Public Funds Utilization: Guardianship, Accountability & Development

Introduction & Summary

Public funds, comprising revenues collected from taxpayers and other governmental receipts, are held in trust by the government for the welfare of its citizens and national development.

The utilization of these funds is a cornerstone of good governance, demanding adherence to the highest standards of financial probity, prudence, accountability, and transparency. Mismanagement, wastage, or corruption in public spending not only undermines public trust but also diverts resources from essential services and development goals.

Public funds as a trust: They must be managed economically, efficiently, and effectively for their intended purposes, upholding the public good above all.

Core Principles of Public Fund Management

Principles of Financial Probity and Prudence

Probity in Governance

As per 2nd ARC, probity is "the quality of having strong moral principles, honesty and decency." In public funds, it implies:

Honesty: Truthfulness and integrity in all financial dealings.
Integrity: Adherence to moral and ethical principles, resisting corruption.
Fairness: Impartiality and justice in financial decision-making.
Observance of procedural requirements and ethical codes.
Avoiding conflicts of interest.

Prudence in Financial Management

Wise, cautious, and careful management of public funds, involving:

Foresight: Anticipating future financial needs and risks.
Carefulness: Avoiding reckless spending or risky ventures.
Good Judgment: Sound financial decisions based on evidence.
GFR Rule 6: Public officer to exercise same vigilance as an ordinary prudent person with their own money.

The '3 Es' of Public Spending (Parameters for Performance Audits)

Economy

Minimizing the cost of resources (inputs) used for an activity, having regard to appropriate quality. Spending less.

Efficiency

The relationship between the output from goods or services and the resources (inputs) used to produce them. Spending well. (e.g., achieving more output for same input).

Effectiveness

The extent to which objectives are achieved and the relationship between the intended and actual impacts of an activity. Spending wisely. (e.g., achieving desired outcomes).

Accountability for Public Money

Public officials are accountable for the custody and use of public funds to the legislature and the public.
Fiduciary Duty: Public servants act as trustees of public money, implying a legal and ethical obligation to act in the best interest of the public.
Mechanisms include financial reporting, audits, parliamentary oversight, and legal action.

Ethical Issues in Public Spending

Wastage

Incurring unnecessary expenditure or spending more than required for a particular outcome.
Example: Over-specification in procurement, poorly planned projects resulting in idle assets. CAG reports often highlight infructuous expenditure.

Misappropriation

Dishonest or fraudulent conversion of public funds for personal use or unauthorized purposes (theft, embezzlement).
Example: Siphoning off funds for welfare schemes by creating fake bills or inflating costs.

Irregularities

Violations of financial rules, regulations, and procedures, even if not necessarily corrupt.
Example: Incurring expenditure without proper sanction, splitting purchases to avoid tender requirements. Creates opportunities for corruption.

Corruption in Procurement

Bribery, kickbacks, collusion, and favoritism in acquiring goods and services.
Example: Rigging tenders, awarding contracts to unqualified bidders. Government e-Marketplace (GeM) aims to enhance transparency and efficiency.

Lack of Transparency

Opaque decision-making processes, insufficient disclosure of financial information in budgetary allocations and expenditures.
Impact: Hinders public scrutiny and accountability, facilitating arbitrary use of funds.

Ghost Beneficiaries & Leakages

Fictitious or ineligible individuals listed as beneficiaries, leading to diversion of funds in welfare schemes.
Example: In PDS, MGNREGA. The JAM Trinity (Jan Dhan-Aadhaar-Mobile) and Direct Benefit Transfer (DBT) aim to plug these leakages (e.g., $27bn saved as per 2022 UNDP report on DBT).

Role of Audit and Parliamentary Oversight

Comptroller and Auditor General (CAG) of India

Constitutional Basis: Articles 148-151 of the Constitution.

Appointment & Independence: Appointed by President, security of tenure, removed like Supreme Court judge. Salary & expenses charged on Consolidated Fund of India.

Powers and Functions (Article 149):

Audits all receipts & expenditure of GoI & State Govts, and bodies substantially financed by government.
Conducts:
- Financial Audit (accuracy of financial statements).
- Compliance Audit (adherence to laws/regulations).
- Performance Audit (assessing 3 Es: economy, efficiency, effectiveness).
Submits audit reports to President/Governor, laid before Legislature.
Acts as guide, friend, and philosopher of the Public Accounts Committee (PAC).

Parliamentary Committees

Public Accounts Committee (PAC):

Examines CAG audit reports on appropriation & finance accounts.
Scrutinizes public expenditure for legality, economy, prudence, wisdom, & propriety.
Composition: 22 members (15 Lok Sabha, 7 Rajya Sabha). Chairman usually from Opposition.

Estimates Committee:

Examines budget estimates and suggests 'economies' in public expenditure.
Suggests alternative policies for efficiency & economy.
Composition: 30 members (all from Lok Sabha).

Committee on Public Undertakings (CoPU):

Examines reports & accounts of Public Sector Undertakings (PSUs).
Examines CAG reports on PSUs.
Assesses if PSUs are managed according to sound business principles.
Composition: 22 members (15 Lok Sabha, 7 Rajya Sabha).

Social Audits by Citizens

Process where citizens collectively monitor & evaluate government schemes.
Empowers communities to demand accountability and transparency.
Example: MGNREGA has mandatory social audits by Gram Sabhas. Meghalaya Community Participation and Public Services Social Audit Act, 2017 was first state law.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

Aims for inter-generational equity in fiscal management & long-term macroeconomic stability.
Mandates annual reports & quarterly reviews of receipts/expenditure before Parliament.
Sets targets for fiscal & revenue deficits (revised by NK Singh Committee and later due to COVID-19).
Recent: Union Budget 2024-25 Interim reiterated commitment to fiscal consolidation, aiming below 4.5% by 2025-26. FY25 estimate: 5.1% of GDP.

Quick Reference: Prelims-Ready Notes

Core Concepts

Probity: Honesty, integrity, strong moral principles.
Prudence: Wise, careful management; GFR Rule 6.
3 Es: Economy (spending less), Efficiency (spending well), Effectiveness (spending wisely).
Fiduciary Duty: Public servants as trustees of public money.

Ethical Issues

Wastage, Misappropriation, Irregularities.
Corruption in Procurement.
Lack of Transparency.
Ghost Beneficiaries, Leakages.
JAM Trinity & DBT: Tools to curb leakages.

Oversight Bodies

CAG: Articles 148-151. Audits govt. accounts (Financial, Compliance, Performance).
PAC: 22 members (15 LS + 7 RS), Chairman from Opposition. Examines CAG reports.
Estimates Committee: 30 members (all LS). Suggests economies.
CoPU: 22 members (15 LS + 7 RS). Examines PSU accounts.
Social Audit: Citizen-led monitoring (e.g., MGNREGA).
FRBM Act, 2003: Fiscal discipline, deficit targets.

Summary Table: Oversight Mechanisms for Public Funds

Mechanism	Key Function	Constitutional/Legal Basis	Key Features
CAG	Audit of government receipts & expenditure	Articles 148-151	Independent, Financial/Compliance/Performance Audits, Reports to Legislature
PAC	Examines CAG reports, scrutinizes public expenditure for propriety & economy	Rules of Procedure (Parliament)	22 members (LS+RS), Chairman from Opposition
Estimates Committee	Suggests economies in public expenditure, alternative policies for efficiency	Rules of Procedure (Parliament)	30 members (all LS), "Continuous economy committee"
CoPU	Examines PSU performance & accounts	Rules of Procedure (Parliament)	22 members (LS+RS), Scrutinizes PSU management
Social Audit	Citizen-led monitoring of scheme implementation	e.g., MGNREGA Act	Enhances transparency, accountability at grassroots level
FRBM Act	Enforces fiscal discipline, sets deficit targets	FRBM Act, 2003	Medium-term fiscal policy, transparency in fiscal operations

Mains Insights: Analytical Notes & Debates

Major Debates/Discussions

CAG's powers: Debate on "activist" CAG vs. purely "auditory" role. Should CAG have powers to enforce recommendations or pre-audit scrutiny?
Effectiveness of Parliamentary Committees: Often hampered by lack of technical expertise, time constraints, politicization, and non-binding nature of recommendations.
Implementation of FRBM: Balancing fiscal discipline with developmental needs, especially during economic shocks (like COVID-19). Flexibility vs. rigidity in fiscal rules.
Social Audits: Challenges include capacity building of communities, resistance from implementing agencies, ensuring follow-up action on findings.

Historical/Long-term Trends, Continuity & Changes

Continuity: Fundamental principles of accountability for public funds have remained.
Changes:
- Shift from mere regularity/compliance audit to performance audit by CAG (focus on 3Es).
- Increased emphasis on transparency and citizen engagement (RTI, Social Audits).
- Use of technology (PFMS, GeM, DBT) to improve efficiency and reduce leakages.
- Growing awareness and lower tolerance for corruption.

Contemporary Relevance/Significance/Impact

Good Governance: Proper utilization is central to good governance, enhancing public trust.
Development Outcomes: Efficient & effective spending leads to better delivery of public services (health, education, infrastructure), impacting HDI.
Economic Stability: Prudent fiscal management (FRBM) contributes to macroeconomic stability.
Combating Corruption: Strong audit & oversight act as deterrents. India's CPI 2023 rank: 93/180.

Real-world/Data-backed Recent Examples

DBT Savings: Economic Survey/govt. reports quote savings from eliminating ghost beneficiaries (e.g., PAHAL scheme for LPG).
CAG Reports: On defense procurement (Rafale), scheme implementation (Ayushman Bharat, Bharatmala Pariyojana - cost escalations reported Aug 2023).
Government e-Marketplace (GeM): Crossed significant Gross Merchandise Value (GMV) milestones (early 2024), indicating wide adoption for transparency.
Fiscal Deficit Targets: GoI's commitment to reduce fiscal deficit (Budget 2024-25 Interim projected 5.1% for FY25, aiming <4.5% by FY26) under FRBM.

Current Affairs: Recent Developments in Public Fund Management

Ongoing

Strengthening Social Audit Mechanisms

Ministry of Rural Development continuously working on strengthening Social Audit Units (SAUs) for schemes like MGNREGA and Pradhan Mantri Awaas Yojana-Gramin.

Recent

CAG's Focus on New Areas

CAG increasingly auditing IT systems, cybersecurity readiness, and environmental impact of projects, reflecting evolving governance challenges.

Ongoing

Public Financial Management System (PFMS) Expansion

Expanded use for all central sector schemes, ensuring better tracking, minimizing float, and facilitating just-in-time fund release, enhancing transparency.

Recent

Parliamentary Scrutiny & Committee Reports

Debates during budget sessions and PAC discussions on CAG reports remain vital. E.g., PAC's 56th Report (17th Lok Sabha) on Eklavya Model Residential Schools (EMRS) highlighted deficiencies.

FY 2024-25

FRBM Review & Fiscal Path

Consistent focus on fiscal consolidation post-pandemic. Finance Minister's budget speeches (e.g., Feb 2024) reiterate commitment to achieve sub-4.5% fiscal deficit by FY26.

UPSC Previous Year Questions (PYQs)

Original MCQs for Prelims

1. Which of the following principles is specifically emphasized by Rule 6 of the General Financial Rules (GFR), 2017, for public officers incurring expenditure from public moneys?

(a) Absolute transparency in all transactions.
(b) Exercising the same vigilance as a person of ordinary prudence with their own money.
(c) Prioritizing expenditure that directly benefits marginalized communities.
(d) Ensuring maximum public participation in budgetary decisions.

Answer: (b)
Explanation: Rule 6 of GFR, 2017 directly states that every public officer is expected to exercise the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of expenditure of his own money. This is the essence of financial prudence.

2. Consider the following statements regarding Social Audits in India:

1. They are primarily conducted by the Comptroller and Auditor General (CAG) of India.
2. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) mandates social audits of its works.
3. Social audits aim to enhance transparency and accountability by involving citizens in monitoring government schemes.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3

Answer: (b)
Explanation: Statement 1 is incorrect; social audits are citizen-led or facilitated by independent bodies, not primarily by CAG. Statements 2 and 3 are correct. MGNREGA has strong provisions for social audit, and their core purpose is citizen-centric transparency and accountability.

Original Descriptive Questions for Mains

1. "While technology-driven initiatives like Direct Benefit Transfer (DBT) and Government e-Marketplace (GeM) have significantly enhanced efficiency and transparency in public spending, they are not panaceas for all ethical challenges in the utilization of public funds." Critically analyze this statement. (GS IV)

Key Points/Structure for Answering:

Introduction: Acknowledge importance of ethical fund use & positive role of technology.
Benefits of DBT and GeM: Reduced leakages, targeted delivery, increased transparency, cost savings, reduced corruption opportunities.
Why Not Panaceas? (Ethical Challenges Remaining/Arising): Exclusion Errors (digital divide), Misuse Post-Transfer, Quality Compromise (L1 focus), Collusion/Cartelization, Policy-Level Corruption, Need for Human Oversight, Capacity Issues.
Complementary Measures Required: Strengthening ethical training, robust grievance redressal, independent/social audits, whistleblower protection, tech upgradation.
Conclusion: Technology is an enabler, but a holistic approach (tech + institutions + ethics + citizen vigilance) is essential.

2. "The principles of 'Economy, Efficiency, and Effectiveness' (3Es) are fundamental to prudent public expenditure." Elaborate on these principles and discuss how the Comptroller and Auditor General (CAG) of India promotes them through its audits. (GS II / GS IV)