The control exercised by the Ministry of Finance, particularly by its Department of Expenditure, can be divided into three parts: 1. Control Exercised during the Preparation of the Budget 2. Control Exercised during the Execution of the Budget 3. Control on Miscellaneous Matters.
1. Control Exercised during the Preparation of the Budget:
During the preparation of the budget, it has to scrutinize all proposals emanating from the spending departments in so far as they have financial implications. This enables the ministry to have a hand in the formulation of policies of other departments.
Generally, the scrutiny exercised by the Ministry of Finance is “very broad in nature… and is more concerned with the overall financial implications of the proposal and its impact on the expenditure.”
Thus every proposal or policy having financial implication has to be scrutinized by the Finance Ministry and the Cabinet attaches considerable weight to the opinion of the Ministry. After all the proposals have been received from the spending Ministries, it proceeds to determine priorities of the schemes and suggests economies where possible, taking into consideration the standing and continuing charges.
Its main concern IS to obtain “proper balance of expenditure between services, so that greater value could not be obtained for the total expenditure by reducing the money spent on one service and increasing expenditure on another.”
To secure a uniform standard in the measurement of the financial sacrifice involved in the activities of all departments,” says Prof Hawtrey, “the general criteria adopted” in the selection of new proposals are:
(a) Is the proposal a proper one, i.e. does it merit an expenditure from Public funds?
(b) Has the ministry the authority to propose such an expenditure?
(c) Is there enough of justification to show that the expenditure is necessary or desirable?
(d) Have all parties substantially interested in it been consulted?
(e) Are the costs of individual items excessive? and
(f) Are the financial arrangements proposed the most desirable and economical having regard to the circumstances, or are alternative arrangements possible?
It is on the answers given to these questions that the Ministry of Finance formulates its opinion. The importance of its control lay in seeking justification for every proposal from the departments proposing it and what Lord Goschen once said about the English practice holds equally good as applied in the Indian context.
He said, “The first objects of the Treasury must be to throw the departments on their defence and to compel them to give strong reasons for any increased expenditure and to explain how they have come to demand it. This control helps to make the departments careful in what they put forward.”
Equipped with these answers, the Ministry of Finance proceeds to review the total estimates in the light of likely revenue for the year. At this stage, it can suggest reduction or as technically known ‘cuts’ if it finds the estimates too high or ‘inflated’.
It may also reject proposals which its scrutiny may reveal as technically ‘unsound’. It is here that the supremacy of the Finance Ministry as a controlling agency is most clearly visible.
2. Control Exercised during the Execution of the Budget:
After the budget has been passed by the Parliament, the responsibility for the control of expenditure from thereon lies on the administrative ministry and each Head of the department who is aided and advised by an Internal Financial Adviser—again a representative of the Ministry of Finance—in the discharge of his responsibilities.
During the execution of the budget, it is the responsibility of the Ministry of Finance to ensure that the amounts are spent properly and economically. It has also to see that the achievement is in accordance with the plans included in the budget of the other departments to keep themselves in touch with the Ministry of Finance.
Prior consultation of the Ministry of Finance is sought whenever any department wants to spend on schemes whose estimate exceeds a particular limit. This is technically known as ‘expenditure sanction’.
Similarly, prior approval of the Finance Ministry is essential before amounts can be transferred from one sub-head to another, technically known as ’re-appropriation’. Besides, the Ministry of Finance, through its accredited Financial Adviser, conducts financial reviews after every quarter in order to know the progress of expenditure.
This enables the Ministry to get a review of the performance of other departments in monetary term. It also helps the Ministry of Finance to forecast next year’s budget.
3. Control on Miscellaneous Matters:
The other matters on which the Ministry of Finance exercises control arise in the various specified fields of expenditure such as grant-in- aid, write-off of losses, waiving of recoveries, contracts, inspection of establishment of other Ministries through Staff Inspection Unit, etc.
Thus we find that the control exercised by the Ministry of Finance helps in promotion of a financial order in the country. In almost all fields where risk is involved in spending huge amounts, the shadow of the Ministry of Finance is always present though it minimizes the effect of financial delegation of powers already granted to several Ministries.
Durrell has aptly stated, “It is the risk of Public loss where the amount involved is considerable that calls for the intervention of the Treasury, for it is important that under such circumstances the responsibility should be assured by an outside impartial tribunal.”
During the recent (2008) global recession the Finance Ministry took various measured to mitigate its adverse effects on Indian economy and keep India’s financial position sound and strong.
Criticism of Financial Control:
The financial control as exercised by the Ministry of Finance has been subject of great controversy. It is alleged that its control extends even to trivial matters, it is too-detailed and born out of financial mentality. The policy of the Ministry is of saving “candle-ends” and that it betrays an attitude of “cheese-paring” and “wood-packing”.
Its motto, in the words of Dr. Appleby, is “acceptance of precedence and refusal of risks”. The Ministry, because of its irrevocable habit of imposing ‘cuts’ or reductions in estimates, makes other departments to unusually ‘inflate their estimates’.
This results in ‘false economy’ being effected by the Ministry of Finance. Further, the Finance Ministry also examines the technical details of the developmental schemes a function for which it is ill-suited.
In the words of Ashoka Chanda, This not only acts as an irritant but is also time-consuming. Ultimately these objections mostly come to be waived, but often only after interminable discussions; and control becomes effective only over establishment proposals, the expenditure on which forms but an insignificant fraction of the total cost.
The Finance Ministry, therefore, while straining at the gnat, has often to swallow the camel. A.D. Gorwala observes, “what is really needed in financial matters is control and not interference. What would seem to be happening is exasperating interference in small matters leading to a great deal of waste of time, energy and frustration on the part of the administrative departments, that is the greater part of government. This must be avoided.”
No doubt, control by the Finance Ministry is a delicate affair “comparable only to tightrope walking” but much is to be lost than gained by relaxing this control.
Late John Mathai (a former Finance Minister) observed “I think the control that the Finance Ministry exercises even in certain matters of detail has a deterrent effect which is not entirely to be disregarded On the whole I think more is to be lost than gained if I issue instructions to the Finance Ministry to relax its present method of control.”
Of course, things have changed since John Mathai made this statement and the Ministry of Finance has already relaxed much of its control in favour of other departments but the kernel of the problem still stands unsolved ‘How much of control?’ It is very difficult to determine the degree of control as too much of it may prove a hindrance and too little of it may create financial disorder.
Dr. Appleby rightly stated. “The first concern of financial administration is frugality. The enthusiasm of those charged with special functions has a high value; to damp them unduly is wasteful; not to discipline them is to open wide the door to extravagance and imbalance. True economy, consequently, results from the interaction of the drives of enthusiasm with the restraining disciplines of review.