ofthe taxation and expenditure programmes. The manner in which these programmes are inplemented havd, likewise, wide ramifications. It is

therefore, necessary to emphasise the objectives and purposes of Government, to lay down the manner in which the programmes would be implemented and to ensure that they are, in fact, duly implemented. The second generation efforts in performance budgeting, therefore, aim ar a comprehensive management system. The emphasis in such a system is on analysis of programmes to provide an organic link between objectives on one side and physical targets and achievements on the other, investing some content in the form er and imparting some meaning to the latter. The degree of sophisticated techniques that may be used in such analysis depends not only on the nature ofthe programme and its objectives, but also on the availability of relevant data and the cost of collecting and analysing data. As the concept became more broad based new terminology was coined. A task force of the Second Hoover Commission in the United States coined the term Programme Budgeting (PB)

in mid-fifties. The new approach was embodied

in the term

Planning, Programming and Budgeting Systems (PPBS) adopted by the U.S. Department of Defence under the leadership of

Robert S. McNamara, now President of the World Bank. Its main goal was to rationalise policy making by providing a) data on the costs and benefits of alternative ways of achieving proposed objectives and b) output measurement to facilitate the

PERFoRMANcE

BuocrrtNc

29

posed ones.

efective attainment of the objectives selected out ofthe prolt involved considerable analysis for identifying and selecting long term objectives, determining alternative programmes to achieve those objectives undertaking cost benefit analysis, making long term investment choices and structuring

them into budgets specificaily indicating programmes, activities, etc. The new systems incorporated ideas from economics and "systems analysis" while the earlier attempts in Performance Budgeting derived the techniques mainly from cost accounting and "scientific management". While the accent of performance budgeting was on implementation of a work plan or cost based budget that of PPBS was on planning and its integration with budgeting. The new system received powerful support from the U.S. President in 1965 who commended it in the following words:
Once in operation, it

f.

identify

our national

will enable us to goals with precision and on

a conti-

nuing basis; 2. choose among those goals the ones that are most urgent; 3, search for alternative means of reaching those goals most effectively at least cost; 4. inform dverselves not merely on next year's but on the second, third, and subsequent years' costs of our programmes;

5. measure the performance of our programmes to ensure a dollar's worth of services for each dollar spent.
The chequered history which the system has since had in the United States is a matter for detailed comment elsewhere. Briefly, it can be stated that the failure resulted from not so much the system or the conccpts underlying it but the manner in which it was implemented. There can be no greater proof of this than that such systems, under different nomenclatures, have since been implemented with greater success in other countries, notably United Kingdom and Canada (to confine
ourselves to the English speaking world). The United Nations Manual for Programme and Performance Budgeting, brought out in 1965, quoted with approval the definition given by Jesse Burkhead in his book Government Budget-

30

PERFoRMANcE Brr'DcETTNG FoR PLANNED

DgvrtopltrNt

ing (referred to earlier). However, this was very much the original concept of Performance Budgeting. Subsequent developments widened the concept. The UN Manual took no specific note of them. Indeed, it gave an incorrect and somewhat restricted definition to the term "Programme Budgeting" saying that it was a system where "the principal emphasis is on a budget classification in which functions, programmes and their subdivisions are e$tablished for each agency and these are related to accurate and meaningful financial data." On the other hand, it argued that "Performance budgeting is an all inclusive concept embodying programme formulation as well as measurement of the performance of work in accomplishment of programme objectives." The Manual, however. claimed that Programme and Performance Budgeting represented a management approach to budgeting. ln the United Kingdom, Programme Budgeting and PPBS are used synonymously with another term "Output Budgeting".

A Department of Central Government defined the latter formal system for establishing:

as

what a department is aiming to achieve, what its objectives are, in the area of policy ior which it is responsible; 2. which activities are contributing to these objectives; 3. what resources or inputs are being devoted to these activit

l.

ies;

4.

what is actually being achieved or what the outputs arc.t departnrents

With whatever nomenclature, some

of

the

Central Government and many "Local Authorities" (rvhere the pattern of Government is similar to that in our municipalities but whose range offunctions approximate to those of out State Governments) have made steady and, one is inclined to believe, enduring progress in modernising their budgeting systems. An experienced civil servant in the United Kingdom observed that "the P.P.B. approach rests broadly on the following six
assumptions:

r Output Budgeting for the Department of Education and Science, Education Planning Paper No. 1, London, H.M.S.O., 1970.

PERFoRMANcE

BupcrrrNc

31

l.
to

Decisions

do-if

will be better if you know rrhat you are trying objectives are stated and activities devoted to the

accomplishment of a particular objective are grouped together. 2. Decisions will be better if information is available on how resources are at present being used-by major objectives, by ways in which objectives are being carried out, by the type of people being served and so forth. 3. Decisions will be better if the effectiveness of the present programmes is evaluated. 4. Decisions will be better if alternative ways of accomplishing objectives are considered and analysed' 5. It makes sense tc plan ahead-to decide first what the Department should be doing in the future, and then what immediate policy, budgetary and possibly legislative changes are needed to move in the desired direction. 6. It is good to be systematic about decision making-to follow an explicit procedure for reviewing long range plans periodically in the light of new information, evaluation and analysis, and translating changes of plans into budgetary and legislative consequences."l

An agency of a Canadian province identified the basic objectives of a P.P.B. system as follows: to define departmental objectives clearly and to relate them to defined provincial needs and goals; 2. to stimulate the in-depth analysis of all existing and proposed new programmes in terms of their costs and benefits; 3. to link the planning and budgeting process through the annual review of Multi Year Plans; 4. to measure actual and planncd performance; 5. to provide a systematic way of integrating all of these elements in order to arrive at a more effective system for the allocation and management of resources."2
1.

I J.M. Britlgeman, "H'M. Treasury in the Planning, Programming, . Budgeting Systems", O&M Buttetin of the Civil Service Department
(London; (Novernber
2

1969).

Efecth,e Management through P.P.B,S, Treasury Board (October 1969).

of

Ontario

32

PrnnonueNcn BuocBttllo Eon PleNnEo DrvrloplrarNt

The htdian context

Commission stated budgeting were:

In India, a Working Group of the Administrative Reforms that the primary purposes of performance

a) to correlate the physical and financial aspecls programme or activitY;

of

every

D) to improve birdget formulation, review and decision making at all levels of management in the Government
machinery;

c) to facilitate better appreciation and review by the Legislature;

d) to make possible more effective performance audit; e) to measure progress towards long term objectives as
envisaged in the Plan; and

"f; to bring annual budgets and

development Plan closely together through a common language."l

The Administrative Reforms ,Commission itself stated: "Performance Budgeting, which in essence, is a technique for presentiDg Govetnment operations in terms of functions, programmes, activities and projects, seeks, among others, to achieve the following important objectives:

a) to present more clearly the purposes and objectives for which the funds are sought and to bring out the programmes
and accomplishments in financial and physical terns; b) to help a better understanding and better review of the budget by the Legislature; c) to improve the formutation of the budget and to facilitate the process of decision making at all levels of Government; d) to enhance the accountability ofthe management and at the same time to provide an additional tool to management control of financial operations; and e) to render performance audit more purposeful and effec' tlve.- 1

to the Report of the Study Team of the Administrative Reforms Commission on Financial Administration (1967). t Administrative Reforms Commission Report on Finance, Accounts and
Appended Audit (1968).

PenEonr.reNcB B ooorrnc

JJ

that planning and budgeting should be brought much closer than had been the case in the past but did not spell out how these could be brought closer in an integrated management system of the kind Governments in The Commission
emphasised

other countries were attempting. What was being attempted in other countries was to extend the budgeting systems to incorporate ideas of long term-planning on the one hand and techniques of modern management on the other. The Indian context: was different. We had already adopted a framework of planning with ideas borrowed from the Socialist countries. How to' flt in a budgeting system as originally incorporated in the Constitution into such a framework and whether improved budgeting systems based on modern management techniques being attempted elsewhere could also be tried in our country are questions which were, and still are, open. As mentioned above, in the improved budgeting systems ir other countries attempts are made to graft the techniques of
management, especially the quantitative techniques, successfully employed in the private industrial sector into public administration. We shall refer to some of them. But, it is appropdate at this stage to recall some 'cultural' differences between private, The techniques of rnanagement

industrial sector and public administration especially in the

in private industry are primarily internal. Even where it becomes outward looking, the purpose is only to serve the internal goals. The goals of public administration, on the other hand, are external. It is concerned with the impact it makes on the members of the public even when it devotes attention to its internal efficiency. Second, in the earlier stages at any rate, management was anelitist concept. Management was defined as "gettittg things. done". The manager was different tiom and superior to the' managed. This dichotomy is singularly unsuited to public admi-nistration, where the "service to the community" concept is .
more relevant.

context of performance budgeting. First, the goals of management

something of a low level activity, a control apparatus for' ensuring the achievement, of objectives decided otherwise. In,r

Third, in the management of private industry, budgeting

is

34

PmlonlraNcE BuocrrrNc non pleNNro Dnvruopr.rENr

'public administration, on the other hand, because of the "value" considerations predominating. the public expen<liture
programmes and because control of the purse is regarded as the ofa denocratic system of government, budgering is the highest level activity. Hence, it must rank higher in the -"warrant of precedence". The budget document of Government ds not, at least ought not to be, just an accounting document. -trt is a policy document par excellence. Let us now refer to some of the management fechniqued which earlier provided inspiration or can be useful for improves budgeting systems.
.quintessence

Systems approach

The term "system" i's usually defined as any set of interrelated elenrents, for example, the solar system, the political system, the economic system or the eco sysrem. By definition, a system has a "boundary" in the sense that all the inter_related elements fall within it. The system can be closed or open. A closed system is one in which there is usually no entry of fresh elements; the solar system is a closed system. An open system is.one in which there is exchange of elements with the environ_ rnent. The respiratory system, for example, is an open system. The organisations we deal within public administration are
open systems. Since most such organisations ar6

of man and machines they are also known as ,socio-tecl_mical' systems. The purpose of such open systems is to receive and to give, to transform inputs drawn from the environment into out_ puts given out to the environment. The three ingredients of such a system, therefore, are input, process and output. The transfor_ rnation process ofa system is facilitated by its i) structure (the way its elements are organised); ii) communication sub-system (which provides the right information at the right place at the right time); iii) decision-making processes; and iv) feedback

combination

the efficiency with .whicli the inputs are transfornred into outputs. [n order to maintain this any organisation has a) to provide for systematic ,collection of information relating to the environment so as to
'recognise the problem to be tackled or opportunity to be seized, 6) to consider various alternarive ways of tackling the problem

'mechanism. The efficiency of a system is. measured by

PERFoRMANCE

BuocsrrNc

35

or seizing the opportunity, and c) to analyse the inputs and outputs of different alternatives so as to make a careful choice' It has to monitor implemeniation (l) to check the hypothesis
on the basis of which the alteruaiive was chosen, (2) to compare the performance with pre'determined standards, (3) to modify the action plan in response to changes in the environment in the rneanwhile, and (4) to evaluate on completion of the task' This is seen as an "open, explicit, verifiable and self correcting" process. The self-correcting ability is acquired through an appropriate feedback mechan'ism which is crucial for maintaining the efficiency of the system. There is no great complexity in the ideas behind this approach which is also known by the generic names Systems Analysis and Operations Research. It is just organised common sense' But no mathematical tool, no economic concept' and no statistical technique is considered alien to it.
Linear programming One of the most widely known Operations Research techniques is linear progtamming. It is one of a family of optimisation techniques which are intended to help inthe best allocation of

input resources. Along with input-output tables (which give, on the basis ofpast experience or known technology, the of output), lineat proQuantum of inputs necessary fcrr a unit gramming forms tbe basis for all planning efforts' The attempt is to maxirnise the possible output or benefit under given constraints of availablity of input resources'
scarce

Blandly stated, planning attempts to maximise human welfare under given l.imitations of human, physical and financial resources. Where human welfare can be reduced to so many kilogrammes of foodgrains. litres of milk, or metres of cloth, planning

determines, using linear programming and other optimisation techniques, the maximum quantities that can be produced under the constraints of input resources like fertilizer, animal feed or raw cotton. (Output offertiliset, animal feed or raw cotton can in turn, be maximised with reference to their input resources)'

Alternatively, if these quantities are otherwise predetermined, the techniques can help in minimising tne use of input resources. ln either case, allocation ofresources is'optimised'' Where planning is totally centralised, as in the Sociaiist

36

PERFoRMANcE BUDGETTNG FoR PLANNED DEvEroprrlrNr

countries, the planning model, based on such programming techniques, will itself yield the outputs of diferent sectors, industries, plants and organisations, and nothing is left to be determined as part of any other system such as performance budgeting. Such total planning is, however, not feasible not only for political reasons but also because the data requirements of such a system are so vast and the computational capabilities necessary so complex that they arejust not avpilable in developing countries. But, linear programming technique itself is neutral to the level at which it is applied. (It can, for example, bea pplied by the housewife to determine the best nutritive food she can give to her family for a given amount of money. Her data requirements are the nutritive values of different food items their availability, and their prices. Her computational requirements are high school algebra, paper and pencil.) In the improv_ ed budgeting system we are discussing, linear programming can be used to determine the outputs or .objectives, at different levels keeping in view the input constraints. It wiil be obvious from the above description that if effciency in public administration were to improve significantly we need to adopt a systems approach to ensure that each unit or organisation works at its optimum effciency. At the same time, each limb of the administration must be looked upon as an element in a "grand system" that is Government, in which the
different elements are inter.related. Manaaement by object tves (M.B.O.) It is a systematic aoproach to define the long term goals and shorl term objectives of an organisation, and build a hierarchy of objectives and targets down the line by departments, divisions, units, sections and, ultimately, individuals. Objectives are set by determining what shall be measured in each area of activity and specifying the yardstick of measurement. The essential philosophy of management by objectives is participation of all members of the organisation in setting these objectives and targets, and establishing suitable control systems to permit regular compari_
son

which process, again the members participate. AII units and all individuals do not, ofcourse, contribute to allthe goals and, objectives. But identification of the goals and objectives to

ofactual results with the stated objectives and targets in

PERFoRMANCE

Buocr

flNc

rl

will itself snul t!em. to make which they are not contributing idea is to i. lt."aen their roles' is has been said' the also "ff"ti, ;i;; ;;iin;"; not onlv to the abilitv of .each individual,.but This and specialitv' i;';;-";;t;anship of each function ;;;ic'h peter Drucker has beenthe sreatest exponent ;;il, proerammes in the is, again, relevant to puolic expenditure failure of of repeated assertfons regarding the ;il;;.t participation bv goods' Greater
to d]eliver the and closer identiflcathe civil servants in settrng the objectives particular tasks ought to tion ofindividual civil servants wiih
improve the Performance'
CorPorate Planning

;;;;;;;;"y"

anv partithttl;;;;;;gen"ric-tetm which does not signifv attention on focuses

AlsoknownaScolporatemanagementorlongrangeplanning

but cular technique or organrsational form the planning and management iil" ioi.r*oon.ction between big organisation relating roles of different depa ments ofany themtoitsoverallobjectives.Twotypesofplansareprepared:

i;;##;;ill,:":.'U:1ff product improvement P^l

ilan, "t". i"t-'pf"",
and,

operational plans compnstngi market_ treated production plan, etc' The "plans" are followed under these heading to be .as first steps to management process' namely' by other steps in the cyclical management Thislechniqrre is ,tumog, directing, controlling' etc' of "ir-i.i"g, prrUr," tott'itises which are' in the naturethe ofrelevanceto planning apparatus in things, the building Ufocks of the

ffilii,:"',,1ill'ti,1l,',,111;

(2)

countrY.
Value analysislValue e ngineerinB ' --An essentially engineering technique'

it is used in managefrom the point of view of tbe ment to look at the ptoduit component part Jorto*.. unO determine what function each of each part is lneeds'' The value Derforms in relation to tris notionallv H"d of marginal analvsis'.A part is #;;i;; ;ii;tr"J. p."[t..g

part' If the cost of in.'p"iii"rn"'uuio"'n"lt-tu"hes to the ,t* part is higher than this 'value" it is just as well

customer would The assessed iiff.."o.. in price'rhe tiithout part i.*pt.p"t.a," pay for the product wih the -and

38

Prnronlaancr Buocerrlc roR prerNro Drr.,rropupNr

that the part is not produced because the resultanf saving in cost can be added to the profit o, ,t ur.o ritt, ttre customer. The same holds good if the part *, ; ;;;;.0'u, ,.r, .or, -J"rn" without effecting its .value, to the custome'r. tions asked in this techni "f the ques_ can ir be mad e sinpre r? :H:,T ; #"'*d:!.?.x'#ffi,,."1; can itbe replaced by a standard panf standard material? and so on. "an'li Ue'made using As stated, this is essentially an engineering technique. But, the basic concept is important. A private inairtriai firm looks at its product from the point of view even when it wants to maximise its profits. prUii" iirnioirtrution, l" "i-ifr.".rrtonier of course, we are concerned solely wirn trr" i*ii derived by the customer or the citizen receiving the services. And, it is not far-fetched to suggest that cetain lr..ui.rrij-.un be trimmed without making any.diference to the citizen. In respect of tangible goods supplied by public .or.t;;; ,*h t.im*ing ought to be carried out more iigoro"rry t.""rr" ,.li:pu.tugiog, -rron"cessary, of essential goods to enhance *n*_.. upp*i l, even vulgar. In the case of clotb, for ex#ple, certain ,,finish_ ing" processes do not add to the srrength o. io.uiiiitv or tn. cloth, but only to consumer appeal. fi tf," of textile mills in the pubric sector rs to produce "f;."ti"e croth for the masses these processes could well be eliminated unJ- ti. iloit, ,ora ut cheaper prices. And, if the .frjfls, iou;;";;-.;arketing,, public services, beautifyin

L1'affi

of our ways of thinking than of lack ofknowledge ofany technique.

Performance Budgeting_a total management system

;i;;;;;il:#":'"'#

jiff :;,::',:H:ii"',T:i':

book on budit to say that the techniques il'rr"'potential to enhance the capabilities of public adminirt*ti., to and implement public expenditure. prog.u.."r.- for*ufui" il;;';; little to borrow from the developed .Joot.i...'the tevet of 'development of a country has nothing to do with il ;il;;' ;;
getjng. suffice
use modern management techniques.lndeed, Iower the development greater should ,be the ..pay

ma]la.gegent tchniques within the curnpu*, of a

It will not be possibre to exhaustively a.rt witr, utt tn"

i;;;1 ;; off; f.orn-irr.i. ur"

PERFoRMANcE

BuocertNc

39

in public adminisprovidedwe adapt them to suit the conditions tration. of all organs of public Since the receipts and expenditure

administrationpassthroughannualbudgetsapprovedbythe built around . this imporLegislature, management techniques of administrative activitv have a ff; "v"1' ";;'ilt*tull"getting assimilated into the "g1and system" of gl."r..

"tt"""" technique' ihun .poruOi" effoits to graft this or that of management techniques in public The scope for the use administralionisnaturallybound-edbysocialobjectivesand Performance Budgeting provides this p"-iii" to project and "".""*ability' iru-.*.rt. It is a kind of umbrella system of any manageenhance rather than detract from the usefulness not compete with any ment technique. In an.v event, it does technique for attention, effort or resources' Theeffectivenessofmostofthemanagementtechniquesin the principles that the private industrial sector, ranging from office room to the ,tto.,ta gon".n the decor of an e-xecutive's programming for decisionntost siphisticated mathematical the profit ;il";,;";ultimatelv be judged bv m-easuring made bvthe rod is rarely This nrtn.itpfoving the techniqueJ' effectiveness of nranage,""if"Ur" ln puUti" administiation' The be *""i-*ft"iq*.s in public administration can' therefore' which delineates a system .i"Jg"J .tfy in the context of within. itself the means to and incorporates ifl""oU;..tiu"t ."urrri" the achievement ofthose objectives' *-W. and budgets are nuu" often heard it said that our plans that goes wroDg' all well prepared and it is implementation is goes wrong iii. i, , p""irl trurh. If implementationprocess do itnotpartly t*uor. ihe planning and budgetary structure-of' andtake the and ua"qou* u".orrot ofthe organisalion .machinery' on, the implementing -Performance "oortrulnt, will be discussing is intended to fill this gap' lt is we iil;;G achievements' It oot i -.t1 statement of physical targets and o.tr to focus attention orthe very fundametals. of Governadministration so .ro, poli.y related to each area of publicvarious. levels are' ib;th" objectives of Government policy at
andcanbeseentobe,relatedtooneanother.Itwillspellout analysed and the in adequate detait the data collected and programmes inparticular assumptions made in selecting the

40

prnronuexcn

BuocrrrNc;

FoR pLAr.rNED

DsvrrotrapNr

,cluded in the Budget. O1r.: our;are proposed to be monitored,.by "O:rl

whai *rr.rr""il" success failure of the programms or will.. be judged and how the data required for such evalua on a reliable basis. such an
improved

wjll be how programmes

o"ii1l'I]'ib"."ollected

ar the simple reason all management activities lidi-.-r*t^ 4o get reflected in the bu -that sinl any ,x::f :*,"Tffi:Ji' J"u"?:?,,il"tr? it is obvious thar we are not attempiing-to-",",r"J,iJ. anything new. Rarher, the artempr i, to ,;ha;; l; ," rn.., ,fr" dynamic needs of the organisatiori und transfo.-m it rri.'ui"#nuur ,rnent Ao.u_

.arotar"'""*._.",",J',i:11';'1.fi ';Ii:11:TT..Xi"rl;*:

;"**fi ;

to a comprehensive management system.

to spell out discrete 'instance and even as one step.foflows "iiii*iin the first the othei .there are fresh opportunities to review and, if need u", ,.i..." ini ."urri.. ,t.p. Moreover, performance budgeting ,y"._ various, levers, starting from "rri" f rtroCuced at a small departmenta.r unit to the national level. The system at any lower level;s to Oe organi"afly since the wiro]e

of performance Budgeting systemit ls .sequenlial stages -^^1r:l:t:tu*gement

,Sta_ges

pr"".* i,

dificult

with the system -":r:.:.r..d be derived that it should

fr -il;il;;:T.,T:.ll ever system.

at the next frigfrer

f*.i f, the sense

fhe performance budsetins "

J:T_l:lT:,#

:il]i"i,ll Hj:fi'j::,:.,tins
2.

;:

i::*:
as

;ff i;*;;; out, in lt.'J*:# ;iffi ,ff *ff.H:ffi ::X1: spelt quantrtative and
them against

tong_ie;-;*, il'goals of

measurable terms

far

,",.f""J pr.rrammec. rhebudget so prepared musto nro"._ dure ofpresentation, approval and sanition.

up for imple_ mentation are classified with,:efireice,;;"rrfi#oo.r.,"_ so as to facilitate allocation ofresources

short-term tactics f,or achieving- the objeciives are considered, possible alternative ,programmes identified, the costs and benefits of tne iiterrrative - *' lprogrammes worked out and programme, ..t".i.A. 3. Budgetlctassifcatnn. rie

Analysis. The lone-term strategy and the

{r"sr;;;;;;i;

*.*il;;';;rJriiio

PERFORMANCE BUDGBTING

4l

achievOrganising. Tbe roles ofdifferent organisalions in and the financial rules ing the siecifiedobjectives are demarcated and accounting system are remodelled to effectively implement the programmes. programmes with i. frafuation. Criteria for evaluating theproper information reference to the objectives are evolved and data anJ.epotting systems on financial, physical and economic to monitor the prorelevant to the programmes installed so as

4.

grammes during execution and evaluate on completion' performance The interaction between the different stages of when we UuJg"tlng mentioned above is quite apparent' Only

.unul-yr"

specific programmes and work out their costs and which we beo.fit, w" ui" likely to realise that all the objectives within the have so enthusiastically accepted cannot be achieved of sights' ,i." ,pun, originally thought of' This leads to loweringobjectives' dir"orrioo on-inter se prioiities, and redefinition of terms Analysis of programmes in general economio.-or social the specific activities contributing to them ' withoui reference to *iii t. -.u"i"gless. Further, programmes designed to achieve particular objectives must be examined alongside programmes budgetio u"ttl.u" reiated objectives. An overall framework of a necessary adjunct to programme is thus

tie

ary classification

analysis'

--enatysl,

also gets sharpened with the demarcation ofroles

of

.pro!.urn-., 'iheJe timitutions into account. Hence organising cannot be divorced from analYsis. -chosen However laudable the objectives, however carefully management system' not the programmes and the attendant i"ft.-q"""trv, monitoring of programmet Tu.y show that rephasbottlenecks have developed requiring, at the minimum' ex post evaluation at the ing of programmes. A more th oto'tgh be end of the year may show that the objectives sought to measure or certain ..t i"n.a are iot being fulfilled in adequate This must surely other unforseen co[sequences have followed'

different instruments of public policy' ihe specific activities of any programme must either fit into procedures' or the existing organisational set-up, its rules and and, consequentlv' the ;;y;h""ft be-modified or the activities, reexamined taking and even objectives must be

of objectives' lead to review of programmes and even redefinition

42

PrnronueNcr Buocrrruc pon PLANNFD DBvrropurNr

evaluation. The methodology fol.lowed in onr"-uoulysis can itself be sharpened in the iight of tfre "* exp#n.l"guin"A in collecting necessary data for ex post evaluation. . Thr:, we cannrt pursue any single aspect of performance budgeting in isolation. We will be Air.usslng the Ji#"r"ot ,tug", sequentially in the following chapters Jnty a, u _utt.r of convenience.

Also, evaluationl is closely linked to the analysis stage because the assumptions made at the time of orrr"inaysis must be tested for their validiry in the course

,,

of io,n"uirlnlo, q, por,

The five stages of performance. budgeting mentioned above can be represented in a diagrammatic form. n.*i pug.;

fr..

r The dictionaly meaning

varue of,Technically, therelbre, it can be used .v"onyrnou.i, *ir, o-.i."i sal or cost benefit anarlsis as many authors havi done. "po."r_ Hlwever, ttre pracdce in our country is to use the term in the conte", oipiog.u.rn." already selected and being implemented.

ot

evaruation

is

.deciding the

PnRroruteNcB BuocntINc

4\

Diogrom

STAGES OF PERFORMANCE BUDGETING

FIVE

OBJECTIVES

EVALUATION
PERFORMANCE
BUOGETING

ORGANISING

lsstrtcntroH,/
BUDGET

The clockwise orrows represenl the octivity ltow

ol

ihe system, while the onti-clockwise broken

orrows represenl. the feedbock processes The

longenliol orrows represenl lhe inteiloco wilh lhe oulside worid

CI{AprrR

IV

OBJECTIVES I
stage of performance budgeting we are concerned with clarifying in our minds the purposJs oi-puUitl^i"p".raitur" programmes and specifying them. These purposes may be qualitative or quantitative. The plrposes may be variously termed as functions, aims, goals, objectives, targets, norms, etc. One can keep arguing about the terminology. However, we shall, use "functions,, todemarcatethe area ".-;;';. possible of operati;;, ;ui111r,, uod "goals" to deal with long_term purposes itr quantitative or qualitative terms, .,objectives" to as-

OLt": r3lt

The purposes are, therefore, spelt out "m"i.ory. io O....uriog order of generality in terms of functions, aims "objectives, goals, or targets and norms. This. cannot be a on._tim. operation. Definition of purposes, their review to U" *o..- pr"cise, should be a continuous process in order to bring about'greater ctarity and precision as time progresses and to secure continued rerevance to the environment. Sp-ecification ofgoals and objectives is only a necessary, nor a sufficient, condition for the success of public pro""f.oJitu." .The other stages of perforrnance budgeting we will fluT.r.r. are equally important. But, the sicond genera_ :.^_o,::or:toC. performance uon efiorts in budgeting particularly emphasis specification of goals and objectives tecause, as sbmeone said, as much money can be wasted in doing a wrong tning emcientty as in doing a right thing inefficiently. , We shall now proceed to seek answers to the following questions concerning the specification ofgoals and objectives. Who is responsible for their specificationi Wnut io".s uoO conflicts anse ln their specifcation? When is public expenditure a fit instrument to reach the.specified gouio, ofj*liu"f How are

refer .to the quantitative purposes of each component ofthe organisation; and .,norms" to refer to standards J

far as possible, with

deal *itt pu.p*o, quantified reference to a tirne ,f*, ;,turg"tr,, to

Onmcttvrs

45

the goals and objectives of public expenditure programmes to be relared to the organisations which implement them? What are the criteria for defining the objectives of individual programmes so as to facilitate anaiysis of different alternatives and selection of one of them? Finally, how to specify the objectives to promote efficiency in public expenditure programmes? Specification of a clear hierarchy of goals and objectives is both the right and the duty of the politician. If he chooses not to specify them, what will happen is that different people in administration can frame their programmes according to their individual judgement ofwhat the objectives and priorities are, all the time referring to the aimsor goals specified in general terms in support oftheir stand. In sucha situation, it is conceivable that the impact of some of the programmes will partly
cancel

out the impact of some of the other progralnmes-a national waste we can ill afford. Even as it is impermissible for the political leadership .to avoid the responsibility of defining the goals and objectives it is unwise for the civil servant to pretend that there is a body of theories of economics, public finance, management or public administration that will enable him to define the goals and objectives on a neutral, value-free, basis. The inter-action between the development process and the political process is so intimate, even if intricate, that neither group should ignore

Aswe go down the hierarchy of objectives the political or value content of the objectives may become less pronounced but at no level of public administration can the programmes be entirely divorced from political or value judgements. What is required is that the politician and the civil servant should make joint, often strenuous, efforts to define the goals and objectives or specify the problems with the clear understanding that the duty and the responsibility rest on the former. What the political leadership aims at is a change in the total situation such as eradication ofpoverty, reduction in unemployment, raising the standards of education, health or housing. Each such change has certain qualitative and quantitative aspects. What the civil servant does is to suggest how this change can be brought about within the specified time with

it.

the minimum allocation

financial, physical and human resources or, to be more practical, to suggest the quantitatively

of

46

PERFoRMANcE BuDcETrNc FoR Pr_ANNED DEvrr_opueNr

maximum change that can be brought about within the specified time with the resources that can be mobilised during that period. Thus, what is attempted is harmonisation of tle desire for change or developmeut, the time span and the availability of
resources-

those levers.

analytical framework for this harmonisation and it is the dutv of the politician to define the degree, texture and fabric of 'change that should be brought about keeping in view the time aqd resource constraints. The relationship bitween the politician and the civil servart in the context of development is, thus, functional in contrast to the traditional master_servant relationship. While the politicai leadership would like to have the maxi_ mum change in the quickest possible time it will be counter_ productive if the goals and objectives are set without taking into account the resource constraints since non_attainment ofchange to the desired extent cannot but recoil on the politi_ cal leadership, This is not to suggest that resource constraints pointed out by the civil servant should be accepted without ques_ tion. Sometimes, the constraints can themselves be modified through skilled operation of the political levers. But, again, the politician needs to be realistic about his capacity to operare

-It is the duty of the civil servant to provide

the

Confict of goals ond objectir.es Def,nitition of goals and objectives should be done with sreat care since specification ofone can conceal its inherent .oifli.t with others. One of the goals, for example, may be to promore development ola backward region. No exception can be taken to such a goal. However, unless it js also simultaneously specified that this development should narrow down,_ at least not widen, the disparities in incomes accruing to various groups wirhin the region it might well happen that the developnrent of the region aggravates the problem of disparities within the region. The political and social tensions that this might create may eventually conflict with the goal ofl economio development of the region itself. The conflict can be between two objectives like growth and equitable distribution or overall growth and regional growth or between objectives of various programmes. At the sime time.

OBJlcTrvFs r

while there may be conflict. between objectives in the short run, as in the case of growth and distribution, this may not be so in the long run. The time dimension is important. Let us now highlight some possible conflicls in the specification of goals and objectives in some sectors by way of illustration. Let us take the agriculture sector first. It is not merely a producing sector producing certain quantit!es of cereals, etc. but also an employing sectorproviding sustenance to about 70 per cent ofour people. lf, therefore. we specify the production objectives for this sector without harmonising them with the .employment objectives a conflict might arise between the two sets of objectives. It may well be that more employment can be generated in agriculture sector only at the cost of more production. Where an integrated view is not taken, we may make the mistake of assumrng that the agriculture sector will cater to a 'smaller proportion, if not a smaller size, of the population,

lation will be employed in the non-agriculture sectors. Not merely that, we may fail to speli out the further consequence like increased housing, drinking water and otlLer facilities they wiil require in their new locations This point deserved to be brought because the induction ofonly 8 to 9 million households into urban areas in the first twenty years of planned development without any concomitant steps to provide for such basic
.amenities has aiready converted our towns and cities

without specifying how the implied transfer of the balance popu-

into

vast

slums. The consequences of any further unplanned transfer of 'population from the agriculture to non-agriculture on urban

are unimaginable. has been recognised that nearly half the number of people 'living off the agriculture sector, ormore than 30 per cent of the total population, do not, on the basis of existing strategies .and techniques of production, derive incomes sufficient to meet their basic requirements including, principally, food. In determining the production goals and objectives in the agriculture ,sector, therefore, the number ofpeople who would continue to 'drawsustenance from the agriculture sector (the balance of the total population being transferred to specified non'agriculture :sectors) and the pattern of incomes this sector would generate ihave to be taken into account.
:sectors

It

48

PERFoRMANoE

BuocgrNc ron PlaNNro Drvrr.opturNr

Fuither, there can be

conffict between the production

derived from the consumption objectives of the population. According to the .balanced diet' recommended by the Indian Council of Medical Research (1968) the average ,norm' is 2450 calories and 74 grammes of protein per head pcr day. The contribution of different food items to this ,balanced diet' were projected by the ICMR as below:
TABLE 2

objectives themselves. The ultimate objectives of the agriculture sector is to provide adequate and balanced nutrition to the citizens. The production objectives ofthis sector are, therefore,

THE .BALANCED

DIET': AVAILABTLITy nNo RrqunrunNt

(in grammes)
Food item Cereals
Pulses

Balanced diet required

376
64
116 61

Availabliity'
(r970)
395
51

Vegetables: Leafy Roots and tubers Others

l7
18

69

18

Fruits

40

Milk

and

milk

44
108 12 10

products

t89
38 39

Eggs, Fish and Meat Fais and oils Sugar and jaggery Calorie content

Protein content (gms) (Hyderabad, 1971).

42 2450 74

40
1945

49

Souncr: National Institute of Nutrition Diet Atlas of India

items of food (see Table 3).

Another source compared the consumption of principal in India with consumption in other countries.

It may be seen from the above data that our cereal consumption is highest among the countries compared and is higher tban even the standard provided in the balanced diet suggested by ICMR. But, the consumption of non-cereal food is very low.. And, it is not as if we have reached the limits in the production. of non-cereal foods. For example, our catt)e yield is only l/l5th ofthe quantity of milk yielded by cattle in .,developed,, count-

Oslscttvrs I
TABLE 3

49

Colqsr,laprtox oF PRrNcrpAL ITEMS oF FooD rN INDrA: A Covpenrsorq

wrrH orHER CouNrnrss

Country

Per capita daily consumption

@ms)

Per capita in take \gms)

Sugai Milk Meat

India
France West Germany Japan

Calories

Protein,

UK
USA

384 219 189 352 200 176

49
94 95 73
1,36 1,40

116 630 567

137

240
185 28

592
689

201 294

1,990 3,270 3,180 2,470 3,170 3,330

49
103 83 77 87

99

SouRcE: ,ttdtistrcal Outline

of India,

1978, Tata Consultancy Services

Limited, Bombay.

tution as may be consideled undesirable by the nutrition.

gardens in the consumption of which there is such a wide gap? At present, there is a good deal of snbstitution of cereals for non.cereal foods due to non-ava ilability as well as higher prices of these items. The question is whether they can be produced in adequate quantities and at reasonable prices so that such substi-

ries and our catch of fish is only 1/l0th ofthe available fsh_ And, how much does it cost to grow leafy vegetables in our

experts is avoided, There is thus a conflict between the objectives for additionah production ofcereals and those for additional production of,

sumption needs of the people. The production objectives should thus be specified in respecr of each of the food items keeping in view the consumption or. nutritional objectives. Important as this is, specification of goals. and objectives involves neither erirdition nor complexity. Often, what is required is a broad judgement and suggestion of a broadL direction. If we did have this kind of broad prospective, may be, the pulse production would not have gone down in absolute(not to speak of per capita; terms and we would not have faced, shortage of edible oils.

non-cereal foods because resources, particularly budgetary" resources, will not be sufficient to achieve all of them at the same time. Resources can be allocated and the conflict resolve& only with reference to higher level objectives in regard to con*

50

PrnronueNcs BuncBrrNc FoR PLANNED DpvnloplrrNr

Let us now turn to the education sector. In respect of educaobjective was clearly specified in the Constitution which provided that the State shall endeavour to provide free .and compulsory education to children up to l4 years of age by 1960. As objectives go, this was unambiguous, quantitative and ;timebound. Let us see how far this objective has been achieved. In 197 1, rthere were 140 million children in the age group 6 to 14. Of

tion one

ithese, only 80 million or about 60 per cent were enrolled in schools. Of those enrolled, the actual attendence in class one was said to be only 70 per cent. The attendance in higher classes was even less. According to one study only 30 per cent out of the 100 enrolled in class one reach class six. The other 70 drop out. Thus, only i8 per cent of children for whom we had committed to provide ltee and compulsory education up to the age of 14 study even upto the 6th standard (i.e. age of 12). The poor performance in attaining the objective specified is

partly attributable to paucity offinancial resources. Onthe the Kothari CommisEducation ( 1966) recommended that education should .sion on
question of funding education in general
,be

alloited 6 per cent of the Gross National Product by 1985-86 against the existing 3 per cent. We can be sure that one or the ,other of the learned commitles would have recommended simi{ar increase in the share ofthe national cake for their respective sectors. Quite obviously, the share of everyone cannot be increased. The share of some can go up only if the shares of others go down.
However, what we are concerned with is whether the goals and objectives of the education sector have been clearly spelt out in order that the limited financial resources allocated to the

education sector are further allocated accordlngly. Since no

.other objective was so specified in the Constitution, one would ,expect that free and compulsory primary education to be an over-riding objective and, hence, a first charge cn the lesources allocated to the education sector. But, a typical State Governmgnl which spends about Rs.100 crores on education spends ,only 40 per cent of its education budget on primary education. It spends another 30 per cent on secondary education and the jbalance on higher education. [f we take into account the .resources allocated out ofthe Central Government budget for

Onlrcrrvrs

51

allocated Gr-ants Commission) the relative proportion of resources to primary education would be even less' This paltern of allocaof resources does not conform to the objective so unambigu-

higher eCucatton (channelled through bodies like the University

tion

ously specified. One can modify the objective' One can add other objectives. All that we are sqggesting is that whatever be

view the objeciives they should be clearly spelt out keeping in the respective physical dimensions and the relative priorities so thatiesources are allocated accordingly' What has happened inthis case is that we have specified the objective very clearly and let it hang in mid-air' We have not resolved the inherent conflict between the objective of universal primary education and other objectives within the education budget' Now to the health-seclor. A welfare state should aim at providing extra health-care facilities to vulnerable, economically weaker, sections' Since there is greater poverty in the country side than in the towns one would expect allocation of a propoitionately larger share of the health budget to the rural areas where 80 per cent people live. However, the proportion ofhealth budget spent in rural areas is 30 per cent, that is' far less rhan even the proportiQnate share' Thus, the pattern of allocation of resources within the health budget does not even ensure uniform standards of health care let alone provide extra care to the weaker sections. The question is: what are our goals and objectives? That the standards of health care are lorv and can be- raised through a larger allocation of resources to the health sector is a different matter. Thus, conflict between multiple goals and objectives cannot be primacy resolved by merely specifying all of them' Their inter se of regional developis of great importance. ln the example ment earlier cited,

it will not be adequate to say that the two goals are (l) "to promote economic development of the region" and (2) "to reduce income disparities in the region"'

foi the simple reason that the programmes proposed to achieve these goals cannot all meet boththe goa'ls to the same degree' Progrumme A might secure goal ( l) to a greater degree than goal (2) while situation might be just the reverse in Programme i. The.cost-benefit analysis of programmes we will be discussing can quantify these dimensions; but it cannot lead to a decision on the selection of programme, A or B, unless it is specified as

52

Psnronrr.raNcE BuocBrrNc noR prAlrr.*ro

Dnv[opurNr

to which of the two

To^tatr<e

other and to what extent.

goals" should have precedence over the

another example,

is not defeated by another.

specifled in the performance budget for the National Textile Corporation. This will lead acquiring ,"_i"frlrg . .to particular set of machines designed ""A to proiuc" "oa.." "fotn on :. -us_ scale. If the objective is not so specified we cannot blame the corporation if rt acquires a different set of machines which will produce cloth of such quality and qu.aniity tt at is likely to give it the maximum profit, as utt otle. ,"r,it" g.oup, are doing. So far as the Corporation is coocernJ th.r" i, u real conflict between the objective of making profils and the social objective of clorhing the milions. If Goielnment oesires that {^he shourd get precedence over the former it should -latter specifically say so. Not merely that, it will have to state it as a long-term policy because machinery cannot be changed over_ night. Further, and more important, it should specify the "trade ofl" level between the two objectives: how much profit can the Corporation forgo or how nuch loss can it incur to pro_ duce cloth for the millions. Suppose the Corporation is able to produce coarse cloth for the millions only by incurring a loss gf Rs. 100 crores per annum. Would that be acceptable?" Thus, it is not enough if a number of goals and objectives, ,_ all nobly considered individually or together, are specified without reference to the priorities and withoui relating them to each other. It js true, as some say cynically, that consistency is not a very great virtue; but, neither is inconsistency. ffre efforts,towards consistency will at least ensure that one objective

rates for the millions is an over-riding objective

if supply of coarse cloth at cheap it must be so

objectives.

The overall goals and objectives may be defined first. These may then be broken down into objectives of individual pro. grammes, These latter may be further delineated into annual objectives and targets to be incorporated in the unnuuiuuag"tr. In the absence ofsuch a clear nexus, the objectives of inividual programmes may run counter to, dilute or modily the overall
Suppose,

objectives could not be reached or there is reluctance to specify them precisely. What do we do in performance budgeting? As

for some reasons, consenEus on overall goals and

OwrcrtvEs
discussed

53

in the first

chaptet, the pattern

of allocation of

resources to various programmes itself implies c;rtain objectives. We should state them expiicitly. If the objectives of all indivi' dual programmes are so specified and are known to the public, the conflict between the objectives of different programmes! or of any of the programmes with what the public expect the overall goals and objectives to be,will become apparent. This may itself help the process of formulation of overall goals and objectives. Thus, though specification 9f objectives should normally be a "top down" procedure, a "bottom up"'procedure can also help, Is public etpendfture justif ed?

As mentioned earlier. Government has a number of instrunents at its disposal to secure its objectives of planned development. These include legal and administrative sanctions, price and distribution controls, credit policy, direct and indirect taxes, subsidies, public expenditure and public investment. lt is necessary, therefore, to examine a problem or development goal carefully to decide which instrument or which combination of instruments will enable us to solve the problem or reach the goal within the specified time at least cost to the society. Very often, a public'\penditure programme is taken up, or

solved at lesser cost through other means. For example, where irrigation potential created by a project is not being fully utilised it is not necessarily because the extension

a tax concession
or problem

given, whereas the objective can be achieved

services are inadequate or the water rate is

high. We may spend more on extension services ,or lower the water rate but still flnd that utilisation is not picking up. It may be found on fuller examination that several other factors are responsible for not fi.rily utilising the irrigation potential, e.g. unremunerative prices for the produce, lack of credit, lack of timely supply of seeds and fertilizers. More basically, with modern technology 'rnder irrigated conditions, the farmer has to spend quite a sum, particularly on fertilizers, to raise a good crop. A weed, a locust, a cyclone or a flood can simply wash this crop away without any compensation except a token relief by way of remission of land revenue. If therefore, irrigation potential is not being utilised, or adequate fertilizer is not being applied, the reason

54

PERFoRMANcE BuDcETINc FoR PLANNED

DrvrlopurNr

on extension services and,the like? Ainong the various instruments availhble lor achievine the goals and objectives ofplanned development, public .*p"ojit..r. involves the maximum drafr on public resources and should be selected only if it is distinctly superior to other instruments. Certain "home truths,' regarding public expenditure should, therefore, be borne in mind in selecting this instrument. These
are:

may well be lack of risk cover or insurance in case of crop failure. If that be so, why spend more money from the budget

l. Since public expenditure is financed mainlv from resources collected through taxes, tbe first point to be noted is that a publtc expenditure programme is an alternative .to non4mpo_ sition (or reduction) o.f tax of an equal amount. However, an
tion
established that the contr.ibution of. such a irogramrne to the overall objectives is Iikely to be more than what a non-imposition (or reduction) of an equal amount of tax can achieve. 2. It may well be that the effect of some expenditure item

only if itcanbe

expenditure programme has administrative cost: non_imoosi_ of tax has none. It should, rherefore, be undertaken

is cancelled

meaningless to levy customs and excise duties on fertilizer and, simultaneously, mount an expenditure . programme for subsidised sale of fertilizers. ln such u .ur., it makes sense to omit both of them and save the administrative

example,

it is

out by the effect of

some

tax

revenue

item. Fot

not be subsiclised inpeople are generally prepared, if they are able, to pay for the health care service; they directly receive. If the Government introduces a general health service it is important to ensure that people will not be required to spend less than what they would have been willing and able to. pay. If this js not ensured, we cn only finance the ser.vice through a general tax burden, which includes the duties included in the prices we pay for kerosene, sugar, tea, coffee, razor blades, cloth, matches and footwear. Thus, if a well_to_do man, able and willing to pay for his health care, is not charged or charged at a concessional rate it is not as if some philanthro_ pist sitting in DeJhi is subsiding it; we are all paying for the
disoiminately.

cost. 3. Public expenditure services should

For example,

OBJECTIvES I

))

service through

duties' Thus a free or subsidised onlv if the ,.*itt should ;;il ;;;iliiu.. do wlrnout it butbe undertaken pay for it' are unable to beneficiaries cannot *;;;-il"tly' programmes which go to fublic cxpenditure on educational t-;;;;; tle'productivity of human beings like point is the A case in io.ifi i". shoul,il not be stretched too far' on college and university education' Beyond a' ""p*airor. benefit deiived bv the students is both specific and ;;1;;, ;. capacity"fhere' sizeable and, hence, increases his own earning i, rro ,"uroo why such education or other facilities should be' prospective emphighly subsidised. If these students (or their are i;;;6 "* not paying for their education, we casesall paving for is to provide A morelustiflable course in such iiinait..try. .Oo"ution on payment of full costs, but to award scholarships to the deserving and the needY' 4' An awareiess of who is palting for what and who should pay how much is also essential fotr maintaining fficiency in public ' are financed ri'*prnd.irrrn. Since public expendilure programmes waslage of public' by rfr" itp..ronal':they", there can be great if u.rd huna" national, resources in real terms' For example' as water is supplied free to our homes we will not be taking had the much care to minimise its use as we would'bave taken here is tbat water been charged. An interesting point to be noted used' but if water is chargcd, not according to the actual volume can, again, be a lot of wastage' at a flat rate there ' public expendiResearch and Development efort s thtough

the

excise

5. ,urr'prosro^

rnA

efforts by Government include^(a) exploring prospecting for new minethe availability of real resources like research to improve the technology to rals, etc. (b) promoting

rs should be financetl by the b7ertc1ari.ey Research

a"*fopt.nt

expioit the' iroved resources more efficiently' However' resultantbenefitsdonotalwaysaccrueonlylop'.rb|icauthorior ties. lf private enterprises make use of the new resources for benefits' Indeed' ;;ild. new techn;logies, they must pay areas in which such is to locate o .o.. dynamic approach *p1"t"f.it ot ,.r.ui"h is promising and wotk out a scbeme of in which all the intending beneficiaries participate' A
noun.iog

the

plan' una technology plan, and a design and development of this approach' derived therefrom, are essential ingredients

."i""".
--

induce' 6. Public expenditure programmes should

not dis'

56

PERFoRMANcE BuDcETrNc FoR PLANNED

DrvrLopuENr

subsidies illustrates this point. Large_scale commitment on tne part of Government in these areas may substitute rather than private savings. Before undertatingsu;h;.;;;;;;, promote we musr carefully anaryse the criticar factors r.rpoorili. r- the row lever of activity. The criticar f""i.r, ;;;;;;;bry, !o_us]ns availability of land, mainly.in u.Uun u.*r-Luilultty is the in ,urut areas also (because of the_social sffucture). Whai is important, thel9lo1e,,is taking, tegal and administrarive J.rion to _rt" available the land. In our country we are so much attached to land and house property that if a suitabl" lou." rli.-i, provided people may make extra efforts to increase their personal savings to take up the construction of house. This wlll increase the total savings in the economy. On the other hand, publi" ."p.o_ diture_ in this sector (which includes recoverable io'uor) oofy Aip, into the savings already available in the economy. itre attempt should, therefore, be ro limit public sector iutLy ro that level as would still ensure maximum possible personal savings. 7. Tokenisnt should be ayoided. Many ;xpendrture pro_ grammes, with sizeable administrative overheads, are taken up merely to reflect Government's concern with some problem. Such schemes abound in the social services sector. Where the problem is of such dimensions that it is not possible for Government to tackle it effectively within a reasonable period of time keeping in view the likely resources available, it does not make sense to undertake token programmes. It is much better: to draw public attention through the normal information and -publicity media, pass legislation rvhere desirable, and remove the social constraints via the political process. 8. Public expenditure programmes have cost dynamics of their ,own. Once a programme is taken up expenditure thereon must increase at a certain rate partly due to increase in prices and partly because of the time scales of staf and the expanding benefits being conferred on them. More important, the inital programme outlay would be determined on the basis of a certain service to be rendered to or in respect of a certain level of physical parameter like the number of children likely to attend schools, number ofpatients likely to attend a hospital or number of vehicles for which traffic arrangements are to be made*

courage, private savings. The case ofgrant ofloans for construc_ ;tion of houses at subsidised iot...rt ,ui., o.;;;;;;"

OBJEC

rIvEs I

)t

These parameters are bound to move upwards and there can be no question of limiting the service to the original numbers' Inevitably, there will be increase in expenditure on the programme. This cannot be considered either extravagant or unproductive. This should be kept in mind while undertaking
.such commitments.

9. Public expenditure programmes acquire rigidity and, worse, ,immutability. Once the programme is started, personnel recruit.ed, cadres formed, and offces built or hired out, it is next to impossible to give up the programme. No body can be retrenched. We have not even been able to shift men from one completed irrigation projct to another. Thus, public expendi-

ture programmes can be altered in the short run, without

entailing wastes, only at a very narrow margin. Utmost thotlght :should, therefore, be given before undertaking new commitments and new progJammes. 10. Public investments already made tend to be neglected. \Ye have seen how modern rice mills constructed, canals dug, equipment installed, out of public funds, just lie idle while we
are busy making plans for .new rice mills, canals and factories. It is difficult to assert that pressure groups who have built their internal economies on the expectation ofa continuous ffow of 'such programmes play only an inconsiderable part in pushing

up such programmes. Thus, before proceeding to specify tbe objectives of public expenditure programmes, we must satisfy ourselves, that public expenditure is the bes[ instrument to tackle the problem at hand or reach the goal in view.

CH

APTER

OBJECTIVES II
SprclrrclrroN oF GoALs and objectives as discussed in the earlier a part of the ,,planning" function. This does not mean that a centralised body like the Planning Commission will be specifying the objectives dor,vn to the last detail. This is both impossible and undesirable. The annual budgetary' process will thus bave to incorporate within itselfthis decentralised planning function. This rvill strengthen rather than weaken.
chapter is essentially
the planning process. Performance budgeting as we are discussing is thus complementary to planning and provides an effective

feedback to planning itselt.

Orgonrsat ions and ohjecIi'tes

In the complex modern world, Government, as indeed other segments of society, needs to be organised into smaller, nore,
manageable

units. oalled organisations Administration

or

management is the process through uhich the activities

of each

organisation are guided to achieve the purposes for wbich it exists or is created. lf objectives are specified without taking into account the organisational set-up, there will only be confusion in the first instance and much avoidable time-lag in taking. up the programmes later.

Thus, purposes or objectives of public expenditure programmes should be specified with reference to the organisations.

which are

to

implement them.

If an organisation

has the

responsibility for more than one programme the total situation should be considered and the objectives specified delineating the role of the .organisation in respect of each of the programmes. For an organisation to be successful its objectives should be clearly known to all the people working within the organisation. The more clearly the members of an organisation understand its objectives and the more firmly they become committed to the objectives the more effective they will be. This effectiveness

OBJEcrrvEs

II

59

will be derived from (a) co-ordinating their actions to achieve the purposes, (b) minimising the internal conflicts inherent in
any organisation, and (c) subordinating the individual and group struggles for power, again inherent in any organisation' to

achieving the objectives. If an organisation is found to be 'look into how well its objectives ineffective, therefore, one must have been defined and how deeply its members are committed to their achievement. To put it differently, where one finds that the members of an organisation are working at cross purposes or that they are in conflict or that there are intense power struggles, theprimafacie conclusion to be dtawn is that the objectives of the organisation have not been well defined or that commitment to them is lacking. There will, perhaps, be little dispute about the validity of this principle of management or its applicability to public administration. But, another kind of commitment is necessary in Government organisations. The people whom the organisation intends to serve, whether they are farmers being served by a-n irrigation project or villagers being served by a family planning centre'
should also clearly grasp the purposes

of the organisation and be committed to them. Without such understanding and

commitment on the part of the people, no matter horv laudable the objectives and how committed the members of the organisation itselfare, nothing can be achieved. Quite obviously, a pre-requisite for the understanding and commitment of members of the organisalion within and of the

concerned

people outside is an explicit statement of the

i

objectives.

Tbere is always a certain inertia in the matter ofdefining the purposes of public expenditure programmes, Very often they are not defined. If defined, they lack in clarity and precision. But, the worst that happens is that organisations implementing them develop purposes of their own. This is sometimes called 'goal displacement'. In the process, what ought to be just means really become goals. As an organisation becomes complex, the

day-to-day behaviour

of different groups of its members

becomes centered around

their immediate problenrs and pro'

cesses. Gradually, they come to occupy an increasing proportion of thei( time. Very soon the limited purposes become the actual goals for the groups and individuals concerned ard the

60

PrnronueNcr BuocgrrNc pon prexNro DEvaopnrnr

original purposes for which the organisation exists arejust for_ gotten. Sometimes a further perversion takes place; goals are paraded merely to serve as a facade for the unstated and se.llisb goals of the people controlling the organisation. ini.r.r, grolrp, are formed; and their main pre-occupation becomes preserving a:rd building the organisation itself rather than helping it serve the original puTposes. The organisation then degenerates a "bureaucracy" (pejoratively defined as the ,.pathologyinto of large organ isations,,). It becomes inward_lookini unless the discipline periodical spring,cleaning of goals aid ob3ectives ,of is imposed upon it. There is yet another, and more unfortunate, .,bureaucratic,, tendelcy. It arises not from lack of commilment to objectives but because of it! In the ..grand system,', that is Governmenr, often, each element tends to function unmindful of the impact of its activities on other elements. An organisation connected with the beautification of a lown may do an extraordinarily thorough job of clearing the slums with the utmost zeal and lnthusiasm but without realising that another organisation connected with the rehabilitation of the families displaced is not correspondingly geared to discharge its f,unction. In the jargon of economics and rn^auagement this is ..suboptimisation,,_improving the efi ciency of a part without contributing to efficiency of the whole. While this is essentially a matter for coordination in tbe l.mplementa_ tion of programmes, an essential pre-requisite for such coordinationis the specification ofobjectives in an inlegrated manner so that the objectives of diferent organisations are properly related to each other.
O bj ect

certain incomes. For example, a hoarding put up to give publi_

city to a small savings campaign does serve

As noted earlier, public expenditure is nothing but the common expenditure on behalfl of all the citizens for common good. At the same time every public expenditure programme, besides serving the particular common purpose, gives rise to
ih" .o*rrJn purpose

ives of individual prbgramme s

of promoting savings. But it aldo provides incomes to the seller of tinsheet, the seller of paint, the painter himself and the agency which puts up the hoarding. Since, as argued earlier, Govern_ ment is deeply concerned with income distribution in the

OBJEcrrvEs

rr

6t

conomy, it must ensure that the incomes pattern generated by each public expenditure programme conforms to the broader objectives of Government in regard to income distribution. This does not always meiin giving up certain programmes where the resultant income distribution is unfavourable. For example, the objective of defending the frontiers ofthe country cannot be compromised no matter what the resultant income distribution

is. But, it does mean that the programmes should be so formulated that the income distribution becomes as favourable as possible. For example, it is possible to put across the same message regarding small savings or family planning either through a T.V. network or through film shows or through a series ofperformances in folk arts like tamasha or burra katha.

The three alternatives give rise to three different patterns of income. The first criterion for defining the objective ofan individual public expenditure programme is thus its having impact on income distribution. It follows lhat the objectives of public expenditure pro. grammes in the fields of production and distribution of commodities, such as grant of fertilizer subsidy, should take into account the costs of production and the likely behaviour of the producers or distributois in passing on the benefit to the consumers. In the case of fertilizer subsidy, for example, it will not be adequate to say that the objective is to produce more fogdgrains because the expenditure has the impact of altering tbe incomes pattern of the farmers and the consumers. It is not a question of being pro-farmer or anti-farmer, but of makirg explicit the objectives in terms of the impact on income distribution behind the public e:,penditure programmes. Further, while it is true that such programmes have the efect of increasing production through the incentive of larger profits to farmers, the manner of giving such incentives can sometimes be counter-productive. It may happen that the incentive may give rise to expectation of further incentives rather than induce the recepients to produce more. The second criterion, therefore, is to ar.oid giving the impression, as unfortunately we seem to have created at places, that Government will do everything. The third criterion is to recognise the complementarity of public and private expenditures. Construction of canal distribution systems in irrigation projects is a case in point. Before

62

PrnronueNcn Buoctrrxc Eon PleNNro Dgvrroprr,rtNt

Independence, Governncent irrigation systems provided for of canals up to a discharge capacity of 5 cusecs (cubic feet per second). Construction and maintenance ofwater courses and fleld channels below this capacity was the responsi' bility of tbe farmers. This worked quite successfully. However, after Independence Government accepted the responsibility for onstruction and maintenance of water courses up to 2 cusecs capaciry. Later ttris was changed to I cusec capacity. But, even after the construction of water courses of 1 cusec capacity, the utilisation of irrigation has not picked up in certain irrigation projects as field channels necessary to convey water from water courses to fields have not been constructed by the farmers. We are not discussing here the justification for a particular Government decision. We are on the limited point that in defining the objective for the irrigation project it should be brought out that (a) Government would provide irrigation for a specified area and convey water up to a w.Iter course of 5 cusecs (or 2 cusecs or I cusec as the case rnay be) capacity and (b) the complementary objective ofconveying water beyond that point would be achieved through programmes to be taken up by the farmers and this woukl be ensured through adoplion ofspecifled legal, administrative, extension, liscal (tax/subsidy) or economic (price) instru-

construction

rlents.

In defining the objectives of individual progranlmes their conflict with the objectives of the individual households or citizens should also be taken into account. This is the fourth criterion. If the objective of private household expenditure P on any function, say, health, conflict with the objective of public expenditure Q and, as a result, there is a mutually cancelling effect the econonly does not derive the full benefit of public expenditure. The total benefit will correspond to a figure less than P +Q. If we recognise the conflict and define the objective of public expenditure programme clearly we could derive the full benefit. Even when there is no expenditure on the part of private households, it will still be necessary to take into account the role to be played by then, or the effort required to be put in, in order to achieve the objective of the public expenditure programme. For example, a public expenditure programme to construct cement tankers for collecting refuge at street corners conflicts raith the traditional habit of hotue-

Osrrcrrvrs rr

63

wives of throwing the refuge out of the window. Little purpose recognised at the outset that the programme will be successful only if the housewives can be persuaded (or compelled, if that were pcssible) to deposit the refuge in the dustbins. Such a .delineation of mutual responsibility is necessary for the successfui implementation of programmes. The fifth criterion is that the objectives for individual programmes should be neither too broad nor too specific. Such broad terms as "to promote economic development", "to se cure isocial justice", or "to serve the poor" are not good enough as .objectives. At the same time we have to guard against the opposite danger ofspecifying the objectives in terms of means

will be achieved in constructing such dustbins unless it

is

rather than ends. For example,

precise enough as an objective to facilitate formulation of programmes; at the same tin,e, "to spray x tonnes of insecticide y" will be to identify a particular means ofachieving the objective. Spraying inse cticide may not be the most efficacious way of

"to

combat malaria"

is

not

preventing the disease. Insecticide y may not be the best avail'

able for the purpose. Quantity x may not be optimum quantity with reference to the likely volume of incidence. An objective

must serve the purpose of stimulating the search for various alternatives, evaluation of relative "beneflts" and "costs". Too ararrow a definition particularly specifying the means, will preclude the consideration of other, possibly cheaper, alternatives ofachieviag the same objective. In the present case, one could start with a definition like "to reduce the incidence of malaria from p number of cases in 1000 population to q number ofcases in 1000 population in r years'time". The sixth criterion is that objectives should be defined in .operational terms so as to facilitate formulation of programmes. A certain activity (like distribution of seed) may only be a means to a certain higher level objective (like increasing production .of foodgrains) which itself is a means to a still higher level objective (like providing balanced nutrition 1o population). But, -we cannot define the objective of every activily as the highest level objective because operationally every link in the chain of activities must be programrned separately. Thus, we cannot specify the objective of the programme of distribution of seed
as balanced nutrition.

64

Prnronua.ucn

Buocnrnc ron Plextro DnvrlopueNr

The seventh criterion is that objectives should be realistic and attainable. Too ambitious an objective, especially where the political leadership becomes publiciy committed to it, can only lead to window dressing of programmes, false reporting on achievements and, eventuallv, general disillusionment when the programmes fail to have the desired impact. The last, but not the least important, criterion is that the objectives should be capable of being evaluated to determine the success or failure of programmes. Collection of data for evaluation costs money. The objectives should not be so specified that it becomes impossible or prohlbitively costly to evaluate their success. Examples which readily come to mind are some' of the crash programfies for employment we have had. As stated earlier, some objectives can be merely qualitative.. However, qualitative dimensions can become quantitative over a period of time. For example, one ofthe qualitative objectives. of a telephone service is to provide a disturbance-free telephone instrument to the subscriber. But, the number of occasiols on which the subscriber gets the disturbance and the number of' subscribers who make such complaints over a period of time clearly quantify this objective which can be measured and evaluated. Similarly, prompt attention by the doctor in the out-patient department may appear to be a qualitative objective of a health scheme since the time taken by the doctor must vary from patient to patient. But, over a period oftime the quality of service can be quantified by computing the average waiting time of the patient through systematic collection of data or samplq surveys. The objective should be specified in terms of the estimated average waiting time. Like everything else in Governmentn even objectives, once defined, tend to acquire a certain permanence. The emphasis in performance budgeting on explicit definition of objectives should not become an exercise in straight-jacketing. The system should carry within itself opportunities for reviewing and.: redefining the objectives at the time of preparing the annual budgets. Changes in economic or social conditions, changes in technology, or changes in inter se priorities arising from internal or external political developments must lead to rethinking on problems and issues and to redefinition ofgoals and objectives. Without such built-in resilience, performance budgeting will

OnJncrtvBs

rr

65

be no better, could even be worse, than traditional budgeting' Efficiency objectives In specifying objectives, "performance" objectives should be distinguished from "efffrciency" objectives' "To increase coal production from 100 million tonnes to 120 million tonnes" or "to increase fertil'izer production from 5 million tonnes to 6-

million tonnes" are periormance objectives. "To reduce unit cost of production of coal by rupees x" or "to reduce thE' quantity of sulphuric acid used in the manufacture of a tonne of superphosphate by quantity y" are efficiency objectives' Per-' formance and efficiency objectives can be in harmony with each' other but they can also come into conflict beyond a point" Electrifying every village in the State-a performance objective, can seriously conflict with reducing the unit cost of electric supply-an efficiency objective. The samc is true of extending coverage of transport and irrigation systenls. Efficiency of fueil consumption may deteriorate due to empty haulage; efficiency in water use may suffer because of larger evaporation and
conveyance losses.

Setting fficiency obj ectives-a simple illustrat ion Electricity Board isthe biSgest public enterprise at the State level. Its efficient working is crucial to the economic development of a State. The volume of electricity generated and supplied determines the level of industrial (and partly agricultura}. activity in the State. More important, the high cost of electrivarious capital and consumer goods.
cost possible.

city will result in higher cost ofthe output inindustry and, alriculture which will have multiplier effect on the costs of

It is thus important that electricity is generated and supplied at the minimum maximum
The Electricity Board in an imaginary state has an optimum' generating capacity of 5000 million units (kilowatt hours). The generating plants work at 60 per cent efficiency and gerterate 3000 million units. The transmission losses work out to 30' per cent of the electricity generated. The Board is thus abie to sell only 2100 miltion units. While framing the budget next year"

it

should be examined whether the efficiency of generation, cannot-be stepped up to, say, 70 per cent and the transnissiotl

66

PERFoRMANcE BuDGETINc EoR PLANNED

DevnropurNr

2100 million units, an increase of 33$ per cent without any additional investment in generating capacity. This is only a hypothetical case. In actual practice, the gain trray not be so substantial. Even then, it will be sizeable enough to take the trouble of examining the eftciencies in the working of the Electricity Board once a year. Thus, when the State Government wants to augment its resources by cutting down the losses ofthe Electricity Board, it should sit with the Board and determine what efficiency improvements are possible. This is not enough. Government should obtain periodical repbrts from the Board, say, on a quarterly basis in the foilowing simple format:
This year,s
level

'of

losses cannot be brought down to, say, 20 per cent. This will mean that the Board will be able to sell 2800 million units instead

Projected Actual
Ievel

level

for the ext

j'ear
70%

qchieyed upto

the quarter

Efficiency in
Transmission

generation loss

60% 30%

20%

The other possibility before the State Government for cutting down the losses oF the Electricity Board is to increase.the electricity tariff. This is re:illy a'.soft" option, not a ,,hard" one as some people believe. Increase in tariff will benefit the Board and the Government but the burden is borne by solneone else in the economy. Who are the beneficiaries of the present lower rate and whether they could be asked to pay more without disturbing their economies and their contribution to growth of the national economy bear separate scrutiny, This ooes not, however, create additional resources in the economy. The real "hard" option, therefore, is to gird up the loins and inrprove

the efficiency.
.Efficiency objectives in the agriculture sector

Apart from the production and employment. objectives certain efficiency objectives which can be set for the agriculture sector. lndeer,l, attainment of
djscussed earlier there are some of these efficiency objectives can help in faster attainment "of both the production and employment objectives. We will

Onrecrtves tr

67

discuss below a few such objectivbs by way of illustration' 1. Layout of land. Besides the uneven distribution of trwner-

ship, a major problem relating to land is parcelisation. While the size of the land holding of an "average" farmer has come down to less than one hectare (throwing over board all the research on "viable" holdings) it is not as if even this small holding is at one place. Dr' B.S. Minhas, the <iistinguished economist, pointed out in his book Planning and the Poor that, as early as 1960-61, the all-India average number ofparcels per holding was about five. The situation must have deteriorated considerably over the past 18 years' Thus, the "average" farmer today has one hectare of land distributed into 5 parcels of 0'2 hectare each located at five different places. According to the State-wise data furnished by Dr. Minhas parcelisation was high (the average number ofparcels in 1960'61 vas 7 to 8) in Orissa, West Bengal, Bihar and Uttar Pradesh' It may be a coincidence thatthese were, and are, among the poorest ,states, but there are also causal links between parcelisation and low productivity. The most obvious reason is that the managerial efficiency of the farmer in managing 5 farms of 0.2 hectare each, located away from each other, will be distinctly less that that in managing one consolidated farm of one hectare. This inefficiency implies a national waste. The second link is founded on the simple premise that loss of water due to evaporation in the field depends on the wetted perimeter rather than the area. Thus the 1655ss will be higher ifthe holding ol one hectare is divided into five different parcels than if it is consolidated at one place. Even assuming the best layout for unconsolidated lands (regular shapes with the least length offield boundaries) the evaporation loss could be twice as rnuch in unconsolidated holdings as in consolidated holdings. This loss in efficiency in water use is again a national waste. Undivided Puniab was one ofthe States which successfully implemented the programme of consolidation and the results .are there for every one to see. Thus, the "targets" set for consolidation ofholdings should be viewed as efficiency objectives of great importance.

2. Land utilisation. With increase in irrigation facilities which, in some cases' permits raising of second and third crops, some of the land can be cultivated more than once. Likewise,

68

PERToRMANcE
.

BuocrrrNc pon prANNro DevrropnrNr

some

of this efficiency objective in respect of irrigated land can be gauged from the fact that the average yields in irrigated areas are nearly twice the average yieids in areas without irrigation facilities. All the additional vield can_ not be attributed to irrigation. But without irrigation substan_ tial increase in yield is not possible. It is thus necessary ro ser targets for land utilisation, State by State, district by district, block by block and even village by village for each crop season separately for irrigated and unirrigated lands. 3. Efficiency in water use. -Ihe area that can be supplied irrigation facilities deperds on a) the availability of water at source, b) efficiency in water use, and c) cropping paftern. While there may be no control over (a), the latter two factors can be controlled. Efficiency in water use is determined by the area irrigated per unit quantity of water. Depending on the soil conditions, the optimum .,duty" or ,.delta" (area irrigated with reference to water used) can be assessed fairlv reliablv. Sereral field studies have shown that there is great *ur,ug" of water due to poor water management. Specific objectives in regard to efficiency in water useunder each projeci and each distribution system are, therefore, required to be specified. As mentioned earlier, public expenditure may not be the most efective instrument to achieve all objectives. ln any case, its efi-ectiveness may be enhanced if it is used conjointly with

capital investment! The importance

grass cultivated area reported is about 165 million hectares, Land utilisation is thus about 82.5 per cent. We can ill afford the shortfall of even this ordbr when 30 per cent of our people are starvirg. Further, on a base production of about l l5 million tonnes of foodgrains, a 10 per cent utilisation of the gross culti_ vable area alone can result in additional production of more than l0 million tonnes. The objective should. therefore, be to ensure utilisation of all cultivable land.. And this needs little

season as it may be water-logged; but may become culti_ vable during the rabi and summer seasons, Further, some areas may be "reclaimed" for cultivation through drainage and other programmes. The gross cuhivable area is, thus, estimated at about 200 million hectares, counting each area as many times as the number of crops that can be raised. Against this, the

kharif

of the land may not be cultivable during the main

Osrrcrtvrs

69

other instruments. For example, full utiiisation of land can be ensured either through legal and administrative measures penalising non'utilisation or through a tax instrument by taxing land that is not utilised or a combination of both' Similaily, the problem of parcelisation of land can be tackled either through legal and administrative steps to consolidate parcels of land on a graded scale of higher rates (so that, over .a period of time, this can lead to voluntary consolidation of holdings). These are examples of how Government can use more than one instrument to tackle the same problem or achieve the same objective. Sometimes, a broad social perspective helps. How is that in a country where a vast section of population are starved of iand (the landless rural households and the marginal farming households number 45 million) there can be any under utilisation of land ? Can we formulate programmes ln sucn a lnanner that they simultaneously secure our production, employment and effciencY objectives? - An idea which canbe explored is, that, in the layout. for consolidation of holdings, the marginal farmers may be glven land in the command areas of the irrigation systeffs so that publicly financed irrigation becomes an insurance not only agaittri grain shortage in the country as a whole but also .aiainst Jestitution of the most vulnerable sections in tbe farmin'g community. There is no ideological bias in the suggestion thl theirs is the first claim. This is Gandhiji's "antyodaya" ''"the last man should be the first to benefit' If credit arrangements are properly tiedup, there can then be no under-utilisation of land oi irrigation facilities because these marginal farmers cannot afford such in.difference. The layout of the land in the cornmand area may, therefore, be arranged with refenence to the alignment of canals and land on either side allocated exclusively to marginal farmers, and, if possible' to landless labour.l This may be one of the ways of simultancously achieving our production, employment and efrcipncy
{ This suggestion came up in an illuminating discussion the author had in Patna with Shri P. S. Appu, now Additional Secretary' Ministry of Agriculure, Government of India. The responsibility for making it here
is, however, entirelY

of

the autbor.

70

PERFoRMANcE BuDGETTNG FoR PLANNED

Dpvnopr.rnrr:

objectives. One may add, cynically, that if distribution of alms is all that we ar.e capable of doing_most public expenditure programmes concerning weaker sections have been nothing better than that-let us first line up the niendicants along the
canal banks.
Object ives of public enterprises

economic

Government. The aims and goals stated as follorvs:

Public Enterprises are now at the centre of the country,s activity. Their revenue budgets aggragate to Rs. 15,000 crores, as much as the revenue budget of the Central

of public enterprises may be

ii.
iii.

i.

to contribute to econornic growth; to assist in reduction of unemplol,-ment and correction of

regional imbalances;

to promote technology and to contribute to self reliance; iv. to produce quality goods and services; v. to supply the produced or traded goods and services at
reasonable prices;

vi. to serve as model employers; vii. to give, censistent with above

the investment made.

and

goals, reasonable returns on

Since profit is mentioned last, it does not mean rhat the financial working of public enterprises is nobody,s concem. If a public enterprise makes adequate surplus it goes to the bene_ fit of Government budget either in the shape of dividend or in reducing the demand for further funds for renovation, expan_ sion, etc. If a loss is made, on the other hand, it will have to be met by Government budget sooner or later. If the entorprise continues to make losses it will eventually eat up thc public money invested in it as share capital or loans. In this sense, we all have a stake in the efficient working and profitability of public enterprises. However, since public enterprises are set up as part of the planning process, profit is not the only index of efficiency. When product lines and prices are predetermined externally profit is not solely determined by the actions of management or efficiency ofthe enterprise. This makes it necessary to establish

OBJECTIvES

lI

1l

appropriate objectives for public enterprise-s' ln promoting ptJti" .t t"tptisis, we have done a splendrd job in the matter of left engineering and technology' Rarely has a challenge been in fields so diverse as making a missile and pro' unanswered ducing peanut butter' Our failures in public enterprises have been largely managerial in setting the objeciives on tbe one hand and in managing the men on the other. We are concerned with the former question. The difftrent objectives that may be specified in respect of public enterprises in a planning context include the product objectives, the cost objectives' the price objectives, the resource use objectives, the efiiciency objectives and the R & D objectives. The product objectives specify the nature and speclncations are well as the quantities of the output to be produced' Cost objectives specify the ex-factory prices of the products or the cost at which the enterprise should produce and market them. Price objectives state the delivery prices of the products which include the excise, sales tax and other levies' Resource use objectives specify the mix of input resources like capital' proforeign exchange, labour, natural resources to be used in costs' Efficiency ducing the desired outputs at the specified objectives specify the process and other efficiencies in making use ofthe aisets and other resou{ces placed at the disposal of the enterprise. R & D objectives specify the present state of technology and the directions in which R & D effort is being
pursued.

In private firms, product and price objectives are dictated by the "market" and the rest are specified by the Management or the Board of Directors. In respect of public enterprises, however, these two objeclives are specified as part of the planning process. The idea is tbat once they are so specified by the planning authorities, the managernents of pubiic enterprises will be free to devote their attention to the achievement of other

objectives. And, the product and price objectives should be so specified as to enable the enterprises to make reasonable profits at optimum levels of effciencY. There is no suggestion that a monolithic planning body can undertake thistask. A certa'in decentralisation ofplanning process is inevitable. Above all, the responsibility of the enterprise itself in independentiy working out and suggesting

72

Panponu,qNcn

ButcrrrNc

Eon plANNEo DsvnroprlrNr

'

for realistic planning. An enterprise may make a loss, among other reasons, when its product price is fixed low or it is working ineffciently. If former be the case, the planning authority must take note of and suggest suitable legal/administrative/fiscal action to correct the plice situation. For example, if the export price of iron ore is fixed low, for whatever reason, the National Mineral Development Corporation uill make losses no matter how efficiently it is managed. While the effcient managers get demoralised, inability to correct such imbalances or at least to recognise them while setting the cost objectives for the enterprise will provide a perfect alibi for the ineficient managers. The same situation prevails when an enterprise is compelled to buy its inputs, particularly raw materials. at excesSively high prices. After all, the enterprise lias control over only the ,,conversion,, costs, thet is, expenses invoh.ed in transforming the inputs into outputs. And,, it should not be forgotten that losses incurred by public enterprises are truly in the nature of subsidies, to either the buyers of the products or the sellers ofthe inputs, from out of public funds. While losses made by enterprises usually attract some arrention and lead to pressures to remove the demand/price deficiencies in planning, profits made by them can lull us into a sense of complacency. If an enterprise makes excessive pro_ fits (one'test of excessiveness being that the rate of return on quity capital is considerably higher than the rate at which it is able to borrow funds from the market), it means that either it is able to sell its products at unduly high prices which must surely be efecting tbe firms/individuals who are buying the products or it is able to buy its raw materjals and other goods ,and services at unduly low prices which must, similarly, be .affecting the firms/individuals who are selling their goods and rservices to the enterprise. Where profits made by a public ,enterprise are not the result of genuinely high standards of efrciency and productivity, their true character is a concealed tax on the customers or suppliers as the case may be. Thus, unless it be a matter of deliberate policy to tax the concerned firms/individuals, Government cannot pgrmit the enterprise to exploit them. Planning authorities must intervene to correct

"This kind of feedback is essential

appropriate product objectives can never be over_emphasised.

Oslrcrtvrs

73

ihe imbalaoce. Of course. the apparatus for economic manage' ment in Government must ensure similar action if private enterprises make excessive profits. Many profit-making firms may be really operating at a very low level of efficiency, but may be operating at unduly high margins sanctified by law or administrative approval' For example, the profits made by the Central and State Food Cor-

porations which operate at certain margins approved by Government or the market yards for agricuitural produce which collect, under law, one per cent market lees on niarket arrivals do not reflect their "efrciency". This is not to say that they are working inefficiently, but to suggest tha.t since profit is not the appropriate criterion to judge thern, the planning and budgetary authorities should go into other efficiency aspects as part ofthe annual exercise of specifying objectives.

Since modification of or addition to production capacities takes time, it is necessary that planning for public enterprises is done with reference to a longer time horizon than one financial year. Consequently, the advance projections made by the enterprises should also be on a long-1erm basis. In fact, it is desirable that public enterprises prepare long-range corporate plans to enable them to foresee their capilal requirements more 'precisely and phase them in such a way as not to create either bunching or breaks in public investments at the national level' Planning exercises at the enterprise level are the building biocks of the planning exercise at the national level. For another reason too planning and budgeting exercises in respect of public enterprises should be extended beyond the forthcoming year. The objective should not necessarily be to rnaximise profits, performance and effciency during the next year, if that objective is in conflict with the objective of maximising them over a longer tirne period' say, five or ten years. For example, it is easy to overwork a machine (a generator in the case of Electricity Board) without doing the necessary preventive. This may give the maximum profit, performance or efrciency for the next year; but, over the"life of the machine the achievement is bound to be less than the optimum' This has happened in many industries in the private sector' From the national point of view, this is wasteful. The cost and emciency objectives set fbrthe public enter-

74

PennonrraaNcr

BuocErttlc ron prlxNpo DrvEtonurNr

previous chapter often require detailed cost-benefit analysis. As observed earlier, the diff'erent stages of performance budgeting cannot be considered in watertight compartments and, costbenefit analysis, which we will be discussing in the next two chapters is itself a kind offeedback to specifying objectives.

listic. Performance budgeting sysrem with its ernphasis on explicit specification of objectives $hould thus help inculcate a certain. discipline in the public enterprises to make advance projections. ofthe demand for their products; the prices at which they might be able to sell, the costs they are likely to incur and the profits/ losses they are likely to make. This will, at the same time, enable them to identify rhe likely shortfalls in the utilisation of' cap:.city and the levels of efficiency which they hope to reach in respect ofthe various production processes and input uses like. Iabour and machine productivities. Such a system will help and, in turn, be helped by the central planning authorities to remove bottlenecks and deficiencies, to correct demand and price deficiencies in planning, tci plan for optimum utilisation of national resources-capital, capacities, natural resources and manpower, aDd to improve productivity and efficiency at the national level. To sum up, the approach in performance budgeting isto. make a searching analysis ofthe costs and efrciencies in respect. of all activities of Government and specify production, efrciency, and other objectives by each IVlinistry, each Department, and each unit for the forthcoming year. On-going activities, neglected hitherto, deserve as much emphasis as activilies that necessitate investments for the future. lndeed, future investments. should first be made to remove the bottlenecks in making fuller use of' the existing investments. Specification of objectives as discussed in tbis and the
rea

enterprise itself in the last four or five years. While considera_ tion at (a) should not lead to unrealistic and ambitious standards, failure to achieve which can only lead to frustration and loss of, morale, considerarion at (b) should not persuade the enterprise or Government to fix low standards on the Dlea of beins

efficiency of enterprises producing the same or similar goods and services in India and abroad and (b) the past performance of the

prises should take into account (a) the current trends in ths

ANALYSIS

II
(in
Project A

I lJ rupees)

Proieci IL
1,06,700r

Capital employed Value added per annur4

Cumulative prsent value factor at 10 per cent discount rate (from the second table in Appendix 4) Present value of value added over years VACE*

60,800
17,2A0

21,200,
7.61

(for 7

4.87 years)

(for

15 years) 1,61,332.
1s1.2ya,

83,764 131.8%

xto denote that the ratio

is

worked out on cumulative value added.

an output determined by the Plan in a specified sector or industry in a predetermined time frame, a percentage or a ratio adequately serves the purpose. It is much easier to talk to and convince people in terms of a ratio. The ratio which is well understood by every one is that ofnet revenue benefit or profit to capital. We have only pleaded that the net revenue benefit and the capitai should be worked out from the point of

the net present value, ignoring the distinction between capital and revenue accounts, has some significance only if we are comparing the values across the projects or sectors. If the idea is merely to select one of the available alternatives to achieve

view of the community. Thus, if we discount the future costs. and benefits for the purpose of applying our criterjon, we slallr do so separately for the .value added'or the numeratoi and,_ if need be (where project construction is spread over a number of years), for the denominator and still apply the VACE criterion as a ratio, as illustrated above. For the interested reader a word of explanation on the distinction between the ,,internal rate of return (IRR)', (see Appendix 4) and the VACE ratio for public expenditure pro_ grammes is in order. The ROI and other profiiability ratios, adopted in the private sector are based on rales of return on. capital invested (treating wages as cost) and hence, are comparable with the IRR because both are interest rates on money capital. In respect ofour criterion, where wages are treated as^ benefit, IRR merely corresponds to the rate used for discountine. futue costs and benefits and VACE represents the benefit derived by the entire community, not merely the investors ofcapital. Hence, the two are not comparable.

nl4

PERFoRMANcE BuDcETrNc FoR PLANNED

Drvrroplrrxr

Discounting plays a crucial role in the choice among alternative projects only if the projects have very diflerent Iife spans. "(ln the above example, Project B would not have become preferable if it yielded benefits over l2years instead of 15 years). lt may also become crucial in the selection of projects 'with the same life-span p rovided the benefits are unevenly spread .over the lives ofthe respective projects. However, assumptions regarding uneven spread of benefits, which are common in text book illustrations, are not very realistic in practical life. It may be useful to recapitulate at this stage the swinging fortunes of the two alternative projects, A and B, as rve developed the criterion step by step.
Project

Project B
6'@n

l.

When the ROI criterion of tho private sector is used:

-4ry2o'ooo
2- When Value Added is compared with Capital

,, .o., '-'""

ffi'

tsoT

17.000 22.v _ r., ,", :+07

so$5:
eo,ooo--''"

Employed:

3. When Value Added is corrected for its impact on income distribution:

17.200 : ", ^",21.2y _"o.", 5lP0O: r+ +7o -:--- zo r7o

21.a0_,o o., tt'v7"
into

4.

When Capital Employed is corrected for scarcity of capital and foreign

exchange:

60"800:
-5. When Value Added
account:

17.20026'5

'i17ur61,61,332

by the Project ov:r its life span is taken

83,764 :
6-o,aoo

"^_ ^^, 131'8%

t,o;rM -

1st '211

As the selection of projects depends on various assumptions 'it is necessary to make precise and explicit assumptions regardingthe demand for the product, the price adopted for valuing the output, the life span over which the proiect is expected to yield the output. Equally. it is necessary for the Planning Commission to prepare explicit guidelines on the correcrioh factors to be applied for achieving the income distribution "objcctives, on shadow pdces to be adopted for conserving the

Auar-vstg n
use of scarce

115

inpuls like capital, foreign exchange and, where appropriate, other commodities and the discount rates to be used. These are not matters to be left to the analyst because there is no known methodolcgy of cost benefit analysis which can subsume all these within itself.
,S hadow p r ic e i fo

To conclude our discussion of the

r fo re i gn

e xchange

selection criterion one

further point needs to be made. Where a shadow price is fxed for foreign exchange a suitable adjustment is necessary in the 'revenue' account also. Thus, if there is a net outgo of foreign exchange (the expenditure in foreign exchange being more than the earnings) an amount worked out on the basis of the difference between shadow price and unity is required to be deducted from the value added by thc project. On the other hand, if there is a net inflow of foreign exchange due to the project a

similar amount is required to be added to the value added by the project. This is independent of the exercise ofvaluing the benefit or output of the project on c.i.f. ot' f.o.b. basis, as the oase may be, and is intended to correct the distortion, if any, in the 'market' price offoreign exchange per se. Let us illustrate the use of shadow price for foreign exchange with the following data pertaining to an import substitution project (ignoring the problem of time spread).
(in rupees crores)
Capital cost of the project (of which foreign
exchange is Rs. 30 crores). Cost of production comprising raw materials, etc.
wages 50.00

'

25.00

to.oo
6.00
4100

interest
deprciation

5.00

The raw-materials include imported raw materia,s valued at Rs.5 crores. The output is sold on no profit, no loss basis. The c.i.f. value of the product, if imported would be Rs. 20 crores.
Shadow price

for foreign

exchange

is

1.5 (i.e. a 50 per cent

premium).

116 PrnronlraNcE

BUDGETTNG FoR PLANNED

Dsvrl-opr4rNr
pRrcEs)

CnI.cur.lrtoN or VACE (wrrHour sHADow

'
Value of the product

VALUE ADDBD BY THE PRoJEcT

.R

s. crzres
Wages

Rs. trores 6.00 4.00

10.00

(at
-LeJ.r

cost)

,Ler,r

Depreciation TorAL

Raw materials, etc.

25.00 (10.00)
(5.00) 10.00

Interest

Capital employed by the project: Rs. 50.00 crores (ignoring other items

for which no details are given).

10.00 vAcE:5 o:20.0%

CALcuLArroN oF VACE (wrrn sn.nrow rnrcrs)

VALUE ADDED BY THE PRoJECT

Value of the productr .Less raw materials, etc.3

.Less

depreciation

30.00 (12.50) (5.00)

12.50

Wages

6.00

TorAL
No le5:
1

Interest 4.00 Net benefit due to earning foreign exchange 2.50

12.50

Capital entployed by the project: Rs, 65 croress

c.i.f. value of the product (Rs. 20 crores) plus 50 per cent premium for foreign exchange. I cost of raw materials (Rs. 10 crores) plus 50 per cent additional cost for imported raw materials (Rs. 5.00 crores). e capital cost of the project (Rs. 50 erores) plrs 50 per cent additional cost for imported equipment (Rs. 30 crores)

vACr

-## :

D.z%

to substitute imported equipment costing Rs. 30 crores in foreign exchange if the indigenous equipment costs less than Rs. 45 crores because, up to that price level, capital employed with indigenous equipment will be less than that with imported equipment on the basis of shadow price for foreign exchange.

The net benefit due to earning foreign exchange (Rs. 2.50 crores) on revenue account reflects the excess of social benefit over its market price, i.e. the official exchange rate. In respect ofthe capital costs, the choice often is betwe--n importing equipment or substituting with indigenous equipment at higher cost. With the shadow price for foreign exchange frxed at 1.5, it pays

ANlrvsIs tr

1,17

The shadow price thus determines the "trade off" level between imports and import substitution. Where such a shadow price is not fixed we have no basis to say whether a particular .decisiotr to substitute for imports is wise or not. And, it is not as if, in the absence of a shadow price, a decision to substitute imports is 'neutral' to the value of foreign exchange. For example, if we decide to substilute imported equipment with c.i.f. value of Rs. 30 crores with indigenous equipment costing Rs. 60 crores it does apply that we are valuing foreign exchange .at a shadow price of 2.0, that is, we think that the social opportunity cost/benefit of foreign exchange is twice its official ,exchange rate. If we offer such a high premium we may well be able to earn moro foreign exchange by exporting or irnpott

substituting in other fields. It is, therefore, necessary to have a yardstick, in the form of a shadow price, to measure the benefit derived from import substitution, so long as it is believed that there is a divergence between the social opportunity cost/ benefit and the market value, or that the demand for foreign exchange is more than its availability at the ofrcial exchange To proceed with above illustration, on the basis ofa shadow price of 1.5 there is net benefit to the economy from the value added by the project. This, however, is not good enough from the point of view of fficiency in the economy because the VACE ratio with shadow price is less than the VACE ratio without shadow price, reflecting the high foreign exchange component in the capital cost. Thus, if we were to decide the fate of a project solely on the basis of its contribution to selfreliance, shadow price for foreign exchange yields a simple .criterion for decision making. If the VACE ratio with shadow price is higher than that without shadow price, accept; otherwise, reject. The criterion can be applied at any level of
"decision making.

rate.

a shadow price we can work out, using elementary algebra, the shadow ptice at which the project can be justified on the above criterion. In the above illustration, it can be easily worked out that the proj ect will be justified if the shadow price is 1.56 or above, i.e. only with such a premium on foreign exchange it will be worthwhile taking up

Ifthe planners are reluctant to fix

the project.

The rates thus worked out for different projects

I18

PsRponl{,{ncr BuocrrrNc ron pL,cNNro Dnveroprrlnrvr

can then be compared. However, such a procedure will betray complete lack of faith in decentralised decision making. The advantage of fixing a shadow price, apart from helping to decentralise decision making, is that with a sufficiently high

shadow price it should be possible to bring into play a market mechanism to substitute for some of the more cumberson o administrative procedures .to 'control' or .arlocate' foreign exchange. This presupposes, as mentioned earlier, a complementary tax/subsidy mechanism in respect of the privale sector,

Implemeitation We should not minimise the conceptual difficulties involved in defining the costs and benefits, or the computational difficulties involved in measuring and attaching value to them. We cannot also ignore the cost involved in collecting and analysing the data. Any sizeable effort or expenditure on this will be worthwhile only ifthere is a reasonable chance ofthe analysis determining the fate ofor substantially altering the content of the programme. If those in power are committed to a particular programme to be implemented in a particular fashion, there is
no

point in collecting and analysing data for window-dressing

purposes. This isa question of basic honesty ofpurpose and intellectual integrity. Some of the public expenditure programmes may not give the desired level ofbenefits or achieve the desired objective of a more equitable income distribution, but it may be necessary to take them up because of their linkages with other programmes. In such cases, programmes should be grouped

into appropriate packages for purposes ofanalysis. The more manageable such packages the better will be the quality of analysis and, indeed, their management. In some cases, we may be considering replacement, addition or alteration to existing production capacity. In such cases we do not make cost.benefit analysis for the entire project, The analysis is to be confined to the additional or incremental benefits, because only the question of additional investment i$
under consideralion.

Likewise, in some sectors many input programmes will be involved. In agriculture, for example, different types ofirrigation, land improvements, seeds, fertilizer and pesticides pro-

ANALYSIS

II

l19

grammes contribute to agricultural production. The question to be determined is the additional output from additional investments in one or more of these input programmes. If we are considering a number of alternative schemes, we have to work out the additional production likely from the investment of a fixed sum of money in each of the input programmes and select that which gives the highest additional yield. Conversely, outlay needed in each of the input programmes for a fixed quantity of additional production can be worked out so as to select the one which requires the least investment. It follows that to permit such meaningful and worthwhile analysis all the schemes which contribute to the same final output should be brought together within the same planning/budgetary/manage' ment framework. In making the analysis in relation to any given objective care should be taken not to construct the analysis from the beginning. All possible alternatives to achieve the objective should be considered in the analysis. One important alternative generally ignored is "do nothing". Since programmes are not taken up in a vacuum, only if we make out a case that the additional benefits flowing from a new progranime are decidedly significant oompared to the benefits flowing from the existing programmes should we really go in for spending public funds on the new programme. In regard to continuing progranlmes too, it is desirable to undertake detailed analysis at periodic intervals. In fact, some proponents advocate "zero base budgeting", that is, at the time of every budget, all the programmes are examined de novo assurning that none existed earlier. However, what is adopted today is quite the opposite: "incremental budgeting". We take all the existing programmes as given. The discussion

centres round

on how much increase should be allowed in

respect of each programme. A thorough "zero-base budgeting" cannot certainly be an annual exercise. The time and cost

involved will be enormous. But, what can be attempted is periodical spring-cleaning. Certain selected programmes from among the existing ones can be taken for in-depth anaiysis every year. In the United Kingdom, for example, they undertake Programme Analysis and Review (PAR) of seiected programmes every year.

I20

PtnronueNcr BuocerrNc non

pr.n Nr.rro

Dpvnoptrnlr

At the same time we must remember that public expenditure ?rogrammes caunot . be switched on and switched off at will. 'The unfailing rule is haste makes for waste, either way. Even ;if it is decided as a result of a detailed analysr.s as above, that a programme should be given up, it can only be ..phased out', gradually, just as every new programmg has a take off pericd of its own. Creating the right environment and finding the data base for such analysis will take some time. Improriements can come only over a period of time although one must hasten to add ,that since the pay-off is likely to be great (much more in developing countries than in developed countries) it will not be advisable to be too slow in making progress. Last, but not the least important, cost_benefit analysis should
promote decentralised decision making. lndeed, this is the justification for using cost-benefit analysis as an adjunct to planning process. Once the parameters regarding 1) the nature
fixing the prices
be used,4)

.econorrists, accountants,

and administrators working in thc ;field. This will also ensure that the costs and benefits are estl_ :mated on a more realistic basis, firmly rooted to the ground, respecially because the lower level authorities can then be made
squarely accountable.

'different Central Departments. State Governments, autonomous unoertakings and local bcdies can take the decisions regarding 'allocation of resources at their disposal to achier,e the overall and sectoral objectives set by the planning Commission. This vill 1) reduce the work load on the planning Commission deaving them to devote attention to larger policy issues, 2) provide the necessary cross-check to price and demand decisions 'made by the Commission, and 3) provide adequate training to

ofthe outputs, 3) the shadow pricis. ifanv to the weights to .be attached to incomes u"".uing to difereht income groups, and 5) the need for and the method of ,discounting the costs and benefits are laid down centrally by

.and extent ofcosts and benefits that should be taken into account, 2) the methodology to be used for their varuation especially for

CHAPTER VIII

CLAS SI FICATION
Alur-vsrs oF A programme can be undertaken only on this basis of a detailed examination of the various activities that go to achieve its objectives. Production ofcloth in atextile mill, for example, would need the establishment and running of a group of machines to produce yarn from raw cotton (spinning)' another
set ofmachines to make grey

cloth from yarn (weaving) and a third set to give finishing to the cloth. While analysing the programme of producing cloth it will be necessary to go into ihe iechnology, the types of machines, the types of skills, and the amount of capital investment required for each ofthese
activities.

A pre-requisite for analysis ofa programme, therefore, is its activiiy classrfication. .Ir the literature on performance budgeting a progromme is defined as a set of activities designed to achieve one or more specified objective(s) a{Ld an actirity is defined as a homogenous type of work contributing to the programme' In relation to the objectives(s), an activity cannot stand by itself' It acquires a purpose only as part of the programme' Transport of materials, for example, is an activity. It acquires meaning only lvhen we know what is transported, where, and for what purpose. All the component activities of a progamme are, thus,

The activity classification serves the purpose of comparing the costs pertaining to an activity with the contribution made by it towards the objective(s) of the programme' It should' therefore, be evolved keeping in view, as far as possible' the following considerations:
1.

interdependent.

The activity can be identified with

unit of the organisation.

particular wingor

2. The assets being used to carry on the activity are capable of being clearlY identified. 3. The men as well as other resources such as stores and fuel,

122

Prnnonua.Ncs

BuncrflNc

FoR PLANNED

Dsvrlopvtrlr

employed on the activity are, Iikewise, clearly identifiable. 4. The accounting system will permit the accountal of costs:. penaining to the activity separately. 5. The activity classification helps in the consideration of as. many alternative ways of achieving the objectives of the. programme as possible.

classification. Also, in the process ofevolving an activity classification, it rnay become necessary to remodel the payment and accounting arrangements in order that the accounting system is more closely aligned with the managerial tasks.

profit is subsidiary to the task itself. ln other words, the points at which costs are incurred or revenues earned should not be the sole guiding factor for determining the activity

activities classification is that it task in its totality. Identification

However, the concept of responsibility centre ."l"ounr to. is identified with a managerial

In the terminology of management accountancy, different activities may be identified with differenr ,,responsibili ty centres".
of
relevant costs, revenues or

Sometimes, however,

an activity

matter of convenience. In the case of a textile mill, for example,. one can define production ofyarn itself as a separate prograntme. (with a quantifiable and marketable output or objective) and the deta.iled pro"..rdr in the spinning department ,u"h u, blowing, carding, coprbing, drawing, etc. as activities contributing to the prog.ramme of producing yarn. Further, even separate programmes with clear and measur* able objectives may be related to each other like spinning, weaving and finishing being related to each other even if they are treated as separate programmes. And, when we are con_ sidering the plethora of public expenditure programmes undertaken by Government there should be some way of arranging them in a logical and orderly manner. It is, therefore, necessary to evolve a classification in a hierarcbical arrangement building up to broader and broader groups of programmes. Thus, wbile. each programme may be classified into its component activities, the programmes themselves should form part of a broader, pyramid-like classifi calion. The attempt in performance budgeting efforts at the level of Government, therefore, is to evblve a functional classifcationby

classification

is more

CresstrtcetloN
functions and programm
es,

123

as segment of .the total organised effort of Governnient such or agriculture' Thus, a function comprises a po'iice, education number of programmes even as a programme is broken up into a number of activities.

a iunction being defined as a major

The functional classification is not, of course, relevant to the consideration and analysis of individual programmes designed to achieve specified objectives. However, it becomes very important when the limited resources available in the budget

u." to b" allocated or, more to the point, rationed as between different pragrarnmes. There is no known methodology ofcostbenefil a;alysis which will enable us to make optimum allocation ofresources between such diverse functions as defence, health and irrigation.Itis useful to recall that cost-benefit analysis can be made only when the benefits can be identified and if' possible, quantified and measured on a common measuring scale be it money or some olher standard' Th"- diverse outputs of these sectors do not satisfy this requirement' We have' permit therefore, to evolve a functional classification which wiil Executive and the allocation of resoutces by Colernment, the Legislature, on the basis of certain broad value judgements' It

should permit a "town planning" approach to resource allocation, that is, the finanical resources available in the budget are first allocated into three or four "blocks" at the highest level' Resources allocated to each block are further allocated to a number of convenient sub-blocks by groups constituted for ths purposes. And so on. ' Wttit. evolving such a classification. it is necessary to keep the the functions or programmes with possible "trade off" within more resources same allocation block, For exanple, if we spend on prevention of diseases we need eventually spend less on we can curing the diseases, Again, for preventing the diseases

eitheiprevent water pollution or give preventive inoculation' Prevention of diseases, medical care, and supply of pure drinking water should all, therefore, be part of the same 'allocation block'. In formulating the individual programmes within such -a broad classi6cation, it is desirable that they are kept mutually exclusive, that is, each programme is uniquety associated with one objcctive. However, programmes are sometimes drawn up

124 PrnronrueNct BuncrrrNc ron prnr.ttrro Drvnopurxr

to achieve more than one objective. In such cases, it is necessary decide on the inter se primacy of the different objectives and classify a programme with reference to its primary objective. It sometimes happens that more than one proirurnrn. is taken up to achieve the same objective. This is undesirable for this simple reason that we wi.ll not, then, know which programme is

to

contributing how much to the achievement of the obiective. In respect of some of the goals and objectives, bon".n_.o, efforts may only complement or supplemeut the efforl s of non_ Government agencies. The classification should reflect those efforts also even though public expenditure may not be incurred on them highlight the totality of effort involved in achieving that objective. Finally, the classification should be operational. It is undesirable to a programme classfication which is theoreticaliy sound but which will necessitate (a) extensive restructuring of organisations, (b) extensive reshuffiing of personnel, or (c) extenstve retabulation of accounting data to arrive at the cosis of orogrammes or other performance data.

A new classffication in India

The considerations mentioned above are, at times, mutually conflicting. A certain judgement is involved in deciding on the actual classification. Further, a specific problem faced in our country was that the Planning Commission adopted its own classification for plan programmes, while the budgeis were basecl on the traditional accounting classification which remained unchanged for nearly hundred years, barring some amplification made in 1962 and some minor changes from time to time, Under such an arrangement, extensive reclassification ofthe budget heads was necessary even to arrive at the outlay fixed for a plan programme. In such a situation it was almost impossi_ ble to keep a watch on the progress of expenditure on vanous plan programmes. On the recommendation of Administrative Reforms Commission, the task of evolving a common classification lbr the Plan and the Budget was entrusted in March 1969 to a joint team of officers representing the Comptroller and Auditor General of India, the planning Commission and the Ministry 'of Finance. The author had the good fortune ofserving as a

CresstrIcAtIoN

125

Secretary to the Team which was headed by Shri A.K. Mukherji, former Deputy Comptroller and Auditor General,

The Team had the benefit of programme classifcations evolved, on a selective basis, by the various Central and State Government Departments as part of their eflorts to introduce performance budgeting to which Government of India became committed in i968. The Team held extensive discussions with the officials of the Central and State Departments in order to
evoive a uniform classification as it recognised that, while the classification should be based on sound logic it should also be acceptable to different Governments, Departments and agencies with their differing perspectives, emphases aud resource bases. The new classification suggested by the Team was adopted from the financial year 7974-75, the first year of the Fifth Five-Year

Plan.

That it could be smoothly and successfully adopted within about a year of the submission of the Team's Report was in no small measure due to the democratic approach followed by the Team. The point is made here not for any self-glorification but to emphasise that for efectively implementing any adminishative reform, commitment and leadership at the top shouid be matched by understanding and involvement down the line. Incidentally, by coincidence, the Central Government of the U.K. also revised their budgetary classification from the year 1974-75. They did not have any problem of coordinating with State Governments. (The Local Authorities were making their own efforts separately.) Considering the mammoth task we had undertaken in our country, the comparative outcome gives us reason to feel gratified. The basic attempt in the new classification was to transform the traditional accounting classification based on tbe nalure ofexpenditure, which facilitated itemised control, to one based on the purpose of expenditure to factilitate its linking with the
objectives of Government. The Team evolved a hierarcbical five-tier classification for all Government transactions comprising (1) Sectors, (2) Major Heads, (3) Minor Heads, (4) Sub.heads, and (5) Detailed Heads. Sectors indicate grouping of functions, while major heads broadly represent functions. The general scheme for the lower level classification is that minor heads broadly correspond

126 PenronunNcr Buocprtr.lc ron plaNNEl Dsvnr,opvnwr

to sub-functions or groups of rolated prograrnmes undertaken by different Governments (and even different Departments and agencies within the same Govemment), while sub-heads corres_ pond to specific programmes and schemes undertaken by ,different agencies. Scope is left for intermediate tiers of olassification to suit the particular needs of performance budgeting. "The lowest tier or the detailed head of account indicates the .nature or fonn of transaction like salaries, travel expenses, etc, as distinguished from the purpose of expenditure to which the superstructure of classification was oriented. (The reader who is interesred may refer to Appendix 5 which explains the new classification in greater detail.) With such a classification it is possible to adopt a .,town planning" approach to resource allocation. Thus, the first level allocation is among the sectors, that is, General Services. Social and Community Services, and Economic Services. The second level allocation is to sub-sectors, if any, within each sector, for example, agriculture and allied services, transport and communications, industry and minerals, etc. under the ,sector, Economic Services. The next level allocation is to diflerent major heads within each sector, for example, education, housing and social security and welfare under the sector Social and Community services. As we go down the hierarchy of classification, the ourpurs become more and more comparable, i.e. their money values can be expected to reflect more accurately the relative importance attached to thero. It will, therefore, be possible to use costbenefit analysis or other techniques as aids to allocation of
resources.

It is worth mentioning that the Constitution envisaged the the prescription of a uniform classification of transactions for all the Governments in India. The advantages are that thjs (l) permits a comparison of the activities of diferent Governments 'with reference to uniform classification for purpose of planning,
transfer

of

resourcers, analysis of programmes, evaluation, etc.

.and (2) factilitates a stable classification unaffected by changes in the composition of different Goverments so as to build a time series on expenditures and revenues of different Governments. This no doubt means. that such a uniform classification has to

be at a broad level,

that is, above the level of individual oro-

CllssrrrcetloN

127

:grammes undertaken by different Governments. This should not be considered a disadvantage when we are attentpting to build a budgeting system which is operationally flexible at the manageriaI level. In accordance with the above, which was also the past practice, only the sectors. major heads and minor heads were

proposed and adopted

in the new classification. The

fourth

tier classification, namely, subheads, we lefi

t<i be determined by the respective Governments and Departments. In a sense thejob

of the Team was town planning and demarcating areas for

.development of industries shops, residential houses, and public recreation etc. It was not expected to, and did not, go iDto the

architecture of individual buildings. This has been left entirely to the operating Departments and agencies. However, even as buildings have to conform to town planning regulations, the programrne subheads have to be evolved within the broad fram ework of major and minor heads.
Demands

Attention has already been drawn to the Constitutional provisions relating to the presentation of Government budgets (Appendix l). The budgets are broken up in Demands for Grants at the time of presenting to the Legislaturo to emphasise the wholesome principle of each Ministry/Department being made accountable for the funds placed at its disposal. However, allocation of business and of lunctions among the various Ministriee and Departments in the Central and State Governments do notfollow a uniform pattern either as between the
Governments or, over a period oftime, even within any Government. The structure of Demands for Grants cannot, therefore, be prescribed on a uniform basis. Moreover, the Administrative Reforms Commission noted that the Demands for Giants being presented did not duly reflect the principle of accountability

for grants

of individual Ministries/Departments. Further, it wanted that, ven within a Demand for Grant, each wing should be identified and funds allocated separately. It, therefore, suggested a general review of the structure ofDemands for Grants. Thc Team of ofrcers mentioned above examined this question also and submitted a report (in fact, earlier than the report on accounting classification) which was examined and accepted,

128

PBnnonueNcn BuocBrtNc ron pr,aNNEo

Drvlloprlpwr

with some minor modifrcations, by the Estimates Committee of in their Twonty Fourth Report (Fifth Lok Sabha). The re port was implemented with the Budget of the Central Government for 19'13-74 and the Budget of the Slate Govern_ ments for 1974-75. The main changes brought about were: 1. Decentralisation of budget provisions for loans to public enterprises and grants and loans to . States in the Demands for Grants of various Ministriesi Departments. (These were earlier included in two omnibus Demands for Grants of the Ministry of Finance). 2. Increasing the number of Demands for Grants being presented by each Ministry/Deparfinent, wherever justified, taking into account the enlarged functions (in the spirit of the new
the Lok Sabha classification on the anvil)3. Presenting a composite Demand for Grant for all exoenditure (revenues, capital and loan) relhting to each function under a single Demand for Grant, with the stipulation, as earlier, that funds would not be reappropriaied between tevenue and capital

(including loan) sections.

The purpose of the entire exercise was to make the individual Ministries/Departments squarely responsiblefor the budgeting of their programmes. Their reappropriation powers were enlarged wherever justified. Underthe new arrangement, an administrative MinistryiDepartment presents separate De mand for Grant for each of its major functions and a residuary Demand for Grant for all other functions. It is, however, possible that a broad function like social welfare, denoted by the major head 288 Social Security and Welfare, may be the responsibility of more than one Ministry, one in charge of scheduled castes and

tribes, another
personsanda

in

charge
charge

third

of the rehabilitation of

displaced

of

the pnysically handicapped. The

major head will, therefore, beoperated by all the three Ministries. The functional classification in accounts and the budget ensures that all expenditure on social security and welfare is brought together under a single major head so as to facilitate overall allocation of resources, while the distribution of provisions among the Demands for Grants of the conoerned Ministries ensures clear identification of operational responsibility with a concomitant control over funds. Since the classification of budget outlays within a Demand for Grant is by the standard

Cr,lssrprcenoN

129

accounting classification there ls no partrcular difficulty in preparing a 'cross walk' to arrive at the outlays for individual functions and sub-functions. An important consequence follows from the scheme of breaking up the expenditure budget estimates into Denands for Grants.Once the money resources are allocated as between the various Departments, Executive will not be free to reallocate them bet-. ween the Departments even where the total money resources. are within the aggregate limit authorised by the Legislature. Ifa: Deparlment desires to spend more than its authorisation in the: course of the year, it cannot seek the help of another Deparfment which may be spending less, it has to go to the Legislature and seek a supplementary authorisation. Thus, the structure of Demands for Grants presented to the Legislature plays a significant role both in the management of Government finances and in the control by the Legislature. Every scheme of present-

freedom of action, i.e. power to reappropriate funds, even as it imposes certain restrictions. Let us illustrate. Suppose a hypothetical State Government takes up only three programmes, namely, minor irrigation, animal husbandry and: fisheries andthis comprises only three districts, namely Rampur, Sitapur and Lakshmanpur. There are two ways of presenting the, budget in the from of Demands for Grants.
ALTERNATIVE

ation of Demands

for

Grants uniquely determines

certain.

Demand

I
Budget Estimate.
5.00 4.00 3.00
TOTAL 12.00

Mi
Unir of appropriation

or Irrigation

1. Rampur district

2. Sitapur district
3. Lakshmanpur district
Demand 2

/nirnal
Unit of oppropriation

Husbundary

Budget Estimate.
3.00 6.00

l,

Rampur district

2. Sitapur district

3. Lakshmanpur district
ToTAL

200
11.00

130

PrnponueNcp BUDGETTNG ron Fi.*Nxro DEvELopMENT

Demand

I
Budget Estimate
4.00 3.00 7.00

Fisheries

Unit of appropriation
Rampur district 2. Sitapur district .3. Lakshmanpur district

l.

TorAi'
At-tsnNllvr
Demand B

f4.00

I
Rampur

Development

of

Unit of rryforyiation

Budget Estimate
5.00 3.00

1. Minor iffigation

2. Animal htisUandry 3. Fisheries

TourDemand 2

4.00
12.00

Development

of Sitapur
Budget Estimate

Ufiit of appropriation

3.

1. Minor irrigation 2. Animal husbandry

Fisheries

400

ToTAL
Demand 3
Devel

6.00 3.00 13.00

opnlent

of

Lakshmanpur

4:rnn o{ appropriqtion

Budget Estimate
3.00 2.00

,1. Minor irrigation 2. Animal husbandry

-3.. Fisheries

TorAL

700
12.00

Under alternative A, funds can be reappropriated within the that is, between the districts Under alternative B. funds ean be reappropri ated tith the same district, that is, between the functions. The emphasis in the first alternative is on the development of specialised programmes in the State as a
same function,

qryhole. The decision making in this case

is

at the level

of

State

Cr,AssrFrcATIoN

131

Government Departments. The emphasis

native is on integrated development of allocated to programmes on the basis of the contribution to ,the development of the district. The decision making in this
case is at the

second alterdistricts, funds being :

''

in the

district level. Which alternative to choose depends

"

on what our goals and objectives are.

Constderation of the budget The concept ofb Consolidated Fund (see Appendix 1) into which all receipts should notionally flow first before any expenditure flows out, though vital for the Legislatures control over the Exccutive, has a certain drawback. This has led to consideration : of the two sides ofthe budget as if these are two separate ntities. This was adequate when taxes were levied mainly to fnance activities like police or defence. This is not adequate now l since taxation in particular sectors, especially taxes on goods and services. cannot be divorced from expenditute items in those sectors. Moreover, many expenditure programmes have their.receipt counter parts in the shape of charges for services rendered like fees for education, charges for hospital services or water rates for irrigation projects. Likewise, the Constitutional requirement of breaking up of expenditure into revenue and capital items (see Appendix l)
ignores the possibility tbat there can be a "trade off" between thd two. For example, instead of constructing a new school building to accommodate more students out of the capital budget, olre c&o
'

think of running the school in two shifts by employing more teachers and incurring other incidental expenditure from the trevenue budget. It can be argued that this should be thought of before presenting the budget; but, it is a question of the degree of flexibility that the Legislature wishes to give to the Executive so as to secure the larger purpose of getting the most out ofthe limited resources. In any event, it is obvious that consideration of the budget by the Legislature will be more meaningful if it cuts across the dividing lines between receipts and expenditure, and between revenue expenditure and capital expenditure. For example, in respect of thi fertiliser sector it will be useful to have at one place all the following information.

'

'

132

PpnponueNcE BuDcETING FoR PLANNED

REcErprs

Drvnloputnr

EXPENDITURE

Revenue Budget

1. Customs duties on importd 1. Promotion, xtension and dislrifertilisers. bution services in the field of
ferdlisers.

2.

Excise duty onindigenous fertiliSETS.

2.

Subsidy on fertiiisers.

3. Lrterest and Dividend re:eipts

from the public sector fertilisers
facto ries

4. Interest and Dividend

factories, if any.

receipts

from the private sector fertiliser

Capitql Budget

3.

4.

InvestmeDt in public secfor fertilisers factories. Long and short term loans to public sector ferilillers factones,

5. Investments

in and loans

to

private sector fertiliser factoriers,

if

any

However, one has to bear in mind not only the principle of Legislature's control over the Executive but also the fact, that, inevitably, the responsibility for the collection ol taxes will be with one Department, that for promotion, etc. services and grant of subsidy with another, and the invesfment in fertiliser factories with a third. ln the circumstances, all that one can attempt is to bring these aspects together in taking decisions without disturbing the formal arrangements for Legislative or administrative
control.

APTE R IX

RGAN I SING

expenditure programme in the budget, but unless a series of decisions on the organisational structure, personnel and management systems and procedures are taken the results will not start flowing. Indeed, one may have to.go beyond the internal structures and procedures of Government and look into the institutional changes necessary outside the Government to make the programme a success.
Demarcat ion of ro Ies We have already discussed

NoBTLITy oF AIM does not. as sorreone said. determine the effectiveness of programmes. It is easy to incorporate a public

the larger question of the role play in achieving a specified objective. or Government can tackling a specific problem, and the various political, social, legal, administrative and price controls, credit, taxation, subsidy or public expenditure instruments available to it. The
instrument of public expenditure involves the maximum draft on public resources and should be selected only if it is distinctly superior to the other instruments, As with different instruments, it is important to recognise and demarcate the relative roles of tbe Central and State

Governments, public enterprises, private organisations and individuals in respect of any objective or programme. Any lack of clarity in this will either delay the programmes or make them less efective. The absence of demarcation of roles can also lead to leakage or mis-utilisation ofpublic funds. The story i! not unfamiliar that a farmer obtained, for the same well, a taccavi loan from a Government department, a second loan from a co-operative society and a third loan from a ,commercial bank. There is then the story of an Electricity Board electrifying the same village twice over financed by two different agenciesl The present brganisational structures with their overlapping functions and responsibilities are a happy

' ' .

134

PrnronrlrANcn BuocsrrNc ron Pr,lNNro Dsvrropl.mNr

hunting ground for "busy bodies, manipulators and parasites."

In the case ofmanyjoint sector and even private sector enterprises, more than one Government Deparlment or public financial institution invest money. Wbile this may be one way of spreading the "risks" of the enterprise (typical of afree

nrarket economy because private individuals have to bear such risks) it is a moot point whether such a procedure is conducive to efficiency with which public funds are being used because" even as the risk is spread, the responsibility for ensuring that the enterprrse subserves the social objectives on the one hand and functions at optimum levels of efficiency on the other also gets diflused. It is desirable that, where public funds are' invested, one agency, may bethe agency with the highest stake,

. avoid such overlapping investments. In a planning context, , where public funds are involved, spreading the "risks" is a , myth. In the 'organising' stage of performance budgeting we
-

is made

to accept this responsibility. Better still would

be to.

' ' .

should thus consider, if not already done at the objective or analysis stages, the relative roles of diferent organisations in the same freld of activity and demarcate them clearly. Detailing

the steps proposed to bring about necessary coordination

between the agencies also forms part of this stage, , Even within the same Government, such demarcation

of

roles as between the different Departments and

'

agencies and delineation of the needed steps for coordination is necessary. This is particularly so where different aspects of the programme are enlrusted to diffbrent agencies, e.g. construction of buildings

"

boing entrusted to Public Works Department, and maintenance oftransport fleet to another specialised agency. The ideal . situa-

' responsibility of one Department or agency, even ifthis involves. ' reorganisation of agencies. We have spoken of ehch programme being the responSibility , of one agency. This is on the presumption that programmes ' '
are so devised that each objective is covered by a comprehensive programme. But, instances are not lacking where more' than one programme administered by a more than :one agency Targets are fixed

tion undoubtedly

is to make each programme the

exclusive

are operated simultaneously to achieve the same.objective. for diferent agencies even where they do not

ORGANISING

135

paraindividually result in any benefit. The proliferation of little responsible Government organisations andbodies is not a for the spread of this malady. It is aggravated by the.fact that right most of ihese agen.i"t have parallel hierarchies running accepted in up to New Olthi and coordination, spiritedly theory, cannot be achftved in practice' What happcns is that the apex organisations finalise their targets with some coordination at the top level, but each of them breaks down these targets to correspond to the lower formations according to its owi information and procedures. At the ground leVel there can be serious disharmony in the targets themselves not to speak of the disharmony arising from uneven achievements by tha different organisations. This is targetry, not performance budgeting.

performance budgeting the identification and elimination of areas oo.uld, therefore, be where there is overlapping of responsibility for achieving the

One

of the pay-offs introducing

..same objective.

The main hurdles to restructuring the agencies within Government to align them with specified objectives are: (l) the rigidity in the personnel management system' the staff bang recruiteA and confirmed on departmental basis with little horizontal mobility, and (2) the reluctance of the staff to and move from place to place, particularly from Secretariat offices' The latter is, in turn' due "headquarters" offices to field to a) the stratification of personnel into localised "cadres"; b) the inadequate educational, health and other facilities outside the metropolitan totr'ns; c) the special allowances admissible to staff lotated in Secretariat and "headquarters" offces; and Governd) the concept of organisational hierarchy within the junior offcer in a Secretariat or "headment *h"reby even a quarters" ofli." .uo tick off a senior officer out in the field' Let us now look at the organisational aspects of public expenditure programmes in the agriculture sector to illustrate

the point that organisational structure must follow the objectives if achievement oi objectives is not 1o be jeopardised by the ."irtiog structure, and to cxamine some of the implications of

of restiucturing the organisations. As they say in architecture' if the structure is not designed to suit the function' the structure eventually determines what function is performed'

136

PsnponN4lr.,lcB

BuncsrtNc ron puNNro Drvrropl,lsNr

0 ryanising for agricultural development The need for localised coordination and ieadership in agri_ 'cultural development programmes is obvious. Area-baied . ,economic and statistical studies into the structure of land ownership, parcelisation of holdings, and physical features of land (high, low, undulating, water-logged, etc.) should form the basis for any planning or formulation of programmes. Areabased surveys on water resources, cljmate and soil conditions should, likewise, be part of the planning process. Local food habits and availability oflocal foo<i must be taken into accounr in conducting research into nutritional values and specifying 'nutritional objectives. Location-based research to arrive ar suitable cropping patterns and appropriate qualities and optimum quantities of seeds, fertilizers, pesticides and herbi_ lcides is the essence of modern technology. Distribution of lcredit and other inputs again requires specific area approach. The need for coordination arises because (l) these services and ,inpuis have to be delivered at the rjght time and in the risht sequence, and (2) conflicts belween the objectives and program_ mes of different agencies concerned with different services and inputs have to be avoided. Centralised planning and the process of implementation through a Iong hierarch]r of command cannot but ignore local realities and variations which, in the field of agriculture, may critically determine the success. For example, the optimum proportions of nitro_een, potash and phosphate in the fertilizer required by the soilin a remote are in north Bihar, for each season (as soil condition changes after every crop), cannot be determined by a single centralised agency. It can only be .determined by a localised agency. Our purpose is to optimise the allocation of resoufces to "varied programmes designed to contribute to the overall objec_ rtive ,of increasing the agricultural production. In ons area :minor irrigation niay give the highest return at the margin (that is, for the additional outlay proposed); in another it may be a drainage scheme ; in a third one it may be multiplication of the latest variety ofseed. An optimal allocation of resources. that is, one which maximises the return at the margin on the proposed outlay can be done only on the basis oflocal conditions. At the same time, the need for centralised coordination

Oncel,ttstr,lc

137

cannot be overlooked. For example' the fertilizer requirements ofdiffereirt areas spread all over India need to be aggregated to enable the planning of production of fertilizer and of their

distribution. Such

a task can be accomplished only by

of communication. So long as the planning and budgeting level is within easy communication reach of the cdntral agencies, there should be no great problem. Since the headquarters towns ofvarious districts in India are' or can be, connected by direct telex/telephone arangements with New Delhi it seems reasonable to assume that district is the highest desirable and lorvest feasiblo level at which planning and budgeting should be un dertaken in the agriculture sector. It may be argued that the plea ofeasy communication can be made in revetse to support centralised planning, so long asthe irpproach is "area based," instead of single-input or single-crop based. However, the other important aspect to be taken into account is the need for public participation in planning and budgeting because complementary activities are required to be undertaken by the farmers, since agricultural activities are overwhelmingly in the private sector' It is also necessary that district level plans and budgets consider the credit requirenents. The credit requirements thus worked out must form part of the performance budgets of the concerned banks and other credit institutions. It is not enough if their performance budgets merely indicate that amount Y wifl be advanced in the coming year which is, say ' 20 per cent higher than the amount X advanced in the current year' The question is how X ot Y stand in relation to the credit requirements of the activities, in quantitative lerms, envisaged in the district plan or budget. Distribution of credit is next in importun." ooly to providing a risk cover to the farmers' What is apparently a problem of distribution of other inputs can be pion.a, on a detailed analysis, to be really a problem of distritution of credit. And, if there is one argument which should finally persuade the policy-makers to switch over to district level iLnning and budgeting it is the need for coordination between Government Departments and the credit extending agencies at the local level. We have always paid lip service to planning at the grassroots

centralised agencY. Centralised coordination is, however, essentially

question

38

Prnponrr.rebrcr

Buocrrrltc non puNnro DeveroplrsNT

level. And, if some one seriously suggests district level planning there is bound to be a chorus suggesting that it should actually start at the block level or even village level. But tbe question is servants, scientists and other experts? For example, we need reasonably competent economists, statisticians and accounranrs

what is the lowest level at which we can station our civil

district.

benefit analysis we have been discussing, assuming that decentra_ lised planning will imply real decision making, not mere data collection. It will be impracticable to station such competent civil servants, scientists, and other experts at a level lower than the

to do the '.staff" work required for any genuine planning exercise atthe district level an4 for making the kind ofcost_

P rob Ie ms

of de c ent ralis at ion In respect of many other public services also,

to organise on an area basis instead of organising them on depart_ mental lines with hierarchies running up to the State capitals and New Delhi. This has the advantage that the citizens can, dirsqlly or through their representatives, help in raising resources and participate in the formulation and execution of program_ mes. This is the concept of ,local government.' Local bodies are supposed to be "cradles of democracy.' The urban municipal authorities that we now have were created by the British as .,safety valves" for growing pressures from educated middle class for participation in Government. After Independence, we have not taken them seriously. The Constitution does not recognise these authorities as the third tier of Government. No taxes or other sources of receipts are ,.reserved" for them. The Panchayati Raj institutions created afrer Independence as local bodies for rural areas have fared no better. Many of these bodies have become hotbeds of petty politics and corruption. State Governments have not rectified the situation at the political or administrative level. On the <_rther hand, nost of them have been superseded on narrow and partisan considerations. Meanwhile, a plethora of departmental and other agencies have been created to take charge ofspecific services thereby not only increasing overhead costs but also creating problems of coordinadon. Neither the ..cradles of democracy" theory nor the ,,safety valve" policy operates any

it is desirable

OnceNIsrxc
longer. The casualty has been the citizen-almost
sense.

139

in a literal

have

in evolving political organisations and on mutual trust with the result that any structures based have subject with which Government has anything to do must
not
succeeded
a district level organisation,

we What aie the causes for this malady? First and foremost'

a State level organisation, and a call them Departments, Ministries' Central level organisalion
ite tasic purpose of serving

Corporations, Boards or whatwe like. The result is that all the pathological tendencies ofa large organisation creep in and

the citizen through integration or

mutual coordination of various setvices is just forgotten' Second, we have not leaint to work as groups, work ag equals. To suggest that the doctor, the public healtb engineer' the economist, statistician and the accountant should sit together and discuss the health care problems of the citizens is

heresy. Each professional group would like to build and preselve a hierarchy of its own rather than submit to a superior authority belonging to another discipline at the local level' "Elitism" pervades the entire administrative system' Third, distribution offinancial resources is such that there has to be a downward transfer ofresources. One can have little quarrel with the argument that some taxes can be levied and collected more efrciently and economically at the Central and State level than at the local level. The cost of collection of Central taxes is generally less than one per cent; that of State per taxes about 5 to 6 per cent on an average (ranging f'rom 2 land revenue), while centin sales tax to about 20 per cent in the cost of collection oftaxes of local bodies is at times as high proas 50 to 60 per cent. There is' thefefore, a strong case to or Central taxes' The gressively replace local taxes by State agai$t enhancement of rates will also be less' How-

f.".ru..i
ever,

it is one thing to have sources of revenuo allocated on the principle of economy and efficiency in their administration and the iuite another to deny the local bodies and, consequently'
defeating. The situation can be remedied

citizens the funds needed for the essential services or to make the administrative arrangements so complex as to become self-

by specifying that certain taxes will be levied by the Central or State Governments, as the case may be, but the proceeds shall accrue to the

140

Prnronrra,tNcE BuDGETTNG ron

pran-tlo DtvrtopurNr

on aper.capira basis in respecr of the popularion to which they are expected to cater. The Ceniral and State uovernments can announce in their budgets the per capita rate at which grants wili be made to local UoAies. On the Uasis of such announcements the local bodies .uo pro...d with the finalisation of their budgets. The mechanics are not that important. The principle that the Central and State Gou"roments contribute certain sums on a per capita basis for the welfare of the citizen, to be organised localiy, around trim and with his pan icipation, is important. Thus, when we talk ofperformance budgeting we ought to be very clear_about the organisation of the ,erui.1, at the appropriate level. What are the services which should be decentra_ lised for purposes of planning and budgetingi Wt-ut ur" tt. services which should definitely be Jentrilised ,o .nrrr" "uniform" standards, policy and the tike? It is the author,s belief that efficiency in budgeting can be improved only through decentrarised declsion rnaiing ano that this process of decentralisation can be ,tr"ogth"n"J ;! u p"rfo._ mance budgeting system in which budgeis at various lavels are prepared on a wider data base, with a more explicit consi_ deration of objectives, and with greater particif'uiion ty tfr" civil servants on the one hand, and the citizens on the other. Such a system can serve as an effective feedback to the centra. lised agencies which isa precondition forthe success ofany scheme of decentralisaltion. Hopefully, such u syst.m will also enlist greater pubric cooperation and elicit higher order of sacrifices in the form of larger savings. The attempt in such a .system is to push the responsibility level.for. each objective as lower down as possible'and, after considering the various alternative p.og.uJ.r., for achieving the objective, to push the responsibility level for individual programmes still further down. While doing so, however, care needs to be taken to see that no Cichotomy develops between the so-called policy making and the so_calied implementation. Implementation must act as a feedback to policy'making, and this is possible only if those in charge of i-pf"-"otuiion parti_ cipate in the formulation of programmes und .u.r, objectives. The internal communication systems should be so designed as to make such participation really effective.

local !90ie1

OncnusrNG

t4l

Financial pou,ers In order that decentralised decision making is effective, delegation of financial (and other) powers should be based on the principle that 'authority should match responsibility'. Once a performance budget, setting out the ob-lectives and targets as well as the cdrresponding requirements of resources, is approved at the beginning of the year, the officer in charge should have the necessary powers 10 incur expenditure and acquire inputs necessary for the successful execution ofthe programme. There should be no itemised control over his activities. Unfortunately, because of the hierarchical, not functional, concept on which our administrative system is based their is excessive centraiisation of authority. Look at our Constituion. The chapter on Union Executive, after stating that ..there

shall be a President

of India",

adumbrates the concept of

executive power in the following words: "The Executive Power ofthe Union shall be vested in the President and shall be exercised by him either directly or through officers subordinate to him in accordance with the Consitution". Thus, for example, the station master, the clerk in tbe post office and the extension officer ir. the community development block have no inherent authority to serve us or achieve results. They can oniy exercise such authority as is delegated or redelegated to them from the President downwards. It thus becomes all the more necessary to take deliberate steps to match authority with responsibility-

As many observers oi the administration system in our country have noted, the question of delegation of adequate
powers to the field officers is critical for the success ofdevelopgress in the matter of delegation of financial (and other) powers

ment programmes. It is the case of this book that real procan be made only in the context of a performance budgeting system with clearly specified objectives and a clearly defined organisational set-up. Let us consider an illustration. In a big irrigation project. a Chief Engineer may be in overall charge ofthe entire project, a Superinlending Engineer in respect of a branch canal system, and an Executive Engineer in charge ofa distributary system. The Executive Engineer's functions are: (a) to irrigate maximum area possible in his Division-a performance objective, (b) to achieve the highest effciency in the utilisation of water as judged by the area irri-

142 Prnr<-rnulNcn BuocerrNc

gated per

FoR PLANNED

Dnvrropurtr

have full freedom to decide the manner in which he can achieve his objectives and targets. In other words, once the end is specified, the means should be left to him. He can, for exampie, consider whether greater efficiency in water utilisation lies in (a) reducing the number or the size of outlets, or (b) providing gates to them, or (c) raising the banks of water courses, or (d) clearing the bed of water courses, or (e) lining the water courses, etc. Each one of these measures can help achieve his efficiency objectile of betler water utilisation. He has to make a cost-benefit analysis of the various alternative courses open to him and choose one ofthe activities or an appropriate mix of the activites. It may be added that analytical capabilities necessary for performance budgeting can be built up only if such exercises are carried out in the field to tackle lower level resource allocation problems. Training courses in techniques can supplement but not substitute for such experience. Thus, the vexed question of delegation of powers can be settled satisfactorily only if we make a precise assessment of the powers necessary to get a job done. What happens now is that in case of an emergency, as when a river or canel breaches, all powers are delegated and all rules relaxed; but, in day-today working there are far too many restrictions and prohibitions. lf we desire to tackle the problems facing us on a "war footing" we certainly need to look into the question offinancial {and other) powers with reference to the tasks entrusted and not on the basis of rvho will get what powers. Just as we have spokert of pushing down the responsibility levels for each objective ard for each programme, it is necessary to push the'competence' level (in terms of financial and admi-

unit of water supplied-an efficiency objective, (c) to achieve (a) and (b) at least cost and (d) to ensure the collection of revenue due to Government on account of area actually irrigated. The performance budget of the Division for the next year should be discussed with the Executive Engineer and the objectives and targets spelt out in physical and financial terms, as appropriate. Once this is done, on the basis of mutual discussions, there should be no restriction whatsoever on the Executive Engineer in the matter of inviting tenders, placing cotrtracts and purchasing stores. Going a step further, he should

OncaNtsrNc

143

as far down as necessary. Powers shculd be reserved for the higher authority, or reference required to be made to him, only if the higher authority has additional information or special expertise at his disposal. This should be subject to the further safeguard that such information and expertise cannot be made available to the lower authority for reasons of (a) cost involved (b) shortage of skilled manpower and (c) security. Consideration at (a) shoutd however, be weighed

nistrative powers)

Lrgainst the'cost' of the likely delay if a reference is required to be made to the higher authority. Where the higher authority has no additional information or expertise there should be no question of shifting up the 'competence' level to him. Delegation of financial powers should thus be undertaken as a genuine "bottom up" exercise to matcb authority with responsibility.

Accounting sl stem Accounting is the iife-blood of financial management system. IJnfortunately, a certain dichotomy has developed. in our country between "finance" and "accounting". While they are two aspects ofthe same system, "finance" has been treated as a question of distributing patronage and "accounting" has been reduced to a question of keeping records. One can possibly say that finance is accountingp/zs; but it is certainly not .account-

tant must get

warranted.

ing minus, except to say in a rhetorical sense that the accounover his concern for details where it is not

.r. j

the case of accounts, from the Comptroller and Auditor General of India) to the administrative Ministries. The func.
tions should be transferred down the line to the lowest operating unit which has a performance budget of its own. Let us

The result of the dichotomy is that neither function really got involvedin management. Government of lndia have recently taken steps to integrate the two functions and take them closer to the administrltive Ministries. The formal transfer of the functions was completed by October 1976. Similar action is presently contemplated by the State Governments. However, as in the case of delegation of powers, it is not,enough if the functions are transferred from the Finance Ministry (and, in

illustrate.

144 be

P[,RpoRMANcE BUDGETTNG FoR PLANNED

Dsvgr,opvr]lt

In the case of the irrigation division mentioned earlier it will necessar5, for the Executive Engineer to have information compiled in his office on the expenditure incurred in the construcfion of the various minors and water courses in the water distribution system under his control and the maintenance expenditure being incurred on them. A rnacrolevel reform of the classification system was done by the Team of officers referred to in the previous chapter. The Team had also, incidentally, suggested that under each major irrigation project, each major component like headrvorks, main canal, distributaries should be treated as subheads to facrlitate booking of expenditure accordingly. This was with a view to correlating

financial outlays with physical targets. Unfortunately, no follow-up action has been taken in many States. Even the
suggested sub-heads have not been adopted and expenditure contioues to be recorded under the old subheads like A-Preli-

minary,

the structures

B-Land, C-Bridges, etc. which give the nature of built. This classification, which is the traditional input-oriented accounting classification, may be useful for some limited purposes but is wholly inadequate to correlate

the investment made in each branch canal, distributary, to the 'physical progress during construction and to the benefits derived (that is, area irrigated) on completion. Under the existing arrangement extensive reclassification of accounts is necessary to determine the capital or maintenance cost of any subsystem, for example, the value of capital assets placed at the dis-

ofthe Execuiive Engineer and the cost of maintenance each minor, water course, etc. To introduce performance budgeting at that level it is necessary to modify the accounting classification as well as the procedure for compilation. The accounting system should also enable the Executive Engineer to analyse the expenditure under various items of work like raising the banks or lining ofthe canals in order to enable him to make an analysis of the relative benefits from various prog:ammes of work as compared to the costs. Unless, thereforq the finance and accounting functions are
posal

of

also decentralised to the lowestpossible level, the desired results

from introducing performance budgeting

system

will not be

forthcoming. This, however, implies transfer of staff to field

ORcANISTNG

145

offlces which poses certain problems to which we have already alluded.

added that the accounting requirements of and agercies for the purpose of improving performance will vary and it is no longer feasible to have a uniform system for all of them. There is need to have considerable flexibility in this regard. But, it needs to be emphasised, each Department must work to a system designed to suit its requirements. A system is no guarantee to success (because, must

It

be

Departments

men may t'ail) but without a system nothing great is ever accom--

plished.
Tho ethoi oj peribrmcnce budgetmg

What is important in performance budgeting is not so much the use of sophisticated econohric, statistical or accounting techniques of quantification and measurement but the shaping of a critical and questioning attitude. What is it rle are trying to do? Whai are the d.ifferent ways of doing it? Which is the most effective and least cost way? How do we ensure that results are achieved? What is the feedback mechanism? What are the premises on which the objectives were based and programmesr formulated? Do they continue to be valid?-Asking these" questions is not an exclusive task of the accountanq it is central to the management of xhe Departnent or agency. Neither' should the head of the Department or agency be reluctant to. lend his perspective to it, ncr should the accountant pretendi that he can prepare a meaningful performance budget witliout such a perspective. There can no longer be any question that the accountant alone is cost-conscious or the executive officfAli alone is goal-conscious. Also, what is required, to begin with,is not so much the knowledge ofthe detailed techniques as honesty of purpose and willingness to be held accountable fot. the public resources placed at their disposal. The accountants in Government are a despised lot. (Their. counterpartg in the corporate sector are only a little less. so)" This is because, human beings generally resent being controlled: by others. They, somehow. submit themselves to a superior in, the regular chain of command, butjust cannot tolerate a paralle\ often junior, functionary sitting in judgement over their per_ formance. This arises from a misunderstanding, on bq.th sides,

146 Penronuer.rcr BunorflNc ron PrllnEo

DEYELoPI,IENT

of the control functicn. Control, assomeonesaid, is not supervision. lt consists of merely seeking clarification on what the objectives are, how their accomplishment sbould be measured, vhat is the periodicity and yardstick of such measurement and vhat is the acceptable ievel of accomplishnent, performance ;above or below which level demands the attention of higher .authorities. It is the duty of accountants to make joint elTorts 'with difrerent levels of management to evolve indices efiiciency or perfumance, to assist in measuring the actual performance, and to report to appropriate authorities. To say that the eficiency of an electric supply system will be judged (negatively) by the percentage loss of energy in distribution is to fx an index of efficiency; to say that the such loss should not exceed l5 per cent ofthe energy supplied is to fix a standord. lt is not the function of accortntants to set standards of perfotmance ot take corrective or retributive action. If eforts are made to introduce performance budgeting with such a clear notion of mutual responsibility of the functionaries it will be possible to
enlist enthusiastic participation at various levels. The resentrnent of the executive officials is not against being judged-most honest and efficient officials would like to be
judged and be rewarded or punished accordingly. Tbe resentment is against (a) the manner in which they are judged, and (b) their being held accountable for performance without baving been given the necessary resources in proper time. lf anything, we have only complicated the administrative systems and procedures since Independence with a lot of executive instruc-.dons thrown in for good measure' A system, called by whatever name, which merely seeks to ...supplement the financial data in the budget with physical targets' without concerning itself with the means by which the concetned agencies can achieve those targels on a realistic basis, will be a mockery of performance budgeting. If any Department is , didinclined to look into its administrative systems and procedures, . the adequacy or otherwise of the powers its various agencies . enjoy, it should not go in for performance budgeting. The honest and efficient o{licers will not be any the worse without such a budget and the ineffcient or the corrupt will not be any .- the better with such a budget. Onthe other hand, introduction of performance budgeting

ORGANISING

t47

an opportunity to "debureaucratise" public administration. The emphasis in performance budgeting on explicit

provides

specification of objectives, detailed analysis of programmes including their time schedule, and an obligatory evaluation of their success greatly enhance the value of this opportunity.

HAP TER

EVALUATION
Is DoNE at two stages: (1) concurrent evaluation and (2) ex post evaluation, that is, after the event. The first is undertaken by the executive agencies internally and is designed to monitor tbe programmes, remove bottlenecks and make mid-

EvalulfloN

grammes with a view to assisting the executive authorities in remedying the defects, redesigning the programmes, and even redefining the objectives where warranted. Both provide the feedback necessary for any management system to adiust itseif to changing conditions. The type of data and methodology used for both kinds of evaluation ought to be the same as those used inthe ex ante analysis of programmes at the formulation stage. If a programme

course corrections in the programmes where necessary. The second is undertaken, in respect of all Government and most para-Government agencies, by the Audit Depafiment under the Comptroller and Auditor General of India. Its purpose is to make an independent and objective evaluation of the pro-

has been selected on the basis ofa certain criterion, the same criterion, on the basis of the same assumptions, ought to be applied for purposes of concurrent evaluation by the Department as well as ex post evaluation by the Audit. Unfortunately, all these exercises are presently done without any such coordination. After funds are allotted in the budget Iittle effort is made to collect data to check on the assumptions made at the time oi
sanctioning the programme. The terminology and the criteria to be used for evaluation must be consistent and explicitly defrned before including the programme in the budget. When the programme is already executed or is under execution it is difficult for officials to be wholly objective in their approach to defining the criteria for judging the performance. What has actually been achieved on the ground is bound to influence their attitude towards defining he criteria. Hence the emphasis on prior definition.

EVALUATION

t49

The United Nations M anual for Programme and Performance Budgeting (1965) mentions, inter alia, the following attributes of an evaluation criterion:

a)

Related to the mission and purpose oftbe organisation' D) Representative ofthe total effort expended on the work; cj Reasonably like aoy other occurrence ofthe same unit, i.e. a relatively stable indicator of resource use and quality 10 the extent Possibled) Economical to use and convenient to report.

ei

Mutually exclusive so as to avoid duplicate counting of work.

Capable of audit so that the accuracy of the work count can be verified. Identifiable when seen and readily understood by those who plan, schedule and control work' Suitable for use in the contemplated measurement system'
Stable enough so as to be usefui

/)

for some period of time'

g)

fi)

i)

In devising evaluation criteria one aspect that needs to be borne in mind is that "quantity drives out quality"' There should be no attempf to quantify results that cannot be quantified or quantify only those aspects of ths programme which can be qriantified and leave out the rest. The latter can result in misleading and counterproductive emphasis on the less important aspects of programmes. In the case of a research programme'

for

performance by the number of research papers produced' The purpo;e of .introducing performance budgeting will be served in a much greater measure if a descriptive account of the problem being tackled, accompanied by an assessment of the success achieved, is given. The validity of such qualitative

example,

it will be naive,

even disastrous,

to

measure the

.assessment

will be considerably enhanced if outside experts and user interests are associated with it. The evaluation criteria should, thus, be related to the central purpose of the organisa'tion even if it means specifying them only in qualitative terms'
.dimensions over a period of
.on Objectives.

At the same time, certain qualitative results acquire quantitative time, as discussed in the chapter
Collection of data for evaluation and evaluation

itself

costs

150

PEnnonuaNcn

BuocrrrNc

FoR PLANNED DEvELopMENT

money. The expenditure is worthwhile only if the appropriate authorities use the results of such evaluation for the purpose of monitoring the programmes and modifying the programmes and even objectives, if necessary. Where no such action is forthcoming there is no point in wasting public funds on evaluation.
Evaluation criteria

There are many types of indicators, indices and ratios on the basis of which performance can be judged. In order of
simplicity, but in reverse order of validity, they may be described as below: Volume indicators.

l. Also known as workload data, they merely indicate the volume of work done, e.g. the number of patients treated in a hospital, the tonnes of fertiliser produced. They tell next to nothing. 2. Performance indicators or ratios, These are volume indi-

the previous quarter or year or with the performance of comParable rrnits. The performance indicators are also usually expressed in terms of percentages with reference to targets, e.g. ll2.5.r/o of the targetted number of patients treated in the hospital, 66$/" ofthe anticipated production achieved. They are then called

cators p/rrJ the pre-determined targets for accomplishment, e,g. 900 patients treated in the hospital against the target of 800 patients,20 thousand tonnes of fertiliser manufactured against the production target of 30 thousand tonnes. Where no such targets are laid down, performance is compared with that during

performance ratios. However, if performance is expressed only in terms of percentages certain imporlant information is lost. Without the absolute numbers of anticipated targets and achievements we do nor really know (a) whether the targets are deliberately fixed lowto show better performance and (b), whether performance compares favourably or unfavourably (i) with previous quarter/year and (ii) with performance of other
comperable units. In respect of continuing programn0es, performance indicators or ratios are diferent from data giving absolute levels of performance. While the former measure the performance during

the quarter/year, absolute levels give

the

cumulative per-

EVALUATToN

151

bears some formance so as to indicate whether preformance fnal objective' relation to the long-term or

3. Efficiency iniices and standards' These usually measure or the second the effiiency in the utilisation of basic inputs patients treated per doctor or per level inputs, e.g' number of
oorr",

quarter/year per hospital bed' ;;;b.t of tonnes produced per unit of raw material' per unit nurse is of power consumed ol per staff emplol ed' Doctor or second level input' The u- duri" "inpur". Hospital bed is a indices to judge efficiency become f..-Jete.rrrineO levels ofthese efficiencY standards or norms' perB"yond a point, improvement in absolute levels of lead to deterioration in formance can, not necessarily will, yield efficiency indices. For example, fertiliser gives improved " efficiency oi"rop. The yield per unit quantity of fertilise-r--an fertiliser inar*,'*iff io.i.rr"tith increase in the quantity of But' the aggreup to a point; beyond that it declines' (with "ppfl.a gaie yield-a p"ifo.."on"" indicator, rnay continue to rise of furthet l'.rr"i proportionate yield) in response to application quantities of lertiliser. 4. Unit cosrs. These are used aiongside performance ratlos programme$ and efficiency indices to determine whether the e'g' cost per are being operated on the principle of least costr are patient day, cost per tonne of fertiliser produced' They 'essentially comparable used for making comparison between are particularly useful in the case of standardised .roiir, uni

ou*i"t1f

patients in

services.

serles' They can also be effectively used for building a time unit' Care that is, unit gosts over the quarters/years in the same deflators"' should, however, be taken in such cases to use "price in prices of that is, to make corrections for increasb or decrease ,.t.uuot commodities. Such price feflators may havd to be because a specilically worked out for each category of service for general wholesale or consumer price index with set -weights the increase/ different commodities muy ,roi correctly reflect

d""r"ur" in

collection The above four evaluation criteria <io not require They of external information by the Departments and Agencies' together' attempt to bring the financial and physical dimensions ii.v .u" be used in al1 Government Departments and agencies

costs of specific cornmodities used in the service'

152 Prnronrralxcr BuocrrrNc

FoR PT.ANNED

DrvnorvnNr

of

may depict the picture the effectiveness (as reflected in sales) to som" extent. But, in respect.of most other programmes a detailed search (if not research) is needed to evolve the criteria. Such measures rras, be accepfable to those in charge of executr.on oi, ,f,. pro_ grammes as well as those who are likely to be nefit from the
programmes.

of the normal control activitv. Measures of EJfect i.t,enes". Even programmes with the best performance ratios, highest efficien.y inoil", ana tor..t unit costs may fail to achieve the objectives ofthe programmes, e.g. patients nray not get proper treatment, the pariicular ferti_ liser produced may not be sord. Thus, effectiveness in reaching the objectives is diferent from efficiency. Whi; rhe latter is essentially concerned with the technical efficiency or the quantitative relationship between inputs ald outputs, effective_ ness is a broader concept. It is the relationship between the programme and its objectives. Sometimes this relationship can be expressed only in qualitative terms. Evolving criteria to measure such effectjveness is nof an easy task. In respect c,f commercial type of programmes, e.g. fertilizer production, the profit and loss u""ornt

.- 5,

as _part

will tell us at what ,,cost,' it has been reached or by what "distance rhe goal has been overshot or short_reache d, agarn, 'with reference to ,,costs',.
The methodology for this kind of analysis and the criteria evaluation should not be different from those used for ex ante analysis at the time of selection ofprograrnmes. In fact, the processes should reinforce each other. It is useful to remind ourselves tbat the purpose of social cost-benefit analysis is to

democratic manner efter consutrting represefitative opinion on both sides have a chance of being acceptable. Where quality .of service is of prirne consideration, some kind of .,opinion .poll" is not to be ruled out. Social cost-beneft analysis. Even where the litmus test of -6. 'effectiveness is met, it is possibie that the social benefits actually 'derived from the programme mav not be commensurate with social costs, at least not to the extent anticipated at the time of selecting the progra"mme, While rteasules ol. effectiveness say whether a goal has been reached, social cost-benefit analysis

As a general rule, only criteria evolved in

for

judge the programnre by the benefits derived not only by Govern_

Evlr-ulrtoN

153

f,cent or any department thereof but by the society as a whole' Secondly, "benefits" are primarily seen interms of real resources generated even as "costs" are seen in terms of real resources

locked up or used. For example,

bank advances remains uninstalled for a long time, the bank may not be a loser because it collects its interest charges, but the society has lost the benefit of using the machine (a real resource) to produce material (again a real resource). Evaluation of the bank's performance should bring out this aspect.

if a financing agency like money for the purchase of a machine which

Performance rePorting A pre-requisite for evaluation is proper reporting on (a) the costs incurred on the programmes, and (b) the physical and economic aspects of the programmes. The formats for collecting and oompiling such information and for reporting to higher fornrations should also be settled, 10 the extent possible, before taking up the programmes for the simple reason that they tend to be neglected later. As far as possible, reports reaching the higher authorities should predict the likely future outcome on the basis of present
trends so that necessary changes in the overall plans could be made in time. In respect of capital projects under construction both slippages (delays) and coSt over runs (cost increases) should be promptly reported, duly analysing the reasons for delay and

mentioning the bottlenecks that need to be removed' Where malching investments are made, if there are likely slippages in one project serious thought should be given to rephasing the other connecled projects. Our failures have notably been in areas of synchronisation of investments and phasing of programmes. There is no infructuous expenditure involved in such cases. Tbat is the real danger also. If inffuctuous expenditure is involved, it is commented upon by Audit or someone else. If there is unbalanoed or unsynchronised investment it does not usually attract comment, though the loss to the economy from such investments could possibly be greater than the losses involved in cases of outrigbt infructuous expenditure. This aspect,

therefore, must engage the most careful attention executive agencies at all ievels.

of

the

The accounting classification as now revised should adequately

154 PrnronueNcn Buocrrruc ron Pur.:Nro DrvnopurNr

serve the needs of reporting on financial data at the macro level relating them to the physical performance. Classification at tbe micro level should also be so designed as to se e thepurposes of evaluation. It may sometimes be necessary to. tabulate the same basic data in two or three different ways-. There should, therefore, be no attempt at imposing a rigid classification atthe micro level. Indeed. micro level classification should emerge out of the reporting system.

bI anagement I nformat ion

Sy

s t

em

in shalled properly and presented in an understandable form become information and inform the recepients. Further, information has also no intrinsic value of its own. Its valueisa function of the time at which it is made available and the use to which it is put. The information regarding the expected timeof arrival of a train has value only if it is given before the arrival and that too if we intend to travel by that trairr. The information that there is a big ditch on the road abead has value only if it is given to us in time to apply the brakes and the brakes are functioning. The information that we are likely to exceed the budget allotment has some value only if it is given in time to prevent such excess. Such information has no value if it is supplied on the evening of 3lst March (or later) or if we are unwilling to take steps to prevent the excess. The volume of paper used, is thus, no indication olthe information exchanged. There should be a proper system for the exchange of proper information at the proper time. This is generally known as
Management Information System (M.I.S.).

Facts are the basis of all reporting systems. However, facts, themselves do not constitute information. Only facts mar-

The "intelligence" of a Department or agency is not the

but the "information" which it possesses. Information sysrems, developed in a big way wirh the advent of computers. Bat, the concept of information slrstem can be very usefully applied even,
without using comput?rs.

intelligence of the men working in it, individually or collectively,

supplied to difi'erent levels of management should take a pyramidal shape-the man at the top receiving only that much information from each branch as he can humanly study and act

In a typical hierarchical

agency the volume

of information

EVALUAIION

l5)

upon. lt is meaningless to put up to him bundles of statements other received from the field offices' He cannot, consistent with go through all the statements individually demands on his time, to derermine the areas in which he has to act' The directives' expected of him by the field offices, therefore, donotcone' will Wirat little remedial action is possible wilh local initiative after the prescription of the also not be taken. The situation statements could, therefore, be even worse than what is was
before.

as to who will receive the report; in what manner it will be compiled and consolidated; to whom will the compiled information be supplied, and in what form; what is the type and range ofaction expected of the recepients of the compiled information' Information flows cost a good deal ofeflbrt and money' Addi tionally, they lull the lower forrnations into a sense of complacj't., sending the reports. Reports should, therefore' be "n.y for only as a prelude to action. called An important management corcept relevant to managemenf information systems is management by exception' Where

no The golden rule for any Department or agency is that it is simultaneously decided report ;hould be prescribed unless

standards of performance are laid down, necessary inputs arranged and authority delegated, the top oficials need know about the activities only when there is a significant deviation from the standards of performance. The higher the offcial's level the greater is the need to confine the information flow to him to iuch exceptions. An information system thus designed can extend the vision of the top officials in the field sitting at their tables.

to

"see" things happening

As mentioned earlier, timeliness is the essence of information system. Someiimes, however, the objective of timeliness conflicts'

titn tl"

objective of accuracy in the information supplied' This is particularly true of accounting ioformation' Reports containing information accurate to the last paisa take time to compile. Often one has to choose between sending a report .ontuining information which is, say, 90 per cent accurate but in time, and delaying the report till 100 per cent accluacy can be ensured. In our fast moving world, the former is often thE

preferred alternative. Reliability ofthe physical data deserves particular attention'

156

PgnronruaNcn BuocnuNc ron pt,nNNlto

DrveroplrrNt

Ifthere are no built-in cross checks, there may be a tendency to report unreliable figures to show fulfilment of taraets. Let us illustrate. In one ofthe blocks in anarea where thJ nature of, soil was sandy to sandy loam, the target of acreage covered by rabi wheat was reported to have been exceeded. There was no regular "audit" of such figures. A detailed review made on one occasion revealed that less than 50 per cent ofthe area reported had identi0able sources of irrigation. The rest ofthe ur.u *u, unirrigated. Since the nature of the soil in the area did not permit growing of wheat without irrigation on any large scale, it is obvious that there was some inflation in the figures of area reported to have been covered by wheat. Another interesting result of the enquiry was that the ,,area sown', was worked out on the basis of the quantity of seed distributed by the Block authorities, not on the basis of field verification. In a country of big dimensions, earlier ruled bv an alien ,Government for t\4o centuries, false reporting is not anunknown phenomenon. Undue emphasis on achievement of targets without realising the difficulties on the ground has only aggravated the problem. Even if other information which casts a doubt on the correctness of the data supplied by the lower formations becomes available to the apex organisation. departmental Ioyalties come in the way of taking corrective action. And, at one stage or the other, based on the data earlier sent up, progress achieved would have been reported to higher authorities or even Legislature. It is difficult to go back on that level of achievement without getting the Minister and the Depanment into serious trouble. No amount of sophistry in planning and budgeting systems can be of ava^il, if based on such unreliable data. Apart from unreliable data, there may be other distortions in public expenditure programmes in the.process of implementation. These may be a reflection of the dee,per malaise of lack of commitment of the politician and of the clvil servant to the broader national goals or even the specific objectives of the programme or it may be due to pressures of vested interests. An xample may be cited. A market yard was proposed to be constructed in a State to protect the interests of farmers who. it was said, were being compelled to make distress sale of their produce immediately after the harvest and were in the grip of

EVALUATION

1s7

the local trading class which was also the money-lending class' The yard was to consist of trading platforms for excharrge of

grains, warehouse in whrch farmers could store the grain ifthey did not like to sell the produce at the ruling price, bank to advance money on the grains stored in the warehouse,.and shops for the traCers to keep the grains after pbrchase. As always happens, funds were not adequate to take up the project in its entirety. It could be implemented only in stages. A review at one stage revealed that only trading platforms and traders' shops had come up. Neither the warehouse for the farmers nor thebankwas taken up for construotion. The objective of the project was quite clear: to alter the terms of trade in favour of farmers. But, what was the result at that stage ofdevelopment of the yard? The terms of trade were further aitered in favour

ofthe traders who had

secured additional storage space to

improve their bargaining position. The benefit to the famels was negative. The situation that developed in this case might well have been wholly unintentional; but, the case brings out the complexities involved in devising information and reporting syste.ns which truly reflect the progress made in achieving the objectives of public expenditure programnres. A reporting system in aggregate financial or physical terms would never bring out

tbe kind of distortion cited above. It may, in fact, repofl progress. Only a reporting sJstem closely aligned with the objectives would bring out the negative benefit from the
programme.

Evaluotion of public ent erprises We have discussed in the chapters on Analysis that the appropriate criterion forjudging the efficiency ofa public invest' ment is not Return on Investment (ROI) used by the private industrial sector but Value Added to Capital Employed (VACE). As investnents are to be decided on the VACE cr.iterion, evaluation of running public enterprises should also be done on the same criterion. This point needs to be emphasised because many management ratios, to judge different aspects of efficiency, built around the concept of Return on Investment, are presently being used by many public enterprises in lndia. They continue to have their relevance in so far as the mternal control systems are concerned. But, so far as evaluation dcne by or on behalf

158

PrnronrraeNcs Br,DGrrrNc ron PleNNno

DrvrlopurNr

of

Government/Legislature/Public

is concerned they are not

adequate. There is no attempt here to draw an artificial distinction between the management of public and private enterprises. The nature of internal management and the body oftechniques

required for it are the same in both. The contribution made to the economy, and the criterion by which such contribution
be judged, is also essentially the same. However, while the management ofa private enterprise can pay selective attention ;to the latter arpect, the management of a public enterprise must

may

to

have its main focus the economy.

on the contribution the enterprise

makes

Efficiency of a public enterprise ought, therefore, to be judged, from the point of view of the economy, with ret'erence to the /at4l resources placed at its disposal and the total benefits derived from it bythe economy. The ratio Value Added to Capital Employed is based on this premise. It represents cfrciency achieved in the generarion ofincomes by the enterprise with the capital resources placed.at its disposal, which is what economic development is all about. Now, to the measurement. It is worth noting at the outset that only the value added arrived at after deducting the cost of material inputs and bought out services is relatable to the capital
employed by the enterprise because other enteiprises would have employed their own capital in producing the latter. There may be no difficulty in valuing the ourput (at the sale price) and the material inputs including fuel, power and value ofjobs contracted out, etc. (at their respective purchase prices) and, accordingly, work out the value added at current prices. In working out the value added by a running enterpn'se the output is to be taken as the value of production during the year, that is, sales p/as closing stock minus opening stock. In order to work out the value added fron: the traditional profit and loss accouDt, a suitable classification needs to be evolved to decide whether an item of expenditure should be deducted from the value ofproduction as a bought out.service' or not. (There is hardly any confusion in regard to bought out materials). For example, travel expenses of salesmen and other emplo.v-ees on duty are to be deducted from the value of production, not taken as benefit to the employe( s.

EVALUATION

159

In measuring the capital employed, however, there are certain problems. ln the first instance, the capital employed at the end of the year as appearing in the balance sheet does not represent
the capital employed during the )'ear. The appropriate measurement, therefore, is the mean capital employed during tire year.
say, the average of the values at the end of the previous year and at the end of the current Year. Secondiy, rvhile the value added may be measured at current prices, the machinery would have been installed (out ofthe capital employed) and, hence, valued at prices ruling from time to time. Several altempts are being made by accountants to value capital, and other financial aggregates, at "current" costs. No method has yet gained wide acceptance' No law has yet recognised such valuation' Be that as it may, the issue is
separate from the validity ofthe criterion we are discussing. Moreover, the issue is not parlicularly relevant to atime series comparison i.e. evaluation of the enterprise over the years since, normally, each growing enterprise keeps replacing its machinery in a phased manner. The comparison is vitiated only there

if

is

a break or bunching in the investment/replacement pro'

Since evaluation in purely financial terms is beset with certain problems let us see whether we can go behind the financial magnitudes and look into the physical efficiencies. For examPle, VACE can be analYsed as:
VACE

gramme.

(Value added)

(value of Production)
(ProductionF) (Capacrtyx)

., -(Value of production) -_
^

F;d;ri-*)
(Capacity*)

(Caprtal employed) physical quantities) The significance of (The items with asterik are each of the ratios for purposes of evaluation' of the enterprise is gives the contribution of the enterapparent. Value added

Value of Production prise to the value of the commodrty. value of productioti gives the unit value of the product. Production+ Capacity* gives the utilisation of capacity in physical terms. -proouilion* is related to efficiency in converting money capital Capacity* Capital Emploved

into physical capacity.

160 PrnronuaNcn BuocrrrNc roR PLANNED DrvnLopursr

A tricky problem in the evaluation of public enterprises in physical terms is the assessment of ,,capacity". Capacity is machine plus man. It is usually worked out onthe basis of manhour "standards", i.e. the time required by a worker to complete a specified operation on a specific machine. Obviously, there are no "theoretical" standards.since the time required depends on the output of the worker in a given e nvironment. Manhour standards can, therefore, be set anly on the basis of time and motion studies made in specific enterprises. Holvever, the capacities of many of our public enterprises were initially worked: out on the basis of standards recommended by collaborators.
into account (1) the efiect of lower nutritional standards of workers in India, (2) the time required by them to adapt to industrial environment, and (3) the effect of lesser supporting facilities, in view ofthe smaller size of the enterprises in India, on the productivity of both machines and men. This has led to dilution of standards through application of "correction factors" to the original standards and consequent ,.derating" ofcapacity. No horizontal study of public enterprises has yet been made to. improve the technique of fixing appropriate manhour standards. to serve as a basis for determining the capacity, The remedy in such a situation lies in: a) Holding the enterprise responsible for the capacity stated in the Project Report; 61 giving due importance to the industrial engineering fuaction, primarily concerned with fixing standards, in the.
management of the enterprise; and
based on experience in their own (developed) countries. In many cases, the standards so recommended did not adequately take.

c) submitting such standards, and the studies preceeding their fixation, to scrutiny by an independent agency like Audit. An incidential point that arises in the measurement of VACE is the method of depreciation to be adopted because this afl'ects both Capital Employed and Value Added. What is appropriate, in the context of evaluatlon in physical terms, is to work out the depreciation on the basis of the intensitv rvith which the asset is actually employed rather than the period over which it is used. In either case, the likelihood ofthe technology becom-

Ever,uettoN
.ing obsolescent is to be prominenty kept in mind.

l6l

While evaluation in physical terms is important, it should be borne in mind that physical data can conceal improvement or deterioration in the quality of products, just as financial data can
conceal physical efficiencies and inefficiencies. While we have not concerned ourselves with

the

internaf.

ofpublic enterprises, it is worth noting that the' evaluation criterion VACE can be usefully employed to evaluate, different unils in a multi unit enterprise as well as differentr activities 'within the same enterprise. Since capital employedl reprcsents the net fixed assets and inventories, they can be identified with the different units or the different activities .on which they are employed. Similarly, 'value added' by each unit or activity can also be worked out. Such a valuation is relatively easy where the inputs and outputs of the particular units are marketable e.g. cotton purchased and yarn produced by the spinning department of a textile mill. Where they are not, recourse, has necessarily to be taken to arrive at the 'valuE added'at different stages on the basis of man hour standards. This is nothing new because the works-in-progress forming part of the inventories is already being valued on this basis for the purpose of annual accounts. Analytical exercises as above sre presently done as part of the cost accounting systems. However, the emphasis in perfor* mance budgeting is on efficiency of output in relation to the assets employed rather than on control of operating costs. To put it differently, while cost accounting relates one side of profit and loss account depicting "costs" to the other side depicting
control systems

profit and loss account to balance sheet, both recast, as" discussed in this book, from the point of view of the economg
as a whole.

i'revenues", performance budgeting in

planning context relates

In the background of a systematic annual review of product and price objectives of pubilc enterprises as discussed in the chapter on objectives, VACE can be taken as a fair index of their efficiency for any horizontal comparison in the same way' as profit percentage or the ROI is used as an index of efficiency' for private enterprises. There are conceptual and measurement problems in working out both the indices which may vitiate the. judgements based on theo. But, these will not detract from their

162 Pnnsonulmcn BuocrrrNc

FoR PLANNED

DrvrlopurNr

value as diagnostic tools for a detailed analysis .mance of the enterprises concerned.

of rhe perfor-

Role of audit In the context of a performance budgeting system there is need to modernise the audit system as well. The responsibilitv

.for regular audit check

of

individual transactio;s shoull

progresssively devolve on the accounting organisations internal to the executive agencies. So should be the responsibility for

watching compliance of executive instructions issued by the Ministries and Departments. The organisation of the Comptroller & Auditor General of lndia should progressively direct its attention to a review of performance and of efficiency. The approach of Audit should be consfiuctive, directed at improvement in the management of programmes and in the techniques ofplanning, implementation and evaluation. Since public enterprises seldom function under highly competitive conditions, the consequent absence of a market discipline with its potential threat offorcing business into bankruptcy makes it all the more imperative that an external agency should assist in the enforcement of highest standards of performance and of
efrciency. Since, in a performance budgeting system, much larger powers will be delegated to the lower formations a greater responsibility will devolve on Audit. One of its important tasks will be to reconcile the need for such autonomy granted to the operating units with public accountability iu a wider sense. In so reconciling, it should adopt the role of a ..check" as well as a "balance" in the scheme of checks and balances characteristic oi any democratic set up. Where Audit finds, for example, that, for the job entrusted to an executive agency, the powers d.elegated are not adequate it should not hesitate to make a mention of it in the audit report. Further, in a performance budgeting system, the task ol'Audit rpill be to make an independent evaluation of performance and .ofefficiency with reference to the objectives and targets set out in the budget before hand and report the results, good and bad,
achievements and shortfalls, in a dispassionate manner.
:

The evaluation and reporting systems of the organisation of the Conptroller and Auditor General of India would need to ',be more closely aligned with the executive agengies so that

Ever.uettoN

163

they can serve as an effective feedback to the management at all levels. The reports presented to the Legislature would thus deal with only the results of evaluation at the macro level. For individual acts of omission and commission greater stress should be laid on suggesting corrective aclion through reports made to diferent levels of management. This is, ofcourse, not to 'suggest that the discretion granted to the Comptroller and Auditor General of lndia by the Constitution in the matler of reporting to the Legislature or the privilege of Legislature to get interested in individual cases of gross irregularities should in any waybe fettered. Thisisonly a plea for the exercise of

such discretion
performance.

or

privilege against the background ofoverall

Can we have efficiency-cum-perforrnance audit for public expenditure programmes in respect of which performance budgeting has not been introduced? The answer is a definite yes. Indeed, such audit can spur the departments to make systematic and speedy arrangements for introducing performance budgeting and help improve the internal control systems. By pointing out instances oflack of clarity in the specification of objectives and of conflict between objectives of different public expendi ture programmes with those of non-Government and para Government agencies, Audit can persuadc the authorities at various levels to do some hard thinking which they would otherwise be reluctant to undertake. By ittempting social cost benefit analysis of public expenditure programmes already implemented, Audit can focus attention on the methodological problems as well as problems in data collection with a view to facilitatirg similar analyses in future. Audit can bring out cases of lack of coordination between agencies working towards the same or similar objectives, cases of avoidable ilelays in commissioning ofplants or lags in utilisation of assets created which should help the Executive authorities to 'organise' better. In taking a critical look at the efficiency with which various programmes are implemented Audit can foster thinking on the appropriate criteria for their evaluation. There should be a single agency for the audit of programmes ofall Governments and all public organisations. Perhaps, the greater part ofjusti{ication for the existence of the organisation of the Comptroller and Auditor General of India lies in this

164

Pm.FoRMANCE BUDGETTNG FoR PLANNED Dnvnr,opurl.{r

very consideration. Where there are multiplicity of deparrmenrs and agencies, both Government and para Government, working
towards common goals and objectives, only a single, unified, and compact agency can serve the pu{pose of underpinning the coordination efforts. Lest the author should be accused of making a special plea on behalf of an external audit agency, a quotation from a book on the'situation in U.K. published after the Fulton Commission

titled "Management of Government" written by John Garett may be given. He was not a civil servant. He had no connection whatever with the Exchequer and Audit Department or the Central Government in U.K. He was described as a..leading management consultant with wide experience of the management ofcomplex institutions." In his book, John Garett observes: "Large bureaucracies have many strengths, but they are not good at generating ideas for change and improvement. They are not good at the critical evaluation of the continuing relevance ol their own purposes and activities. They are not the best judge oftheir own efficiency and prefer not to have to demonstrate it. They stifle the searching examination, thc pointed question, the assessment of efficiency. They prefer stability, secrecy aad orderly growth. There are few incentives for improving efficiency in a rigidly hierarchial arrangement of status and seniority, particularly one in which managerial expertise is not the most highly prized attribute. Top management prefer to keep their own efficiency services staff in a subservient position and well away from the upper administrative levels. These staffare heavily depcndent upon the goodwill of their clients for their work and for their career pfospects and they take care to stress the "service" nature of their activity. If there is ever to be any dynamic behind the drive for efficiency in government, then the bureaucracy must be subjected to efficiency audits, backed by the highest authority and by explicit sanctions, and carried out by experts." It will be obvious that such efficiency audit can be con<jucted only by men with the highest order of intelligence, knowledge, and commitment to basic national goals. Further, the men have to be drawn from a variety of disciplines, not only accountancy, economics, statistics and management but also the various technological disciplines. One major risk in a technological

EvarueuoN

165

society is obsolescence-of both machines and men. This is as techniques as with substantive technologies. The men in charge of the overall evaluation should keep themselves abreast of these developments and should promote change and innovation. What we need to do is to bridge the gap between management techniques used by us and those used by the developed world. This cannot be secured if the evaluation agency is conservative and acts as a drag on the executive .agencies. In the matter of use of latest techniques Audit should assume the role of a management consultant, This is not a farfetched suggestion. Only an agency with a nation-wide responsibility for the audit of all public activities can bring to bear on these techniques a social perspective. Otherwise, the techniques would be used for sub-optimisation, that is, for maximising benefits for the indvidual executive agency much in the same way as a private firm would maximise its profits. As we have discussed, what is expected and necessary in public agencies is something qualitatively different.

true with nanagement

APTER

XI

CONCLUSION
Wrrn rsr coMplErroN of discussion on different aspects of performance budgeting, we can now summarise what it seeks to achieve. In relation to public expenditure programmes performance budgeting system (1) specifies the objectives

(a) overall economic and social objectives of Government, (b) objectives of other instruments of public policy, (c) objectives of the concerned citizen groups and citizens, and (d) one
another;

of

programmes, relating them to

(2)

selects programmes to achieve the specified objective taking

into accounq (a) benefits accruing to the community as a whole and (b) flow of incomes from such programmes to different
income groups;
(3) presents budget. estimates

can allocate resources the people;

in tune with

in such a form that the Legislature the will and aspirations of

(4) streamlines the organisational structure, financial rules and accounting system within the administration with a view to
ensuring the attainment of specified objectives; and
as well as on completion

(5) evaluates achievement of specified objectives concurrently

of programme. Performance budgeting system thus serves as an effective feedback to the planning system and permits decentralisation

of planning activity.
Implementatton

It, however, does not mean that all aspects of performance budgeting will be relevant tb all sectors or that they can be tackled all at once. In public administration, we just have no opportunity to write on a clean slate. The first step, therefore, is to improve the presentation of . existing budget documents integrating all the material relevant to the functions ofthe concerned Government departments and

CoxcrusroN

167

agencies. Even as it is, a lot of information is presented in the form of annual reports, administrative reports, white papers' replies to Parliament and Assembly questions. What is needed isihat such information should be presented in a logical and coherent manner at the time of seeking allocation of resoulces' The second step is to bring out, in such an integrated budget document, the physical dimensions on the one hand and the objectives and priorities on the other. This may call for widening of the data base ior the preparation of the budget' Such widening is inescapable if efficiency ln the management of resources-both allocation and utilisation-rvere to . improve significantly.

organisation

The third step is to take a close look at the role ofthe in the specified functional area and its interface wiih other organisations working in the same area and define

them clearlY. The fourth step is to delineate the long term goals and short term objectives of the organisation and harmonise them with overall goals and objectives ofthe Five Year Plan' The fifth step is to consider the diferent instruments at the disposal of the organisation or Government to achieve the long term goals and short term objectives, demarcate their relative roles, and specify tbe steps, necessary to coordinate their use' The sixth stcp is to review and revise the organisational struc'ure, administrative procedures and the financial and administrative powers for effective irnplementation of programmes.

The seventh step is to make a systematic search for the criteria and standards that can be set for evaluating the programmes on implementation. Some of them may be qualitative'

F,valuation agencies outside

the implementing departments and Audit as well as the beneficiary groups should be agencies like associated with this search for criteria which should be done
democraticallY.

The eighth step is

to

instal a suitable information and

reporting system to monitor the progratnmes'

The ninth step is to make arrangements for systematic evaluation of the programmes' at periodic intervals, associating outside
agencies as far as Possible.

The tenth step is to further widen the data base and build up

168 PsnEonru.{NcE BuocnrrNc Fon pleNNrn DrvnopMsNr

the necessary erpertise benefit analysis.

panacea for

to improve the methodology of

cost

And, no one should pretend that performance budgeting is a all evils or will find solutions to all problems. A performance budget document can well be open ended in the sense of exposing areas where data is lacking or strategy is unclear. This will help in directing academic research lnto more fruitful channels than is possible now. It is a pity tbat, to day, there is not much interaction between the academician and the civil servant. But, a beginning has to be made. One prelimi_ nary step is to openly discuss, in the budget documents, the policies of Government and the informatr'on and analysis on the basis of which they have been shaped. While we have generally confined our discussion on the application of principles and techniques of modern managenoent to public expenditure, it is apparent that they can also be usefully applied in other areas of economic management such as taxation and credit. Indeed, rve have argued that all these inslruments should be used conjointly to achieve the national goals and objectives. In respect ofany chosen instrument the refrain is the same: specify the objective, analyse the different alternative routes by which it can be reached, seek the approval of the appropriate authority for selection of the most promising alternative, organise well to ensure proper implementa.tion, and evaluate on implementation to provide the necessary fcedback. However; management of all these instrumants of public policy lLas to be dovetailed with the framework of the overall PIan.
Planning as management system

A Plan takes a community wide view of the resources available and allocates them so as to best subserve thc goals and objectives on a long term basis. . In a developing country {ike ours the capital resources available to the community, in terms of both investible funds as well as their physical embodiment, namely, structures and machines, which alone help us enlarge the reasources available for the future, are severely limited. Their efficient use is, therefore, of paramount importance. That we have not been uniformly successful in achieving this efficiency will be evident from the following data.

CoNcLUSIoN

169

The table below gives the capacity utilisation in our counffy in selected industries in 797 6-77:
TABLT 4

Clprcrrv
Metallurgical Aluminium
Copper Steel castings

UTILTzATIoN

or Srr-rcrep

INpusrRrES lN

IloI'q'

19?6'??

Installed
capacitY

Capacity

utilised

(Yo)

250

57 49 3l

169

thousand tonnes thousand tonnes thousand tonnes

84 42
39

Mechanical Engineer ing

Agricultural tractors Roller and ballbearings

Diesel engines
Sewing machines

288 534

Railway wagons
EIec
t r i c al Eng ineering Electric Motors ?ower transformers

31

thousand nos. million nos' thousand nos. thousand nos, thousand nos.

68 89 38 72 39

Dry batteries
Storage batteries Chemicals

1300 million

6 million H'P. 23 milion K.V.A.

nos.

57 63

million nos.

48 62

Fertilizers: Nitrogenous (N)

Phosphatic (P205) Sulphuric acid Cement Paper and board
S6un cn: Statistical

3.0 million tonnes 0.7 million tonnes 2.8 million tonnes Z1 miliion tonnes 1.1 nillion tonnes Outline of India (1978), Tata

bl
63
61

89
81

Services

Limited,

Bombay.

the capacities built out ofhard earned savingsofa poor country are not being fully utilised it is tragic' Either we have invested in these production capacities far ahead ofthe demand or there are technical and managerial inefficiencies in production. If former be the case, we must review and modify the production capabitities to suit the demand pattern' If we really iia *rir as a iegular exercise the order of under-utilisation in some ofthe industries would not have been so staggering' The case of wagon building industry is a telling example' The pioduction of railway wagons reached a peak of33,500 wagons

If

170

PrnponM,cNcn

Buocnrrxc

FoR PLANNED DtvnropruBNr

or so in 1965-66. From the subsequent year onwards it has remained stagnant in the region of 12,000.14,000 wagons implying less than 40 per cent utilisation of capacitv. Such a situation could not have continued if we had tak.rr r,"pr,o reassess the long term demand for railway wagons and to readjust or diversify our production capacities to produce something
which we really needed. Underutilisation of capital assets is not confined to the industrial sector. In the agriculture sector, a very substantial pro-

of the area planned to be irrigated was

portion of the plan investments have gone into irrigation projects. The average area irrigated during the five years 1971-72 to 1975-76 in some selected projects as a per centage
as

below:

rAsLr
SrLtcrro
PLANNED

5
SoME

Avnnacs AREA IRRTGATED DuRrNc 197l-?2-1975-76 IN

PRoJEcrs As A pERcFNt46E oF tHE AREA

to

ne

Innrclrto
percentage

(in thousand hectares)

Project
Area

planned

to be Bhakra Nangal
Chambal Sarda canal system

Arerage aiea irrjgated irrigated

1421.1 299.3

utilisation
103 51

1381 .5

566.8
1100 2
7

Kosi Hirakud
Mayurakshi
Tungabhadra Nagarjunasagar

848 2
135.1

77

43.7

l8
97 IJ 60 39 30
33

249.4 289.5
414.O
831

240.9 248.8
30.1

.6

Parambikulam

101.5

Aliyar
Kakrapar
Purna
256.0
62.O

Girna
ToTAL

57.2
6443.4

84,1 24.7 22.3 3894.6

40
39

64

S}URCE: Supplementar), Report of the Comptroller and Auditor General of India for the year 1975-76, Union Government (Civil).

The point in managing the economy, whether in the industrial or agricultural sector, is that a large number of people in Government departments and agencies as well as a host of private firms, agencies, farmers, and most important, the private

CoNcl,usrox
households

t7l
'

are all taking decisions all the time which affect all of the economy one way or anolher. How to ensure that decisions in conformity with the them take their respective national goals and objective is the problem' And the national goal of over-riding importance in our country is to employ the iimited capital resources on the one hand and the abundant human resources on the othet in the most efficient mpnner' This has been epitomised in this bcok as the maximum value
added to minimum capital ernployed.

instruments at our disposal whether public expenditure, taxation ol credit must have this as the central objective. Whatever be the macro level policies and objectives in respect of each instrument, they must be broken down into specific managerial tasks for each lower formation in terms ofthe capital resources it will be concerned with and The management

of all

intermsof the value added itisexpected to contribule' And, every such task should explicitly state time after which, and the .uoo., in which, achievement of the specified tasks will be
evaluated. The system of rewards and punishments within the economy should be geared to, not simply what is produced, but, what is produced with reference to what caz be produced with the hnancial, physical and human resources placed at tlte disposal

of the producing unit, that is, the efficiency with which it is produced. There should be efficiency norms for all organisaiions achievement above which attracting rewards (say, a higher profit margin) and performance below which attracting punishment (say, a higher tax liability). Some of the instruments of policy to dayhave the opposite effect. For example, with the same order of capital resources placed at the disposal of two firms, the one making profits pays corporation tax and
system of rewards and punishments for the individuals can be meaningful, from the national point of view, only within the framework of such a system foi the organisations for which they work. There should be no question, for example,
the other making losses goes scotfree.

of employees in a producing firm getting higher wages if the value added by the firm in relation to the capital
question

employed goes down. On the other hand, there should be no

oftheir having to fight for

higher wages if the value

172

PEnpor.ueNcn

Buocrrmc

poR

punNEo DnvuoputNr

added goes up.

A fair

that efficiency in rnanaging the economy can be improved if decision making in different areas is harmonised so that decisions in one area do not counter the effect of decisions in others. However, from the portions marked out in the pyramid it may be seen that the planning Commission is presentlv pre_ occupied with only some of the areas in the entire nefA' of decision making. It can become more efective only by making arrangements for decentralised decision making in the areas of its present pre.occuption and by working oui similar decent_ ralised arrangements for other areas, while concentrattng atten_ tion on centralised decision making in crucial matters in all lie: (i) in its narrow compass, (ii) in not linking up the macro level aggregates of savings, investment and capitut stock with micro level capacities, efficiencies and outpuis, and (iii) in assuming it to be a one time exercise ratheithan a continuous process of managing the economy. As we approach future plans what matters is not the size ofthe outlay oiihe machanics of cheeseparing the limited financial resources commandeered by Government but that our goals should be clear, our priori_ tie^s right; that our policies in each sector of economic activity informed by the overall goals and priorities; that the roles of different instruments like physical controls, monetary policy, credit_ planning, policy on prices, incomes and wages, taxation, subsidies and public expenditure in achieving the*overa goals as well as the seitoral objectives are reasonably well delineated; and that the roles of different organisational entities, Government, quasi.Government and para Government, are well demarcated with reference to the instruments they administer and the objectives they serve.
Antyodaya It may be that we have neither
areas. (see Diagram 2) It is time we recognise that the shortcomings in our planning

account the capital employed, can be a sound basis for smooth industrial relations. (This is not to suggest that ,."uriog u"".p_ tance of the concept of sharing is an easy task.) The decision making areas involved in managing the economy are brought out in the accompanying pyramid. It is obvious

share in the value added, taking into

the political

mandate nor the

CoxclusroN

173

o = z, o ()
u, td
I

9z *6 )ta o5
I
I I

9..> Yyto
*4 aa-

I I I
I I I

IL

-..!

z lrJ
l.|J = (o

NZ

oF

E= ;'
o.F

t-z oO
XE

z1

uJ

o
tr,

E
?

(9

tr
&

z q
u3
KJ

cl

174 PsnnonlalNcp BuocnrrNc

FoR PLANNED

DrvnropupNr

managerial skill to switch over to such a total system of management under the aegis of Government. 'fhe least that oan be done, then. is to ensure that what Governrnent does. in the sphere of public expenditure as elsewhere, benefits those that are in the bottom rung of the ladder. Gandhiji's concept of Antyodaya is that the needs ofthe last man should come first. If this is accepted we should first decide the basket of consumptibn of goods and services we would like to provide to this group; then decide on the pattern of economic activities that will give this group the incomes needed to buy those goods and service*; and then work out the least cost way of producing these goods and services subjecL to the generation of incomes dcsired. In other words, planning should then be confined to consumption needs of specific vulnerable groups.

We should then formulate programmes sector by sector, commodity by commodity and region by region, using analytical
techniques down the line, delineate the organisational structures, supply the managerial skills needed for their execution, and ensure, througheffective feedback mechanism, that the programmes 'fhe particular technologies "do, in fact, achieve Lheir objectives. used (labour intensive, capital intensive or intermediate) and the specific patterns of organisation (smalt, rnedium or large scale) then fall into their places.

In the chapter on objectives we have seen what Antyodaya implies when it comes to utilisation of irrigation water in the agriculture sector. Let us now consider another example. In the case ofcloth needed for consumption we should decide how much cloth and of what durability is required and work out the backward linkages in terms of both the commodity flows, like raw cotton or polyester yarnr power, chemicals that go into the making of cloth as well as the cash flows, like investments, prices of products, and incomes, to select the set of programmes which will produce cloth of the quantity and quality desired at least cost to society subject to the generation of desired pattern of incomes. The administration or management of the programmes, which is a continuous process of making adjustments all along the line, should tben ensure that the incomes are so generated and the cioth is so delivered.

CoNct usroN
U

t75

ofour country, which in a nutshell is providing adequate incomes to large numbers through appropriate work opportunities, brooks no delay as a look at the age composition of our population will make evident. The age composition ofour population in the last census (1971) was as
below:

rgency of the problem Planned development

Diogrom 3 AGE COMPOSITION OF INDIA's POPULATION, t97l

Age group

Percenloge to lhe

lotol

po

pulofion

60

ond ooove

40-

49

:, r3

30-39 20-29

l5

2l

o -9

30

It may be noted that we had a very large proportion (more than half) ofour population in the age group below 20. These boys and girls grow in age as time passes. The problem is to provide them adequate means of livelihood, employment or self-employment, in the next few years to come. Thus. a high premium needs to be put on strategies, technologies and policies which will create a large volume of employment and hence, incomes, not necssarily instantly but over a specified period of time. If we fail to do this, the boys and girls will take to

176

Pnnnonrrr.lxcr BupcnrINc ron Pr,lNNso

DrvuopueNr
other aspect is to

streets, as some

make them "employable" in jobs which will generate further employment and thereby increase national wealth. Our education system hitherto has produced a latge proportion of youth who are not employable in this sense-they are fit only for clerical jobs some of which, no doubt, carry a high prestige. Unless rre take urgent steps to tackle these problems, the bottom bulge in the population pyramid will chase us. It is
a wave today; it

of them already have. The

will be a flood tomorrow.

Appendix

Constitutional Prcvisions relating to Government Budget-

The cardinal principle of

democratic functioning of theGovernment-Union as well as States-as adumbrated in the Constitution is that the Legislature, which reprcsent the will of the people, has the supreme prerogative of levying taxes and, authorising expenditure of the Government. Article 265 of the Contitution says: "No tax shall be levied or collected except by authority of law". (The Executives ofthe Union and the States. are, however, free to borrow moneys up to the limits authori* sed by the respective Legislatures under Articles 292 and 293). All moneys received by the Governments, either by way of' taxes or by borrowings or otherwise (as in the case of charges. for services rendered) are to notionally flow into the Consolidated Fund ofthe respective Governments (under Articte 226). from which not a single paisa can be withdrawn without. specific authorisation. Article 114 in respect of the Union and Article 204 in respect ofthe States stipulate that no mone5r shall be withdrawn from the Consolidated Fund of India or of
the respective States except under appropriations made by laws enacted by the respective Legislatures. The moneys received by the Government as a custodian, as in the case of provident fund and other deposits, notionally flow ilto respective Public Accounts (under Article 266) and withdrawal of moneys in such cases does not require specifie. authorisation by the Legislature. But, to the extent these moneys are utilised for financing expenditure, the latter would require authorisation by the Legislature. In order that the Executive. may not have difficulty in meeting any unforeseen expenditure when the Legislature is not in session a small imprest called the. Contingency Fund is authorised for each Government (Article. 267). 'fhe Constitution thus provides for the supremacy ofthe. Legislature over the Executive in all financial rnalters without in any way putting fetters on the Executive in day to day wolking..

178

PgnronrrteNcr BuocrrrNc FoR PLANNED

DrvrropurNr

In order that the Legislature may have

Governnrent finances before agreeing to pass flny law imposing a tax or authorising expenditure, the Executive is required to place before the Legislature (under Article I 12 in the case of the Union and Article 202 in the case of States) a statement of the ,estimated receipts and expenditure in respect of any financial year before the commcncement of that year. This is called the

a full

picture of

'"annuai financial statenent", popularly known as the Budget.

Such a statement is required to distinguish expenditure on revenue account from expenditure on capital account.

determined by the Executive approaching the Estimates Committee of the Legislature seeking approval to the structure "of Demands for Grants in which the estimates are proposed to .be submitted. The estimates are submitted in the form of ,separate Demands in respect of each Department, the smaller Departments presenting only one Demand and the bigger Departments more than one Demand. Thus, although the Council of Ministers as a whole are collectively responsible to the Legislature (under Article 75 in tlie case of Union and Article 164 in the case of States) the Ministers headingthe separate Departments become individually responsible foi the moneys placed at their disposal. The Constitution, in keeping with its quasi-federal character with a strong Cenre, has made a distribution of categories of tax revgnue between the Central and State Governments on the following criteria:

Constitution further stipulates (Article ll3 intbe case of Uriion and Article 203 in the case of States) that the expenditure estimates shall be presented in the form of various "Demands for Grants" to facilitate proper discussion and voting by the Legislature. In other words, the expenditure side of the budget is noi to be treated as a monolithic bloc but should be so split up as to facilitate a more detailed consideration and control by the Legislature. The manner in which this splittiog up should be done is left to the Legislature and is, in practice,

l)
2)

Certain tanes and duties are required for the discharge of responsibitrities cast on the Union, e.g. customs and bulk of the Union excise duties. Certain taxes and duties are more efficiently collected by

Appmorx

179 proceeds

may be shared with the States, e.g. personal income tax and. certain excise duties. 3) Certain taxes and duties are more appropriately levied on a uniform basis by the Union, but may be collected by the States, e.g. stamp duty. 4) Certain taxes and duties are required for the discharge of responsibilities cast on the States or can be levied and collected by them more efficiently, e.g. sales tax, entertainment tax and State excise duties.

a centralised

agency

with the Union, but the

to changing circumstances keeping in view the need to preserve harmonious relations between the Union and the States, and (b) since the allocation of sources of taxation is weighted in favour of the Union to maintain a strong Centre, States 'should be given grants-in-aid of their revenues' again on the basis of principles to be determined periodically. Constitution, therefore, provides for the appointment of a Finance Commission every five years to determine these principles (Article 208).

The Constitution recognises that (a) the principles of distrirevenue between the Centre and the States, where distribution is provided, should be modified with reference such

bution of

Appendix 2

National Income Accounts

Income is the total money at our disposal during a given period, usually a year, The cash balance with us at any point of time may be only rupees hundred ortwo, but the annual income may be rupees five thousand. The concept of income is thus not astock btt the amount offlow into and out of the annual budget. If we add up the annual incomes ofall the households in the country it broadly becomes the total income of the country for the year. Incomes accrue to the households because we have (i) Ient our money (which gives us interest or profit); or (ii) let out our physical resources like land, property, etc. (which gives us rent); or (iil) offered our labour (which gives us wages and salaries); or, (lrr) employed ourselves, that is, become self-

employed (which gives us notional incomes which are a combination ofprofit and wages). These incomes are earned for supplying the ,,factors of production", namely, land, labour and capital to corporate bodies

or "firms" producing "goods" and "services ". Examples of "goods" are food and fertiliser; examples of"services" are bus journey and cinema show. Some of the households, however, also receive payments like pensions etc. from government. These are called transfer payments. Bulk of the incomes so received by the households are spent on co sumption goods iike food, clothing etc. Some payments are made to Government either as personal income taxes or as charges for services rendered (like school fees, hospital charges). The rest of the incomes are saved, Thus, if the accounts of all the households are added together they will look aS shown in
the table on the next page.

Let us now look at the "firms" producing goods and services. It deserves to be noted that both "households" and "firms" are conceptual entities. The self-employed persons like

ApprNoix 2
(AGGREGATED

t81

Housrnor-o AccouNtst roR ALL HoUSEHoLDS)

(in rupees crores)

Incomes

Expenditure 7,400
2,940 25,000 26,700 Savings 2,000 64,000 64,000 9,000

A.

Factors incomes Interest and profits Rent

Wages and salaries Incomes of selfemployed Transfer payments

Consumption Taxes paid to Govt. Charges paid to Govt. for services rendered

53,000

r,000
1,000

B.

from Government
ToTAL

'All figures in this table are hypothetical but are broadly based on the national income accounts fot 7976-77.
farmers are both "households" and
incomes as "households". Now, the firm which intends
leases

"firms". They produce

goods and services as "firms" and at the same time earn national

to produce goods and services in land (which ternr includes all natural resources), borrows capitai for buying machinery etc. and engages men

for working the rhachines. Thus the firm's activities give rise to the factor incomes ofthe households referred to above. However, in addition to engaging the factors of production, the firms have to buy raw materiais, power and components to produce the goods and services. A firm's account will thus be
as under:
Receipts

Expenditure

Sale value of goods and services

l.

bought out raw materials, power. components, and services 2. Factor payments made to the
Cost households.

of

Ifthe cost ofbought out raw materials, power, components, and services is deducted from the sale value of goods and services, the resultant sum represents the efforts of the firm or its contribution to the economy of the country. It will at the same time represent the factor incomes generated by its activities. This sum is known, self evidently, by the term Value Added. The value added by any firm thus has two sides, the

182 PnnronulNcr BuocBrrr.lc

FoR PLANNED

Drvrr.oprratur

product side (which gives the net ya|ue of its product from the point of view ofthe country's economy) and theincome side (which gives the factor incomes generated by that product). Thus, if we take an agricultural farm, the value of the foodgrains produced /ess the value of bought out water, power, seeds, fertilisers, pesticides, etc. represents the value added by the farm. The same value added, at the same time, represents the aggregate rent, wages and interest etc. paid by the farm and the profit made by the farmer. The ploduct and income sides are thus like two sides of the same coin. The value added concept has another great advantage. If wewant to add up the contributions made by all the producing firms in the economy, we need to avoid double counting. Suppose the value of farm produce of all the farms in the country is Rs. 36,000 crores. For producing this, water, power, seeds, fertilisers and pesticides etc. valued at Rs. 9,000 crores, might have been used. But, this sum represents the output of agencies supplying water and power, the seed farms and the fertiliser and pesticide factories, If re add up the output of

will be inflating the figures for the economy as a whole. This double counting can be
these agencies and of the farms we

avoided if we total up the "value added" by each firm, instead of the output, to get the total for each sector and for the entire
economy.

For the year 797 6-77 , the value added by the diiferent sectors and the value of output were broadly as under:
(in rupees crores)
Value of output Value added
27

Agriculture and allied

services 36,000
55,000

Industry, mining, power,

,O00

transport, etc.
Trade, banking, services, etc.
ToTAL

36.000 1,27,W0

20,000 18,000 65,000

Whlie the sum Rs. 65,000 crores represents the real effort of the producing firms, the sum Rs. |,27 ,000 crores represents the exfactory value ofgoods and services exchanged in the economy. Now, this exchange of goods and services actually takes place at even higher prices because of the levy of excise and

AppeNntx 2

183

other duties (called indirect taxes) by Government. On the other hand, some of the goods and services are exchanged at less than their value because of the subsidies given by Government as in the case of fertilisers. Such subsidies are, in effect, negative excise duties. We shall, for the sake of simplicity' treat them as such in the rest of our discussion, that is, we shall take indirect taxes etc. to mean indirect taxes /ess the subsidies given by Government. Besides indirect taxes, whictrr are generally passed on to the customers, the firms also pay taxes on the profits made by them. These taxes are paid by the firms, in effect, on behalf of the investors because but for these taxes the profits would have accrued to the inveslors in toto as factor incomes' Sometimes, the firms do not distribute the entire profits made by them but retain part ofthem for future expansion, etc. These, again, are factor incomes due to households but withheld by
the fi rms. The goods produced
can be classifled as (1) goods finally consumed by households (2) goods consumed by firms to produce goods finally consumed by households and (3) capital goods like machines which will keep on producing goods under

by firms

categories (1) and (2). The total of all the three categories represents the product oi the economy. Ftrowever, goods in category (3) are not finally consumed in the year. The curnulative value of this category ofgoods represents the productive capacity of the economy. Some of the machines (capital goods), horvever' get worn out or become obsolescent in due course. They need to be replaced in order to preserve the productive capacity ofthe economy. To the extent this happens. there is no adeiition to the productive capacity, although there is production of category (3) goods. We can thus talk of 'gross' value of the product and'net'value of product. This replacement of worn out or obsolescent machines is done by firms through amounts set

apart annually from the incomes earned by them. These are

called dep re ciatlon Provisions.

aggregated thus look as shown

The product accounts of all the firms in the economy when in table on nexi page.

184 PnnronnaNcn BuocrrrNc

FoR PLANNED

DsvrloplrrNr

(,lccnlclrro ron ALL

Receipts

Pnooucr AccouNrs
rrRMs)

(in rupees crores)

Expenditure

of bought out materials, households components, etc.): 2. Indirect taxes l. Agriculture and allied 3. Corporation taxes 27,A0O 4. Corporate savings , servrces. 2. Industry, mining, power, 5. Depreciation transport, etc. 32,0001
value
3. Trade, banking,
services, GRoss

Value of goods and services (1ess

I. Factor

payments to
62,000 10,000 2,000 1,000 2,000

etc. 18,000 PRoDUcr 77,000

GRoss pRoDUcr

'77,000

Rs. 2,000 crores

linclusive of indirect taxes of Rs. 10,000 crores and depreciation of

Definition af national income

Having discussed the household accounts and the accounts of the. point of view ofthe eccnomy as a whole we are in a position to define the various terms used to denote 'national income'. The gross value added by various firms valued at market prices (that is, inclusive of indirect taxes and depreciation), is known as:

the firrns from

Gross fJomesticl Product at market prices -Rs. 27,000 crores If indirect taxes of Rs. 10,000 crores are deducted fron this figure we get: Gross Don'lestic Product at factor cost 67.000 crores If depreciation of Rs. 2,000 crores is deducted fi-om-Rs. figure we get: this Net Domestic Product at factor cost _Rs. 65,000 crores

lThe word "domestic" is used in contradistinction with the term "foreign", rot synonymously with ..household".
1.{o economy is a closed shop. There are tra:rsactions with other countries which results in inflow and outflow of'goods and services as also, correspondingly, outflow and inflow of money. If these external transactions (which are somewhat marginal in our country) are included in the computatioo, the

Domestic Product becomes the National Product. The Gross Domestic Product becomes the Gross National Product and the Net. Domestic Product becomes the Net National Product. The

Net Domestic Product at factor cost (i.e. excluding

excise

AppnNotx 2

185

levies and depreciation) p/us the net effect of external transactiof,s thus represents the Net National Product or National Income'

As explained, the individual citizens or households derive their incomes from the producing firms. Excepting that part which they save, the households again spend their incomes on the purchase ofgoods and services produced by the firms' The households are, therefore, "consumets" and the firms are "producers". Where does the Government stand ? The concept of Government in economics is that it is a former "commoo benefactor" and a "common consumer." The because it transfers incomes to the needy like pensioners, handiapped etc. (called "transfer payments"), the latter because it -on.y on defence, police, etc. known as public goods' "pbtrdr Thus. Government is an extended household in which all the households have a stake. If we add up the household accounts of all the citizens and the consumption expenditure by Govern' ment as well as savings by Government and by the firms we obtain Net Domestic Income- Corrected for the net effect of external transactions, this becomes the National Income' Let us illustrate these aggregates with the broad figures for
197 6-77 .

NATToNAL INcoME AccouNTS

(in
INcoME

ruPees crores)
EXPENDTIURE 1. Household accounts

l.

Household

accaunts
incomes received
62,000

a. Factor
from

a.

Consumption Government

53,000

firms

b. Transfer

PaYments received from Government 2,000

b. Savings c. Direct taxes paid to d.

9,000

I,000 Charges paid to Govt. for service received I,Q00

Government tccouttts

2.
1,000

Government accounts

a. Direct

b. Charges

holds firms

taxes from house-

a.
1,000

Consumption
Paymer.ls to

10,000

for

services

b. Transfer
2,000

rendered to households c. Corporation taxes from

households. c. Savings

2,000 2,000

d. Indirect taxes

from

186

PnnponuaNcE
firms

BuocrtINc ron praNnrn Dpvnopurxr

10,c00

Torlr,

78.000

78.000

Less transfer payments bet-

t.tt,,2t,2ul (_) 4,000 (_) hrms'savings (+) 1,000 (+) Net Domestic Income at Net Domestic Expenditure markct prices 75.000 at market prices Less Indirect Taxes 10,000 Net Domestic Income at Net Domestic Expenditure factor prices 65.000 at factor prices
A_dd

ween Covernment and

,househotds

4.000
1,000 75,000
10,000

65,000

As explained, the last aggregate also represents the Net Domestic Product at factor prices from the point of view of the firms, The above account has been prepared from the ,.income" or "consumption" side while the account pre.pared from the firms'accounts is from the,,product', side.
Savings and investnxent

It may be seen from the above description, that the gros$ savings in the economy taken as a whole are:
(rupees crores) Savings by households 9,000 2. Savings by Government (i.e. surplus on revenue account) 2,000 3. Corporate savings (i.e. earnings retained by the firms 1,000 4. Depreciation provision by the firms 2,000

l.

TorAL

I4,00O

The amount when invested in machines etc., adds to the productive capacity ofthe economy. The capital account ofthe
economy can thus be represented as:
(rn rupees crores)
Sarings Households
Inyestment

9,000 Agriculturat and alliedl 2,000 Industry, mining, power, |

transport, etc. 1,000 Trade, banking, services,
I I

Governlnent Corporate Depreciation

services

14,000

etc.

2,000

)
14,000

14000

Appr1orx

187

However, as we have seen earlier' Rs. 2'000 crores represents merely replacement of worn out or obsolescent equipment' Thus, the net addition to capital stock or productive capacity is

only Rs. 12,000 crores.

P

It will be noted tbat "consumption account" depicts the incomes derived (by households and Government) on the one side on the consumption of goods and servicesp/as savings on the other side. The "product account", on the other hand, depicts the .value of production of goods and services on the one side and the incomes paid out or due plus depreciation provision
on the other stde.

roiluc ti on- con sump

i on o cc

outl

The two accounts can be combined to directly depict the

production-consumption relationship as below:

Px.ooucrron-CoNsuMPTIoN AccouNr (in rupees crores)

Pnooucrlot'l

CoNsUMPTIoN

7.

Consumption of goods and sefiices

1.

Consumption af goods and services

Agricultural and allied

Industry, mining, power,

services
transport,

I
i

By

Government Households

10,000

Trade, banking, ser'

etc.

|
I
I

63,000

By

53,000

2.

vices, etc. Capital goods

14,000

2. Investment

in capital goods

Out of Government savings 2,000 Out of household savings 9,000

Out of corporate savings 1,000

Out of depreciation Provi2,000 sion by firms Gross Domestic ExPenditure at market Prices 77,000

Gross Domestic Product at

market

prices

7?,000

From the above description it will be obvious that national income accounts are based on the concept of circular flow of financial resources. This circular flow may be represented
diagramaticallY as below:

The circular flow

188 PsnFonlaeNcr Buocnttuc

FoR PLANNED Dsvnl,optreNr

Diogrom 4

CIRCULAR FLOW OF FINANCIAL RESOURCES

Desciption

From

To

Amowtt
62,000 2,000 53,000 9,000 2,000

1. Factor payments 2. Transfer payments

Firms
Government
Households Households Households

Households

3. 4. 5.

Purchase of goods and services for consumption Savings by households Direct taxes and service charges to Government
taxes

Households

Firms

6. Indirect taxes and corporation

7. Purchase

Government
Government

of

for consumption

goods and service

Firms
Government Government Firms

12.000 10,000

8. 9,

tion provisions
capital goods

Savings by Government Savings by firms and deprecia-

Firms

2,000 3,000

10. lnvestment (from savings) in

Firms

14,000

AppnNorx 2

189

The circular flow can be 'proved'as below:

(Rupees crores) Incomings Outgoings
(1) (6) (9) 62,000
12.000

Firms

(3) (7)
(10)

53,000

i0,000 i4.000
TorAL
77,000

3,000 77,000

Households

(1) (z) TorarGoyelnment

62,000 2.000
64,000

(3) (4)
(5)

53,000 9,000 2,000 64,000

(5) (6) Toral

12,000
14,000

2,000

(z) (7) (8)

2,000 10,000 2,000

14,000

National budgeting A national budget for a forthcoming period can be prepared, in the same format as national income accounts, either from the income (consumption) side or from the production side. The first alternative will merely be the aggregation of all household budgets plus all Government revenue budgets. The second alternative will be the aggregation of budgets of all firms producing goods and services. The national budgets prepared on the basis ofvarious aggregate appearing in the national income accounts will, obviously, have a much greater element of statistical estimation than lower level budgets. For that reason they will also be much less amendable to managerial control. We can combine the tlvo national budgets mentioned above to give a direct productiou-consumption budget in physical quantities. Of course. the goods produced can be consumed only through the exchange medium ofmoney, that is, through money incomes. But, this direct production-consumption budget will

facilitate planning to be done in physical quantities. The principal objective of preparing a natiotral budget in physical terms is to ensure that the pattern and quantities of goods and services desired or demanded by the households or Government

190 PpnronrralNcn BuocBrrNc

for consurnption
services
budgets.
as expressed

FoR PT.ANNED

DpvrlopunNr

in the household and Government

budgets are matched by the pattern and quantities of goods and

to be produced by the firms as estimated in their

Appendix

Principles of Commercial Accounting

The first point to be noted in the commercial accounts of any firm is that it has a separate legal and administrative personality

distinct from the individuals, organisations, or Goveanment who invest money in the firm. The money thus invested, therefore, becomes a liability ofthe firm (owed by it to the investors for whom it is an asset). All the buildings, machinery and stocks financed by the firm from the money invested are assets ofthe firm matched by its liability to the investors. The second point to be noted is that the business ofthe firm is conducted on behalf and at the risk, ofthe investors. Thus, the.profit made by the firm is a liability of the firm (owed to the investors) and loss is a notional asset (owed by the investors to the firm). When the firm borrows money, the lenders assume the character of investors and the money borrowed becomes a liability (owed to the lenders). Likewise, if the firm itself invests in, or lends money to, any other firm jt creates assets for itself. Where the total moneys received by the firm are in excess ofwhat is required to by the assets, the balance remains with the firm as cash (either in hand or atthe bank) which is also an asset of the firm. The value of assets cannot exceed the liabilities since the firm has no way of creating such excess assets. It has to have recourse at least to short term borrowing like overdraft from the bank. These short term lenders also assume the character of investors temporarily and the money so lent (or borrowed by the firm) become a liability of the firm (owed by it). The firm may purchase or supply goods on credit. The suppliers who supply goods on credit are known as creditors and the persons to whom goods are supplied on credit are known as debtors. The money owed to the creditors is a liability (owed by the firm) and the money owed by the debtors is an asset (owed to the firm). The difference between the cash received from the purchasers and that paid out to suppliers again becomes

192

PERFoRMANCE BUDGETTNG FoR PLANNED DrvslopN{nNr

part ofcash balance or bank overdraft as the case may be, that is, an asset or a liability. Thus, the liabilities aud assets of the firm always match much to the surprise of the uninitiated. A statenrent which gives the position of liabilities and assets ofa firm as on any particular date is known as the Balance Sheet. Normally, such a statement is prepared as on the last

day of the financial year for the business of the firm. The
items appearing in the Balance Sheet are as below:
BALANCE

Snrsr

as oN 31sr MARCH (YEAR)

Liabilities

Assets

1. Share Capital

Land
2. Buildings

2. Long term borlowing 3. Short term borrowing

4. Creditors
5. Profit, if
any

Machinery Closing stock (inventories) 5. Debtors

J.

of

goods

6. Cash

7. Loss,

if

any

side are known as Current assets side as Current assets. These liabilities and assets are created in the course of

liabilities and Items 4,

Items 3 and

4 on the liabilities
5 excess

and 6 on the

the business. The

ties is generally known as

extra capital is required for running the business, besides the capital necessary to finance the fixed assets (Items 1,2and,3 on the assets side), The Balance Sheet gives the position of liabilities and assets. at the end ofthe business period; it does not tell anything as abdut the operationr of the firm during the year-the expenses incurred by the firm in producing the goods and services during the year and the amounts realised by it through the sale of' goods and services. This information is given in the Profit and Loss Account prepared for the year and takes into account all the transactions which took place during the year. The practice in commercial accounting is to show expenses. on the left hand side ofthe profit and loss account and the sale receipts on the right hand side. This is different from the'

of current assets over current liabiliworking capital, that is, so much

AppnNorx

193

practice adopted for household budget/accounts, and for Govern ment budget/accounts. However, this is only a matter of fresen-

tation.
The second, and really important, difference is that commercial accouats are prepared on accrual basis, oot on cash basis as is the case with the household budget/accounts and Government budget/accounts. Profit and Loss Accourit thus depicts th'e revenu earned. for the year not the sale value realised in cash., during the year. Likewise, it depicts the expenditure incurredit

for
on

exhibited in the Balance Sheet as.,debtors" and .,creditors',. Thirdly, the expenditure side ofthe profit and Loss Account, must make one important provision, though it does not reore_
sent a cash outflow as such. The equipment purchased by the factory is of limited llfe. It invariably wears or, not infrequently,
becomes our ofdate. Therefore, some provision is required io be made on the expenditure side so that by the time the equip_

the year not the actual cash payments. Thus, sales effectedr: credit basis and purchases made on credit basis are also, taken into account. The value of goods so sold or the purchaser so made are treated as outstanding assets and liabilities and

ment becomes due for replacement, there is sufficient money to. buy the new equipment. In any case, the value ofwear and tear is expenditarefor the year. Conceptually, the assets have becn partly 'consumed' during the year. This is an important concept in economics as well as business management and hence depreciation (which represents the money so set apart) is an important entry in the Profit and Loss Account. Each year,s Profit and Loss Account of a firm is, thus. separate and looks somewhat like the following: Pnortt nNo Loss Accoulr
t.'oR (rHE YEAR)

Expenditure (on Accrual Basis) Receipts (on Accrual Basis) 1. Opening stock of goods* 1. Sales 2. Rent for land and buildings (if not owned) 2. Closing stock of goodsx 3. Interest on long term borrow- 3. Loss, if any.
ings

year"; closing stock ofgoods paid by the "next year".

*Opening Stock of goods is what ..this year'. has pay to the..previous. is, Iikewise, what,.this year.' has to be;

194 PnnronueNcn BuocsrrNc ron PrnnNEo DrvrLoplrrNr

4, IDterest on short term borrowrngs

5. Raw materials end bodght out

components

6. Fuel and power {a) Materials or charges for

suPPlY

7. Maintenance (b)
Wages

"(bl Wages of labour

of Plant and machinerY (a) Stores and sPare Parts

of labour
Wages of Labour emPloYed on

8. 9.

gocds and services (other than 6b and 7b) Salaries of administrative and sales staff.
production
anY.

of

ll.

10. Depreciation (as assessed)

Profit, if

national income accounts dis2, ihe profit and loss account shown above ussed in Appendix an be recast as under:

To facilitate compilation of

Expenditure Cost of bought out raw materials,

etc. Depreciation

Receipts

Sale Value of rhe Protluct

(5 l- 6a f 7a) (10)

(Sales p/as closing stock tt.nar opening stock)

Fqctor Payments

pra,l profit, if any, rrlnas loss, if any)

(2+3+4+6b+7b+8+e

Depreciation being the po;tion of the assets "consumed off" during the year, the sum arrived at by deducting the Deprecia;tion and the cost of bought out raw materials etc. from the .Sale Value of the Products represents the net contribution by .the firm to the economy. This sum, at the same time, represents the incomes generated by the firm through its activities. It is otherwise known as 'value added' by the firm as explained in Appendix 2. In case ofloss, or in case of profits (if tbey are not distributed to the ]nvestors or to the extent not so distributed), they are ..carried over from the Profit and Loss Account to the Balance

APPENDTX 3

195

Sheet as an outstanding asset or liability. Loss represents a notional asset of the firm (which the investors have to make good and hence owe to the firm) and profit represents a liability (owed by the firm to the investors). Two other items appearing

in the Profit and Loss Account are also carried over ro the
Balance Sheet. These are the closing stock of goods, which is an asset to the firm, and the depreciation provision. The lattcr, is

usually taken in reduction of the value of the fixed assets. The value cffixed assets shown in the Balance Sheet is, therefore, net ofthe provision for depreciation. The value of fixed assets is so much less after their use during the year. Since depreciation provision does not represent a cash outgo, the efect of providing for it in the Profit and Loss Account (and thereby reducing the profit or increasing the loss) is to increase the cash available with the firm. This is reflected on the asset side of the Balance Sheet. If it is decided to invest the money separately, the cash will be less to that extent, and an additional entry 'investment' will appear on the asset side ofthe Balance Sheet. But, usually firms keep tbe depreciation provision to finance their working capital requirements. Iflhen gets feflected either in cash balance or in debtors or in inventories, that is, in one of the current assets. What happens if the firm keeps on making loss ? Gradually, the accumulated (to the extent undistributed) profits get wiped .orit first. Tbe firm then resorts to temporary borrowing of funds. The effect in the Balance Sheet will be to increase the item under short term borrowings on the liabilities side with a matching entry .accumulated losses' on the assets side-a notional asset, The short term borrowing can usually be only on the basis of hypothecation of land, buildings, equipment or stocks. Thus, over a period of time, all the real assets on the right hand side will get hypothecated against the shortterm borrowings on the left hand side, with the result that there will be no real asset remaining free on the right hand side to match the initial capital investment or the long term borrowings on the left hand side. Thus, when a firnr strikes a bad patch, it initially eats up accumulated profits, then starts the era of shortterm borrowings. When the aggregate short-term borrowing exceeds the value ol curent assets the firm starts eating up the capital invested.

196

PERFoRMANCE BUDGETING FoR PLANNED

DrvsropMrNr
as the profit and

Revenue and capital budgets

We can prepare, under the same heads

loss account, estimates of,receipts and expenditure for the next year. This will constitute the firm's revenue budget for the next year. Likewise, we can proj ect the Balance Sheet items of the

frm for the next year, The estimated changes in the value of assets and liabilities during the next year will constitute the capitalbudget for that year. For example, additional investment or additional loans proposed to be taken will resttlt in increase in the liabilities side ol the balance sheet and hence come on the receipts side of the capital budget. Likewise, the additional machinery proposcd to be installed or proposed accretion to stocks etc. will result in increase in the assets side of the balance sheet, and hence come on the expenditure side of the capital Let us examine the revenue budget of the firm that is, the projected Profit and Loss Account for the next year. We must first take a look at the receipt side which represents the financial earnings. The estimated earnings are the product of the quantity ofgoods likely to be sold and the likely prices. The first exercise is. therefore. to make a realistic estimate of the likely quantities to be sold and the likely process at which they can be sold. Having determined the quantities to be sold we come to the quantities to be produced keeping in view the pipeline stock necessary. The estimate ofthe quantity to be produced will directly give the estimates bf the raw materials required, the number of men to be employed, and the quantity of fuel and power to be consumed etc. The estimated value of these quantities are put down on the expenditure side. The estimates under different heads thus finalised make up the budget, the difference between tbe revenue and expenditure sides being the anticipated proflt or loss as the case may be. It may sometimes become necessary to revise the budget as the year progresses because of changes in the environment or because some of the expectations regarding levels of eficiency
budget.

etc. have proved to be either too high or too low. Consequently, budgeting process is closely interwoven with the management process. As management process is cyclical-setting objectives, preparing action programmes, allocating resources,

monitoring execution, and making final evaluation before start-

Apprsorx
ing

197

becomes a Process for the next year-budgeting also cyclical process.

the

Cost accounling

Traditionally, firms relied on financial accounting, which recorded transactions on a historical basis, to get information on the working results. The accountal wasby the nature of transactions.under heads of account like wages, fuel, power, raw materials. No attempt was made to analysO expenditure by products or divisions or emphasise the putposes of various items of expenditure. The entire profit and loss account was a monolithic whole. Cost accounting was later developed to improve managerial control through determining and analysing expenditure or costs by divisions and products and by periods ol time. However, until the concept of budgeting was adopted, cost accounts were also prepared on a historical basis, that is, for past periods. Therc was no emphasis on looking ahead and preparing a plan of irction with built in control systems' Use of budgeting within a sound costing system has now made it possible for the management to correct ineffciencies as they creep into the operations of the firm' Whether the firm is making profit or loss it will know in advance. There is now no question of the manager pacing up and down while the accounts ar'e getting complied, like the father in a maternity home, to know whether he is making a profit or a loss.
A more madern terminology for the accounting function embracing financial accounting, cost accounting and budgeting is management accounting defined as preparation and presentation of accounting information to enable the organisation or
Management accouniing

firm (t) to plan

ahead and

(2) to

ensure effictive control

of

activities during the execution of plan.

Perhrmance budgettng Since no firm would like to make a loss for the forthcoming year, if it can help, rvhere the budget estimates prepared as above indicate possible loss, a thorough review of the estimates under different heads should be undertaken so as to increase the sale volume or sale prices or reduce expenditure. Gene-

193 PrnpontrnNcr BuocntINc ron pr.axNuo DnvEloprutrr

rally, the latter is the only option available. Since the various items of expenditure such . as raw-materials, wages, fuel, power, stores represent certain physical dimensions and the quantities of output from them depend on certain physical parameters like utilisation of machines, process efficiencies, reduction of material waste, productivity of labour, the quality of budgeting can be improved if the exercise is done in physical terms alongside the financial analysis. Sucb an exercise. to be manageable, must break up the production process into meaningful activities and the costs regrouped accordingly. These physical activities have to be related to the objectives, namely, quantities of goods to be produced and the costs at which they would have to be produced to enable the firm to
make profits. The objectives must take into account the environmental conditions. Such a comprehensive budgeting system which establishes a clear nexus between objectives, physical dimensions and financial outlays is what we call performance budgeting.

Appendix 4 Discounted Cash Flow Technique

investments yield different patterns of benefits over periods, in order to make a comparative evaluation different ofthe alernative investnents under consideration, we should bring the net benefits (gross benefits less costs) .eiven by each of them over the respective periods to a commor measuring scale. This isdone by "discounting" all the future net benefits, as represented by the net cash inflows, in obtain their present value. This is based on the simple prernise that a rupee earned or spent to-day is worth nore than a rupee earned or spent to-morrow. If an investment gives a return of rupees one lakh this year it is preferable to an investment which gives a return of rupees one lakh next year, or the year after. The technique is compound interest calculation in reverseIfa sum P is invested on compound interest rate r the sum at the end of t years is given by the formula A:P(1+r)t, r being expressed in decimals. Therefore, if we know the sum of money at the end oft years, we can know its present value P by the formula.

If different

-A
an investment A Thus.

(1+r)r

if

A 1 . A2.

43 are the net benefits likely to accrue frorn during the lst year, 2nd year,3rd year after
A3

investment, their total present value can be worked out as

AI NPv,; rr-,;l a A2 ;F
Similarly
to accrue if

F-1r-,.1u

if

five

1, 82, 83, 84, B5 are the net benefits likely successive years from a second investment E

200 PrnronulNcn BuncEUNc

FoR PLANNED

DrvnropurNr

rthe net present value of that investment

will be

NPV: B1 ,82, ts3 B4 85 (B) al+r) -r 6farr (t+t-f, 11a,y+ 1qy

With such a calculation we can select investment A or invest_ ment B according as NPV (A) is more or NpV (B), that is, select that investment which gives a higher net present rslue {NPV), These calculations are not at all difrcult in actual practice since tables giving present values corresponding to different discount rates are readily availablel, just liki compound interest tables.. Suppose the interest rate is l0 per cent. The values in differei'rt years are as below:
(in lakh
PresEnt rupees)
5

After
year
1.10 1.00 0.91 0.83 r),75

After 2
yearc

lime
1.00

After 3
yaers
1.33
1,.21

After

4 leafs
1.46 1.33
1.21

After

years
1.61

r.21
1.10 1.00 0.91 0.83

o.91 0.83 0.75 0.68

1.46
1

1.10

1.00
0.91

1.10

.21

a.62

0.68

0.75

0.83

1.00 0.91

1.10 1.00

There is no magic

in this table.

ively. For getting its value in apastyear rve divideby l.l Rs. 1.00 lakh earned/spent this year is equivalent Rs. 1.61 lakh earned/spent after 5 years. Conversely, Rs. 1.00 lakh earned/spent after 3 years is equivalnt to only Rs. 0.75 lakh earnedispent this year. To illustrate the application of the technique, the net presenf value at l0 per cent discount rate of a project which costs Rs, 10,000 in the current year and yields Rs, 3,000 every year fof the next five year is as below:
successively. Thus, r Present value factors
dhe end

indicate the year in which money is earned/spent. For getting its equivalent value in a future year we multiply by 1.1 success_

The underlined figures

for

of this note.

certain selected djsccunt rates are given at

APPENDTX 4
Year

20r

Cash inflow
(10,000) 3,000 3,000 3,000 3,000 3 000

(Rs.l

Present value
1.00
0.91

lactor

Present value
(10,000) 2,730

o
1

2
3

4
5

0.83 0.75 0.68

2,490

,t

5n

2,040
1,860

0.62

Net Present Value (NPV) N.B.: Amounts in brackets are costs or cash outflows.

1,310

The technique or the computation involved is tress important than the judgements made on the "life" of the various investments, that is, the respective periods during which they witl give the benefits, and on the quantum of cost and benefit streams flowing from them. The rate'used for discounting in the private industrial sector for these calculations is usuirlly the rate at wbich the firm is able to borrow funds from the market for the proposed investments. Different discount rates can give different results depending on whether an investment gives early benefits or late benefits. The selection of investment may go wrong if the discount rate assumed is wrong. Further, it may be heipful to know at whal. rate the investment will be justified' A variatiotr of this technique is, therefore, to calculate the internal rate of return (IRR) of each investment that is, to calculate the interest rate which gives a zero net present value (NPV) for each alternative. If the internal rate of return (IRR) thus arrived at is higher than the rate at which the firm borrows
funds the investment is acceptable.

The internal rate of return is worked out on a trial and error basis. The netpresent value is first worked out onthebasis of two assumed discount rates, say 10 and 12 per cent. If 10 per cent gives a positive NPV and 12 per cent gives a negative NPV, the IRR lies somewhere in between and can be arrived at by interpolation (rule of three). If both discount rates give positive NPV then the IRR is higher than 12 per cent and hence another higher rate, say, 13 or 14 per cent is tried. If both the discount rates give negative NPV, the IRR. is lower than 10 per cent and another lower rate, say 8 or 9 per cent, is tried. Having arrived at two rates the lower one of which gives a positive NPV and the higher a negative NPV, the exact

202

PERFoRMArqcr

BuocEtNc pon Pr,cNNro DpvrloptanNr

IRR is arrived at by interpolation. For the project illustrated above, the net present value at different interest rates work out (with reference to standard tables appended) as below :Discount rate
10%
12%

NPZ

(Rs.)

t,370
830

14%
1s%

-50290
0e0)

t6%

Thus, the IRR must lie between l5'/" and 16/". The gross, difference between the NPV's corresponding to the two rate$ being 240, the exact IRR can be worked out as follows:

tO*:tt+
:
-t{rl

I 5 -1.0.21

Thus, the benefits in the next five years, ifdiscounted at a rate of 15.21 per cent, less the capital cost of the project would yield zero net present value. The investment is, therefore, justified so long as the firm is in a position to borrow funds with an interest rate lowerthan 15.21 per cent. As the reader may have concluded himself it is more straightforward for the firm to indicale to all the lower formations the rate at which it is able to borrow funds, so that investment decisions can be taken at the appropriate levels using that as the discount rate, than ask the lower formations toworkout the IRR in respect ofeach prepared investment and subrrit for comparison with the borrowing rate keeping it
a secret. (see Table
6.1

the quantum of benefits yielded over the years is uniforrn it will facilitate quick calculation if cumulative values
Where

of discount factors are ready at hand.

(see Table 7)

APPENDTX 4
O \O.a O\ F \f ol 6 a! a] - - F - r

203

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doooooddoooooai

co v_r -! Fr \o \o t-- c) .. oo .. a{ a{ N o. \o <i al - F \O r) v.) s..) - .:;; - - - ; .: ;1 -f ^ ^ ^'; -i -i 4i

i cor-\oq)rt<.'n..-l -: ^' ^ zi A ^ ^l -i ;
oo F t.- O\ N \o O'a

rr $ ; ; ;

rc \c + ; -:

F F

\c 6 co r') c. @ \o - S OO a.t .,t .. oi (\ - o co @ \o v-) lir s .! c,l 'r c! co tr : ; .;; A A i .-j

^'.-.^ ^

ci i d

z o
U

x
q

d\ 6 r .o r.t v_, v\ o \o a-l o \o ts c 04 A o F \i F - + + r, ri r.i c! N .l jooicjcjooododaio

H!
(-)

\oH
@(h

d
I

.) oo 6 I o\ ..) oo .i o\ r.) ..1 o. \o.i X - i< \o '6 'r^' + s - .i - ..t ..t iil .n dddoooooooooooa
* 6 r.r 0o a.l \o - l'r <J d\ t/l a.l ..t \O \f O' N ..r 6 ad Fr \o v-) ra !J. ^.t F-) .-r .1 -l -- A -i 4i -i -i ^'..l -i,-{; -i A -

..t rr F -..) \o <> h O \O N O\ \O.. O \ 6 r.t'- \l \r.1 .n.. - c.l iti c; c- r-l -: -i ^'-i A,-- ,-l .i,-{ ; - ^ .;..; F z

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CJ

O \O \O |r. !.) .i h <t d\ $ o|r rat t\ \O.i O\ \O q. O f* :t al + s. <. Oi OO OO r- F-: ^. -i -: ^' ^',.i ^' -i ^ -i -: ^' -i ^'

>r

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204

PgnponueNcn BuocBrrNc ron PreNNbo Dsvnloptnrxr

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co

tt-

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v_r

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r.) a.l \O + O + 6l 'r_r \oooQ i \o.n -.nO1 O\ + j 6i o\ <l 0oc..t\oo\Ns d,,.i \o \cj ci.'i Fi + + + vi,.; o
oO v1

oo

F D

z
O

t\ \o F c.t o c.t o...q \f o\ .-l N o \o .o + \O.n O\'.| c' <t co \O O\ o -j .,i.i c4 + + + -i vi vi,;.4i- 'o .o
oo co

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09

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Ia q P-: "lq a,c, q-.n909o H a.l tn.n + + * r.) v) h \o \o \o \Q

v-rvo. I o|.)cao\ o-<oo.:,o\ l.' $ x t\ cl t\ - r) oo N v c- c\ d -.; ..i..i..i + + -i,'i d.d \d \4i \o F

\o i.-..'/|ir

(n al..

a:
F -:

Ft c;

? Fi

!'i
f

)i

r.t F..r - $ o\ F- o\ o\ fr + H ts-.o oo..

o -i oi..i..i + +,.i

F \o F- rr + o\ oc o \c) <,/i - .o -e -.. Ft-

'o

,r

..r \O .a <f o\ 6 .i ri o\ .'.1 o \O 6\ o\ \, oi t\ v-)...1 0o {.c)r) o\sco-:i-F-o d --;6i ;,.i.+ vi vi rri \o F- F'F- #

'd

>i
D

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.a i e{ o\ o F 0\ Fr r1. \o t4 ra ar r) o\ co \o.4 ; r-.. o\ - o o o\..r F c --' .i c'i + !. d ,.j \ri r- F F- od oo o.

*.i \o

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ci -i 6i ..i + +

F- \o r *N

N co < o \o o\ c! hr cN O\ r- C.l cO tr) oo.n oO c.l r\

,,.i

\!t vt F- r.-

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Appendix

5-

A New Classification of Govemment Transactiois The broad sectors of the new classification are:
ExPEI\DtruRE RECETPTS A. General ServicesL A, Tax Revenue a. Taxes on Income and Expen- a. Organs of State

b.
c.

Taxes on Property and capital transactions Taxes on Commodities and

Services

diture

b'

Fiscal Services

c. Interest

Payments

d.

Administrative Services General Services

e. Pensions and miscellaneous

B. Non-tax Revenue (including Dividends, Interest C,

Grants-in-aid. contributioni

8.6 Sacial and Community

Semices2

Receipts and charges for services rendered or supplies made).

etc.6

C.6 Economic Senicesx a. General Economic Services b. Agriculture and Allied Services c. Industry and Minerals d. Water and Power Development e. Transport nnd Communicationsa
Railwaysa Posts and Telegraphs{ D. Gr ant s -in-ai d cont ribut ion s

g.

f.

et c.E

lservices
State. 2Services

wlfch are

indispensable

to the

existence

of

organised

to individuals or groups of individuals. "services in the field of regulation, production and distribution' aSeparate sub-sectors allotted to Railways and Posts and Telegraphs in view of certain accounting arrangements. 5To account for ransfer of tesources from Centre to States, States to Local Bodies and Centre to Foreigl Governments. .6Sectors B and C on the expenditure side are the "Development"
sectors.

206 PrnronuaNcr B\ocnrlNc

There

EoR Pr,r.r.rNEo DBvnLopuENr

is an exhaustive list of major heads under each

setcor/sub- sector. For example, "Agriculture and Allied Services" have the following. major heads: Major Head Number
305 306 307 308 309

Nomenclature

Agriculture

Minor Irrigation
Soil and Water Consetvation Area Developmnt Food and Nutrition

3r0
311

Animal Husbandry Dairy Development

Fisheries

314

Forest Community Development.

revenue expenditure, capital investments iL departmentally managed, private or public undertakings, loans given to public or private undertakings or to individuals, and, receipts of departmental undertakings or charges for services rendered. Correspondingly, in respect of each function there are four separate major heads. To facilitate accounting the four major heads are given numbers according to a common code. For example, receipts on account of Dairy Development are accounted for under Oil Dairy Development, revenue expenditure under '31 I Dairy Development', Capital investments rinder '511 Capital outlay on Dairy Development', and loans under '711 Loans for Dairy Development'. The corresponding numbers differ by 200 because provision is made in the new classification to accomnodate 200 functions. Each major head is subdivided into a number of minor heads. They are intended to indicate subfunctions or groups of programmes serving the same objective within or outside the plan. For example, major head 305 Agriculture has the following minor heads:
Major Head
305 Agriculture

to mention that under the same function, there can be four different types of transactions, namely,
It
is necessary

Minor Heads Direction and Administration

Land reforms Consolidation of holdings

ApprNorx

207

Muitiplication and distribution of seeds Agriculture farms High yielding varieties programmes
Plant protection Commercial crops
Schemes

for

small and marginal farmers

and

agricultural labour Extension and farnters' training

Agricultural education Agricultural engineerirtg

Assistance
Resca rch

to

Indian Council

of

Agricultural

Agriculturalresearch

Agricultural econolnics and statistics

Storage and rvarehousing

Horticulture
Other expenditure.

The actual programmes and schemes undertaken by different

Governments and Departments are to be designaled by them as sub-heads under the respective minor heads. Thus, a sugarcane development programme undertaken by the Government of Bihar will be classified in the accounts of that Governmeot as a sub-head under the minor head "Commercial crops". If there be more than one such programme more than one sub-head

will be

so designated.

The detailed heads under each subhead reprcsent Lhe nature or form of expenditure. Since this categorisation will not change regardless of the purpose for which expenditure is incurred,

standard detailed heads are prescribed. This has the further advantages of facilitating the compilation of economic classification. Thus, the expenditure incurred on the travel of an extension

offcer connected with sugarcane development will be classified in accounts as follows:

Major Head Minor Head

Sector+

*EconomicservicesiAgriculturalAlliedServices

-305

Agriculture
croPs

Sub-head -Commercial -Sugarcanedevelopmentprogramme' expenses Detailed head -Travel

*not required to be meuioned on each bill.

208 Pnnnonu.llcr BuocrrrNc

FoR PLANNED Dsvrropr\4pNr

The major heads and minor sub-heads correspond to functions and programmes respectively. So_far as activities are concerned no specific provision is made in the new accounting classification for the reason that below the programme level there ought to be really a two way classification, oho to indicate the nature of expenditure to exercise detailed control over expenditure and the other to indicate the purpose of expenditure or the activities of the programme. (In the literature on performance budgeting, the latter is known as the activity classification and the former as the ,,Objectwise" classification

sub head'sugarcane programme'under the minor head .,commercial crops", not under the minor heads ..extension and farmers' trainirrg" on "manures and fertilizers". The fundamental principle of classification is that expenditure should be classified with reference to the purpose at the lowest possible tier of classification. For example, if there is a Directorate for sugarcane programme the expenditure on that Directorate will form part ofthe sub head relating to sugarcane programme. On the other hand, if there is a common Directorate for all commercial crop programmes (including sugarcane programme) the expenditure is identifiable only with the minor head "eommercial crops", not withany of the sub heads under it. In such a case, "Directorate of Commercial Crops" will itself b: a sub-head under the minor head .,Commercial Crop". Further, there may b.e a Dire ctorate of Agriculture looking

of expenditure). Both are presented together in performance budgets. As further progress is made in remodelling the accounting systems and refinding the performanne budgets it may be considered whether an intermediate tier between sub head (programme) and detailed head (object of expenditure) to represent o'activities" should be introduced. This will be possible whon each item of expenditure is capable ofbeing related to different activities and classified as such ab initio. The attempt in the new classification is to bring together a1l expenditure connected with a particular programme under a single sub head. For example, the extension work done for the sugarcane programme or expenditure connected with fertilizbrs specifically relatable to suagarcane programme is reflected in the
nature

making a distinction, for some unknown reason. betwecn "objective" indicating the purpose and ,.object" indicating the

Apprxorx

209

after all agriculture programmes (including commercial crop which includes sugarcane programme). This office will not be classificable under any specific minor head underthe major head '305 Agriculture'. It will be a separate minor head in itself. Still, further, there are Secretariat Ofrces which look after more than one function. For example, the Ministry of,

Agriculture may deal with not only Agriculture, but also. Forest, Fisheries etc. It will not, thus, be appropriate to classify' the expenditure on the Ministry under the major head '305: Agriculture'. Hence a separate major head itself (296-Secre.tariat-Economic Services) is prescribed. The alternative to foilowing the above principle is to go in for elaborate allocation of the expenditure involved. For example, each item of expenditure on the Secretariat of the Ministry of Agriculture will need to be allocated (at the time of incurring itself) as between all the major heads dealt with by it. That portion ofthe expenditure allocated to the major

head '305 Agriculture' will further need to be allocated as between the various minor heads under the major head .305 Agriculture'. Again, that portion of the expenditure allocated to the minor head 'Commercial Crops' under the major head '305 Agriculture' will need to be allocated to various sub-heads under the minor head including the sugarcane programme. Assuming that we will be able to resolve the methodological problems involved and e mploy a computer to make such allocation at the time of passing each salary or travelling allowance bill of the Ministry, we will find that the .,cost" involved in making the allocation is not commensurate with the ,,benefit" derived. Such allocation cao be attempted on ad hoc basis whenever a detailed analysis or evaluation ofthe particular programme is undertaken. Otherwise, for managerial purposes,. the principle of classification suggested seems adequate. A somewhat sinilar approach is adopted in the case of,' conunon services like public works, stationery, etc. Unless the expenditure is (l) substantial, (2) clearly identifiable with, separate programmes and (3) accountable as such, no allocation, is attempted. In respect of "public works", the Team made ar
specific recommendation that such allocation should be attempted' respect of construction costs that too limited to functional buildings (like schools, hospitals as distinct from ofrces) in the

in

2t0

Prnromuxcr Buocnrrtc ron PreNNno DnvErorltsNr

,development sectors (Social and Community Services and Econornic Services) because building costs form a s'rbstantial 'chunk of these development programmes. Here again, where tthe expenditure connot be classified under the concerned minor ,,head it will be allocated to a separate minor head under the concerned major head. ln respect of programmes with more than one objective, the programme is classified with reference to the main objective. What generally happens is that there is one main objective and there are a number of subsidiary objectives. For example, an irrigation project may include provision for a school or hospital, usually if the project is located away from a town. In this case irrigation is the main objective. The objectives served by the school or hospital are entirely subsidiary. Hence, the entire costof the irrigation project, which istaken as an integrated one, is classified as such. There are, however, programmes with multiple objectives, that is, the same expenditure serves more than one objective, like, for example, scholarship given to a student belonging to a Seheduled Caste. In this case before deciding the classification the question to be asked is: Would the scholarship have been given ifthestudent did not belong to a Scheduled Caste? If the answer is no, it will be classified under the minor head "Welfare of Scheduled Castes" under the major head'288 Social Security and Welfare'. It will not be classifiable under the mihor head "scholarships" under the major head '27'1 Education',. In a way, this is applying the "with and without" principle,

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BuocrrrNc ron pranNeo DrvproptrrNr

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Public Putpose' Harmonds-

York and Tokyo: McGraw Hill-Koga Kusha'

Allen Lewis, Arthur. The TheorY of Economic Growtlt. London: and Unwin, 1972. Mitra, Ashok. ed. Economic Theor; and Planning: EssaYs in Honour of A.K. DasguPta. New Delhi: Oxford UniversitY Mydral, Gunnar. The Challenge of lVorld Poverty ' Harmondsworth: Pelican, 1970. Nove, Alec. An Economic History of (J.S.S'R' Harmondsworth:
Penguin, 1972. Nove. Alec and Ruth, D.M. eds. worth: Penguin, 1972'
So cia

Press, 1974.

li st Econontics. Harmonds-

Schultze, L. Charles: National [ncome AnalYsis.

New Delhi:

Prentice Hall. 1964. Stone, Giovanna and Richard. National Income and Expenditute' London: Bowes and E.L.B.S', 1966. of Stonier, W. Alfred and Hague, C. Douglas' A Text. Book Whitehead, Geoffrey. Economics Made Simple' London:
Economic Theory
1970.

'

Lond,on: E.L.B.S' and Longman' 1972'

W'H'

' Allen,

M.lNecEunNr AccouNTANcY Amey, L.R. The EfficiencY of Business Enterprises. London: George Allen & Unwin, 1969. Anthony, N. Robert and I)earden, John. Management Control -Taraporevala,
Systems: Text and Cases. BombaY: D.B. 1977. Bagglot, Joseph. Cost and Management Accounting made Simple'

London: W.H. Allen, 1973.

14

PBnronrvreucp Buocnrtwc ron pr.a,l.r,.-Bo Devnlop[4rNr

Batty, J. Management Accountancy. London: E.L,B.S. and Macdonald & Evans, 1975.
nald Evans, 1975. Paula, De. M anagement Accounting in p ractice. Londoni pitman,
1967.

Lewis, J. Brown and Howard, R. Leslie. principles and praclice of Management Accountancy. London: E.L.B.S. and lMacdo-

for Managers. London: Cassell, 1967. Sizer, John. An Insight into Manqgement Accountancy. Harmonds_ worth: Pelican, 1969. Wiilismore, A.W. Accounting for Management Control. London:
Pitman, 1971.

Robson, A.P. Essential Accounting

INDTAN EcoNoMrcs

Arora, R.C. Development of Agriculture and Allied Sectors_An Integrated Area Approach. New Delhi: S. Chand, 1976. Besant, A. C. Raj. Public Enterprise Inyestment Diecisions in India-A Managerial Analysis. New Deihi: Macmillan.
1977.

Dagli, Vadilal. Growthfor whom"! Commerce pamphlet 62, 1973. Hunter, Guy. Administration of Agricultural Development. London: Oxford University press, 1970. Mehta, Asoka. Reflections on Socialist Era. New Delhi: S. Chand.
1977.

Mellor" W. John. Economics of Agricultural Development. Ithaca, N.Y.: Cornell University press, lg6i. Minhas, B.S. Planning and the poor. New Delhi: S. Chand,
1974.

Natural Resources in the Indian Economy. Commerce, Annual Number 1970. Bombay.
,Sharma, B.S. Financial Planning in the Indian public Sector_ A Management Approach. New Delhi: Vikas. 1974. Singh, Charan.India's Economic policy, The Gandhian Btue-

print. New Delhi: Vikas, 1978. Singh, Shrinath. Modernisation af Agriculture. New Delhi: Heritage, 1976.

SBr,Ecr Brer,rocnepgy

215

PuglIc ExpnNortuRr
Buchanan, J.M. ed. Public Finance: Needs, Sources and Afihsallon. New Jersey: Princeton University Press, 1961. Cbase, S.B. ed. Problerns in Public Expenditure Analysis. Washington, D.C.: Brookings Institution, 1968. Fiscal Policy for a Balanced Economy, OECD, 1968, Frederick and Pryor. Public Expenediture in Communist and Capitalist Nations. London: Allen and Unwin, 1968. Haveman, Henry Robert. The Economics of the Public Sector. New York: John Wiley, 1970. Hicks, Ursula. Development Finance. Oxford: Clarendon Press,
1965.

McKean, R.N. Efficiency in Goyernment through Systems Ana/7sis. New York: John Wiley, 1964. Musgrave, R.A. The Theory of Public Finance. New York, McGraw Hill, 1959. Peacock, Alan and Robertson, D.J. eds. Public Expenditure: Appraisal and Cor?f/o/. Edinburgh: Oliver and Boyd, 1963. Premchand, A. Control of Public Expenditure in India. New Delhi: Allied Publishers. 1966. Frest, A.R. Public Finance in Underdeveloped Counties, London: Weidenfied and Nicholson, 1972. Reid, Gordon. The Politics of Financial Control: The Role of House of Commozs. London: Hutchinson, 1966.
Schultze, L. Charles. The Politics and Economics of Public Spendlng. Washington, D.C.: Brookings Institution, 1968. 'Turvey, R. ed. Public Enterprise. Harmondsworth: Penguin,
1968.

Cosr-BsNrrrr

ANALYSTS

I)asgupta, Partha, Sen, Amartya and Margin, Stephen. Guidelines for Proiect Evaluation. New York: U.N. l.D.O., 1972. Dorfman, R. ed. Measuring Benefits t)f Got'ernment Investments. Washington, D.C.: Brookings Institution, 1965.

Jalan, Bimal. Essays Macmillan, 1975.

in

Development Policy. New Delhi:

216

PrnporulnNcr BuocrrrNc non Pr,amlpn Dnvrlopurnr

James and Lee, Economics of Water Resource Planning. Hill, 1971.

McGraw

Layard, Richard. ed. Cost Benefit Analysis: Selected Readings. Harmondsworth: Penguin, 1972. Little. IMD and Mirrlees, J.A. Manual of Industrial Project Analysis in Developing Countries, Vol. II. Paris: O.E.C.D.,
1968.

Mishan, E.J. Cost Beneft Analysis London: George

Allen

and

Unwin, 1971. Walsh, H.G. and Williams, Alan. Current Issues in Cost Benefit Analysis, C.A.S. Occasional Paper No. 11. London: H.M.S.O., 1969. Buocerruc

PERFoRMANcE

Burkhtad, Iesse. Government Budgeting. New York: John Wiley,.

1956.

Davis, W. James Jr. ed. Politics, Programmes and Budgets, A Reader inGovernment Budgeting. Englewood Cliffs, N.J. Prentice Hall, 1969.

'

: '

Hinricks, H.H. and Taylor, G.M. eds. Programme Budgeting and Benefit Cost Analysis-Cost, Texts and Readings.. Calif: Goodyear 1969. India. First and Second Reports of the Team on Reforms in the Structure of Budget and Accounts. New Delhi: Publications Division, 197l-'12. Lynden, F.J. and Miller, G. Ernest. eds. Planning, Programming, Budgeting: A Systems Approach to Managemenl, Chica"go. Markham. 1972. Novick, David, ed. Cutent Practice in Programme Budgeting. London: Heinemann, 1973. Novick, David. ed. Programme Budgeting. Harvard University
Press, 1965.

Premchand, A. Performance Budgeting-An Introductory Analysis. Government of India, Ministry of Home Affairs, Training Divi sion, 1970. Thavaraj, M.J.K. Financial Administation of India. New Delhi: S. Chand, 1978.

SrLEcr

BBr,rocnApny
in

217

Thavaraj, M.J.K. and Iyer, K.B. eds. Readings

Performance

Budgeting. Delhi: Research Publications, 1973.

United Nations, A Manual

for

Functional Classfication. New

York, 1958. United Nations. A M anual of Programme and Performance Budgeting, New York, 1965.
Viswanathan, S.S. Performance Budgeting in Govetwnent. New Delhi: I.l.P.A., I972. Viswanthan, S. S. and Chaturvedi, A.Y . Application of Performance Budgeting in the Central Public Works Department, New Delhi: I.I.P.A., 1970. Williams, Alan. Output Budgeting and the Contribution of MicroEconomics
Paper

to Efficiency in Government. C.A.S. Occasional No. 4. London: H.M.S.O., 1967.

INDEX
Commis- kinds of 127 a.ctlvity, 121-2 on purposes of Performance functional, 122-4 Budgeting,32 under the Indian Constitution, Team on evolving common classi126-7 fication for Plan and Budget, Commercjal accounting, principles 124-7 of, 191-8 Agriculture, efficiency objectives in, Cost accounting. I97 66-'70 Cost-benefit analysis, 40-1, 75-98 Anai,ysis, res cost-benent analysis advantages of, 79-80 Antyodaya,69, 172, 174-5 objective cf, 76 Appu, P.S., 69n of revnue programmes, 86-7
Administrative Reforms
sron, 32, 124,

Audit, role

of , 162-5

Budget
consideration of, de ftnition of, I-2
features of,

Discounted Cash
110-5, 199-204

Flow technique.

131-3

Ducker, Peter, 37 Evaluation, 4l-2, 148-65

2-4,6-11,28 criteria of, 150-3 Constitutionalprovisions relatdefinitiouof,42n ine 10, 177-9 need for, 64 household budget 2-6, 9 of public enterprises, 157-62 preparation of, 27n Expenditure, classification of, 22
Government budget
Budgeting an instrument of planning, efficiency in,23-4

2-5

21-3

Galbraith, J.K., 100

relevance
role of,
22

of

candhi, M.K.,69
Hoover Ccmmission, Second, 28 Inconre d istributi on, 24-6, 60 | and basic needs of individual,
25-6

techniques of

management in, Bureaucracy,

33-4

lack of commitment objectives,60 Burkehead, Jesse,27, 29

to

Canada,29,31
Classification,

equitable distribution, justification of, 87-8

average yield-of land (1975), 14 balanced diet, rccommended for,
48

Circular flow of financial resources, India

40 adoption of new accounting classjfication in India, 124-6, 205-10 and demands for grants, 127-31

187-9

Constitutional pro'risions relating to Government budget, 177-9 food consumption in, 48-9

INorx
hew classification ofcovernment and role cf audit in, definition of, 27 transactions, 205-10
resources of,
162-5

2r9

l3-5

Internal Rate of Return (lRR), Kothari Commission on

113

distinquished from Programme

Budgeting, 30 ethos of, 145-7

50

Education,

implementation of, 166-7

in Canada, 3l

Linear programming,

35-6

in United Kingdonl, 30-l in United States, 27-9

nature of, 39-40

Management,

and performance origin of, 27 relation to public expenditure budgeting, 33-4, 37-40 programmes, 166 accounting, 197 Management Management by Objectives stages of, 40-3, 74 see a/so classification, cost-benefit (M.B.O.), 36-7 analysis, valuation, objecManagement lnformation System tives, organising and YACE (M.I.S.), 154-7 Manual .for Programme and Pcrfor- Planning and budgeting, 12-26 mance Budgetirtg,2g-30, I49 as a management system, 16g-72 McNamara. Robert S.. 2g decentralisation of, need for, 58, Minhas, B.S., 6?
136-40

National Income, and

growth,

National income aceounts, 15,

15-7

economic

180-9

65-i0 (PAR)' I 19 66-70 of individual programmes, 60-5 Programme Budgeting (PB), 28 Public adminislration and systems of public enterprises, 70-4 approach' 3+6 specification of, 44-6, 52-3, 58, Public enterprises 64,74 evaluation of' 157-62 Organiring, 41, 13347 delegation of financial powers, objectives of, 70'4 Public expenditure, 18-21, 60 l4l-4 demarcation of roles. difficulties and income disparities, 89-90 complementarity with private in, t33-5 expenditures, 6I-2 Output Budgeting, 30 justification of, 53-57 Performance budgeting, 197-8 objectives of, 59-6i a total management system, 38-40 Return on Investment (ROI), 81, advantages of,29,74,735 84, 113, 157, 161 and linear programming, 36 Revenue programmes, analysis of,
efficiency objectives,

Objectives, 40-1,44-74 and organizations, 58-60 conflict between, 46-51

disadvantages of, I00 objectives of, l2-3, 35, 81 Planning Commission, 21, 90, 100, r05, 114, 120, 124 Planning, Programming and Budgetins Svstems (PPBS),28-30, 98 assumptions of, 30-l basic objectives of, 31 Prpgrammc Analysis and Review

in agricultural sector,

220

Penronu.qNcp BuocsflNc ron PlAtqnro

DrvrlopvrNt

86-7

United Kingdom, 29-30, 93, 719 United Nations, 29-30, 149 Uniied Nations Industrial Develop-

ment Corporation (UNIDO),

103

and discounting costs and benefits, 110-5 and income distribution, 92-3 and indirect benefits, 103-6 and programme selection, 99 and shadow price for foreign
exchange, 115-8 and unemployment, 93-4 and valuation of benefits, 101-3 and valuation of capital employ-

United States, 27-9, 93,

98

University Grants Commission, 50-1 Value Added to Capital Empl oyed

(vAcE), 82-7, 157, 160-1,

advantages

ed, 108-10
and valuation of costs, 107-8 Value analysis/value engineering,
J /-6

182

of, 96-8

and analysis
101

of

revenue prodemand, 99-

grames, 86-7 and assesssment

of

Wages, as bencfit, 93-6

World Bank,

28