PERFoRMANcE Buocnrrnc ron Pr,enNEo DnvsLoPIvnNt

PERFORMANCE BUDGBTINGFOR

PLANNED DEVELOPMENT

K S SASTRY

under the auspices ofCentre for Policy Research

RADIANT PUBLISHERS

fCopyright @ 1979 by K.S. Sastry

All rights reserved. No part of this book maybe reproduced or transmitted in any form orby any means, electronic or mechanical, includingphotocopying, recording or by any informationstorage and retrieval system, without permissionin writing from the Publishers.

First Published 1979 byRadiant PublishersE-l55 Kalkaji, New Delhi-110019

Printed in India byDhawan Printing Works264' Mayapuri, New Delhi-l10064

Tothe memorY of

my fatherKambhampati SambaYYa

(d.1e37)who contributed his bit

to the

freedom struggle '

C ONTENTS

List of APPendicesList of TablesList of DiagramsPrefaceList of Abbreviations

I. BuocnnNc

A household budgetGovernment budget

II. PleNrqrsc AND BUDGETING

Resources of the countrY 13

National income accounts 15

Planning for economic growth 15

Planning for economic development 18

Public expenditure in the national economy 18

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 aPProach 34

Linear Programming 3 5

Management bY objectives 36

CorPorate Planning 37

Value analysis/Value engineering

Performance budgeting-a totalmanagement sYstem 38

Stages of Performance budgeting

xxxxi

xviI

12

2

6

27

viii PenronuaNcn BuocnrrNc FoR PLANNED Drvrr,opMnNr

IV. Orrrcrrves I ^"

Conflict of goals and objectives 46ls public expenditure justified? 53

V. Onrrcrrvrs II 5g

Organisations and objectives 5gObjectives of individual programmes 60Efficiency objectives 65Setting efficiency objectives 65Efficiency objectives in the agriculture sector 66Objectives of public enterprises 70

Vl. Ara rvsrs I I S

Criterion for selection glValue Added to Capital Employed .g2.A,nalysis of revenue programmes g6Income distribution g7

Wages as benefit 93Advanfages of the criterion 96

VII. AN,crvsrs II gg

Assessment of demand ggVaiuation of benefits l0lIndirect benefits 103Valuation of costs 107Valuation of capital employed l0gDiscounting costs and benefits 110Shadow price for foreign exchange l15Implementation 1 t g

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

fX. Oncn NrslNc 133

Demarcation of roles 133Organising for agricultural development 136

€oNrBNrs

Problems of decentralisation 138

Financial Powers l4lAccounting system 143

The ethos of performance budgeti:rg 145

X. Ever,uluoN

Evaluation criteria 150

PerformancerePorting 153

Management information system 154

Evaluation of public enterprises 157

Role of audit 162

XL CoNcl-ustoN

. Implementation 1'66

Planning as a management system 168

Antyodaya 172

Urgency of the Problem 175

AppendicesSelect BibliograPhYIndex

1X

148

166

1772tr2r8

LIST OF APPENDICES

I Constitutional Provisions relating to GovernmentBudget

2 National Income Accounts3 Principles of Commercial Accounting4 Discounted Cash Flow Technique5 A New Classification of Government Transactions

LIST OF TABLES

I Average Yield of Land, 19752 The Balanced Diet: Availability and Requirement3 Consumption of Principal ltems of Food in India: A

Comparison with other Countries4 Capacity Utilization of Selected Industries in India.

1976177

5 Average 'Area Irrigated dwing 7971172-1975176 insome Selected Projects as a percentage of the areaplanned to be irrigated

6 Present Value Factors for Selected Discount Rates7 Cumulative Present Value Factors for Selected

Discount Rates

LIST OF DIAGRAMS

1 Five Stages of Performance Budgeting2 Decision-making Areas in the Management of the

Economy3 Age Composition of India's Population, 19714 Circular Flow of Financial Resources

177180191

199205

1448

49

169

170203

204

+J

L73L75188

PREFACE

'The difference between what we do and what we could do'

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

Tsrs noor DEALS 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

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 Bud-

geting; Output Budgeting, etc. The book takes a synoptic view

if ttre' exlsting state of knowledge on the subject' lt is' thus' a

second generation attempt though the term performance budge-

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

mentioned lforts in other countries, we shall bear in mind the

'cultural' differences (a) between a free enterprise economy and

a planned economy of the type we have adopted in our country'

xii PnnronrraaNcr BuocrttNc FoR PLANNED DgvptopunNr

and (b) between management in the private industrial sectorand public administration

The theme of the book is that efficiency in budgeting is aqT_str_on not of mere magnitudes of resources and outlays butof defining the objectives and priorities and that, at any givenlevel of resources, efficiency can be improved through a moreexplicit definition of goals and objectives, through greaterclarity and consistency in ordering the priorities, through athorough-going analysis ofthe costs and benefits of programmes,and indeed, through proper management of programmes, attend-ing to the nuts and bolts as it were. While these ideas can beapplied to both sides of Government budget, that is, to thetaxation and public expenditure programmes alike, the need todo so is more urgent, the scope iarger and hopefully, the payoff greater in respect of public expenditure programmes. Thebook, therefore, will be confined to public expendrture pro_grammes.

It has long been assumed that budgeting is an accountingjob, even as planning an economist's job and implementa-tion an administrator's. That public administration ingeneral 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 un-realistic; audit js negarive. Administration, which cin bindthese disciplines together, is myopic. Management, administra_tion's younger cousin, is outlandish, politics, which shouldimpart a sense of purpose to the process of development, isjust a power game. A11 these reflect a partiai view ofthe lotalsituation. Unless each discipline understands and appreciatesthe role of other disciplines and bends itself ro the commoncause there can be no development. This approach runsthrough the book.

The motivation for writing the book was provided by doubledissatisfaction; one, rvith the way decision making is organisedin Government. and, two, rvith what is offered by the academiccommunity for improving this decision making. Wbile the firstdissatisfaction is widely shared what is recommended for adop-tion in Government is, often, based on study of a single disci-pline, even a single slrand of a discipline, and is, therefore,

pnprlCn xlll

unhelpful to the civil servant who, with a1l his faults' must

ui*uyt "oo.ia.r the total situation. There is, thus, a felt need

for extension work in the field of social sciences, as in the case

of biological sciences.

The book, then, is not a product of research' It is just an

extension effort, although we shall not hesitate to put across a

new insight, a new mechanism or a new approach where app-

ropriate. Budgeting has generally been far too esoteric for most

people connected with development one way or another' It isLop.a tnut this book will enhance their understanding of the

subject.ieeping in mind the readership to which it is intended to

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 rudimen-

tary fashion. This course has been adopted because any attempt

to deal with the concepts and techniques in all their complex-

ities 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'

AcknowledgementsI am grateful to Sarvashri A'K. Roy, S' Ranganathan' A'

Baksi and Gian Prakash, successive Comptrollers and Auditois

General oflndia for the inspiration and guidance they provided

during different stages of rny career' Sarvashri A'K' Mukherji'g.B. lnar, Y. Krishan, T. Rengachari, A'R' Shirali and B'

Maithreyan are among the senior officers of the Indian Audit

and Accounts Services who moulded my thoughts and directed

my experiences along lruitful channels' While serving in the

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

xiv Prnronuexcr BuoctrtNc FoR PLANNED Drvr lopurNr

them, however, bears any responsibility for the views expressedin this book.

I also think my other colleagues, too numerous to mentionindividually, in the Indian Audit and Accounts Department, inthe Ministry of Finance and in other Deparrmentl with whomI came into contact in my professional capacity as -auditor,budget officer or otherwise. My acknowledg.-.oi i, also due tothe Indian Institute of public Administration, the Institute ofSecretariat Training and Management and the Universities andother institutions in India which I had occasion to visit toparticipate in seminars, lectures, discussions, etc. I also acknow-ledge my debt to my friends in the University of Manchesterand the Institute of Local Government in the University ofBirmingham in the U.K. which I visited under a fellowshipfrom the British Council.

For the help rendered in writing this book I think my friendDr. T.R. Rao of the r.r*ational lron Ore Board (formerly of theNational Council of Applied Economic Research) and Shri p.S.Appu, now Additional Secretary, Ministry of Agriculture, bothof whom had gone through the first draft, which demandedconsiderable patience, and encouraged me to proceed further.Dr. T.R. Rao helped me through successive drafts and hasplaced me under a debt of obligation. Another person who hasgone through the successive drafts and made valuable contri_butions is my nephew, Shri C.V.S.K. Sarma, a student at theDelhi School of Economics. He deserves my warm apprecia_tion. I am also thinkful to prof. H.R. Seshagiri Rao of theInstitute of Public Enterprise, Hyderabad and professor LakxmiNarain of the Osmania University for helpful discussions onthe management of public enterprises. For providing me certaininsights into the nutrition problems facing the country, I amthankful to Dr. S.G. Srikantia, Dr. K. Visweswara Rao antlSmr. 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, forundertaking to publish the book under the auspices of theCentre,

Last, but not least, I am thankful to my mother Suryakant_

Pnnrect xv

amma, my wife Lakshmi, my daughter Sharada, .and my sons'

iurrrUutnotty and Krishnamurty, for helping me in many ways

uoa, -ot. important, for bearing with my moods of withdrawal

uttJ'.u." despair, sympathetically and cheerfully' during the

"oopf" of years t have been actively engaged in writing the

book in addition to my official duties'

Hyderabad24 lantary 1979 K.S. SASTRY

LIST OF ABBREVIA TIONS

PB Programme BudgetingPPBS Planning, Programgfug and Budgeting SystenMBO Management by ObjectivesVACE Value Added to Capital EmployedIRR Internal Rate of ReturnNPV Net Present ValueMIS Management Information SystemsROI 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 depart-

mental budget, a Government budget or a national budget.

The specified future period may be a month in the case ofa 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 expendi-

ture 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 alto-

gether, 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 Govern-

ment, 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'It will strike the reader that the concept of a budget so

defined need not necessarily relate to financial inflows andl-outflows. Indeed, it is not. For sxample, one can take anatural region in the country, and prepare a water resourco"

* 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.

2 PTRFoRMANCE BUDGETING FoR PLANNED DevTIopunnT

budget giving the total water resources available in the regionfrom rainfall, surface run off of rivers and ground waterresources on the one side, and consumption of water forindustry, agriculture and domestic use on tbe other side. Itwill, then, be a water resources budget for the region. To takeexamples 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 conc€ptof accountable Government. It was probably evolved aboutitwo centuries back, when the Executive, or the Monarchy asiit then was, became accountable to the Legislature consistingof people's representatives. The quintessence of thc latter'scontrol over the Executive was thought to be and, in theory,continues to be the supreme prerogative of the Legislature toimpose taxes on the people. ln order to justify the proposalsfor such imposition the Executive had to bring forth estimatesof the items of expenditure which it intended to incur alongwith estimates of receipts from the taxes already imposed.Only then, would the Legislature consider any fresh proposalfor taxation. Thus, the concept of budget originated in publicadministration. This is a comforting thought for those of uswho work for the Government since most of the modernmanagement concepts we will be discussing had their origin in,the private industrial sector.

"4. household budgetLet us examine the concept of budgeting a little more closely

starting with something familiar. Let us take a householdbudget. If the income and expenditure ofa liousehold are setout 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 budqetis 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 expenditureside as a balancing entry. There can be no temporary deficit-in the budget because expenditure cannot physically exceed

INcoMEItem

SalaryRentInterestDividend/Profit

Amount Rs.

300o

6040

the receipts. Excess expenditure has to be met by borrowing,long term or short term, which will be reflected as a receipt onthe income side.

Budget has another characterstic fleature. So long as thereis inflow and outflow ofmoney, even if we do not consciouslybudget for the household expenditure, certain relative valuationof what money is buying for us is automatically implied inthe manner of our spending. For example, if we spend rupeestwo on a taxi to reach a place in ten minutes we may haveunconsciously ruled out a number of other alternatives likereaching by bus paying only twenty paise but spending half anhour. In spending the money on taxi we have valued thetwenty minutes time we saved, and the extra comfo , ar onerupee and eighty paise that has been spent extra. lf wewant to improve our budgeting we must realise that moneyspent on an ltem has a number of alternative uses. Only ifwe fnd that the rupee and eighty paise saved has no betteralternative use than saving us the rwenty minutes time weshould resort to going by taxi. For this we would need toinvestigate and analyse the other possible alternative uses.We are not talking of parsimony; just that we should consci-ously consider the alternative ways of spending the limitedmoney available and decide on that particular item whichwould give us the maximum possible satisfaction.

Thus, budgeting not only makes us think ahead but alsothink ofthe purposes of spending rroney. This is also the onlyway we can exercise some control over spending. We cannot,as we unwittingly permit ourselves to do in regard to Govern-

,lO0

BuocrrtNc 3

Amowtt Rs.

250202040l0l010

20200

400

ExPENDITURE

Item

FoodFuelClothingHousingHousehold goods

EducationFestivalsCinemasTransportSavingTor.lr

4 PERFoRMANcB BUDGETING FoR PLANNED DEvELoPMENT

ment budgets, afford to mai<e arbitrary allocation to various itemsof expenditure. For example, we cannot say that we shall allo_cate the same amount for the expenditure item .food' as earliereven when the prices of foodgrains have doubled because wewill then get only half the quanrity of foodgrains. There arecertain "physical" dimensions to all items of spending. fn somecases there are immediate compulsions to take into accountthese physical dimensions, as in the case offoodgrains. In others,they may not be apparent. Nonetheless, when allocotions aremade in the budget in money terms these physical dimensionsare also simultaneously determined on the basis ofthe prices ofrespective goods and servioes. The question is whether wewould like to consider these physical dimensions first and thenmake the money allocations or vice versa.

While each item of expenditure has a physical dimension; thepattern of expenditure in the budget as a whole reflects certainobjectives and priorities. For example, if we are spendingrupees twenty on cinemas and rupees ten on education, itmeans that recreation is given a higher priority than education.If our objective is to impart good education to our childrenare we justified in according a higher priority to cinemas?Budgeting should make us think about these objectives andpriorities in advance of making the money allocations. If werefuse to do this advance thinking itis not as if we are not"deciding" on these objectives and priorities because eachpattern of spending automatically implies a set of objectives andpriorities though they may not necessarily be consistent. Thequestion is whether we should not consider the obiectives andpriorities first, examine the physical dimensions neit and thenmake a conscious allocation of the money resources available inthe budget.

Establishment of objective-physical dimension-money alloca_tion nexus not only requires advance tbinking but also addi-tional information. For example, if the objective of the item'food' in the household budget is to provide the best possiblenutrition we need to kuow (1) the outritive values of differentitems of food like foodgrains, pulses, milk, eggs, meat, fish andvegetables and (2) the market prices of these commodities.Collection of such information no doubt entails some labourand, often, the data may be imprecise, But, the exercise of

BuocnrrNc

collecting such information will lead us closer to the best nutritive diet we can have within the budgetary resources available

to us. As some one pointed out the other day, if only we knowthat the protein content of cashewnut is less tha:r that of an

equal quantity of groundnut we may not pay twice the money tobuy cashewnut in preference to groundnut. Likewise, if we knowthat guava (amrud) contains 200 times more Vitamin C than an

equivalent (by weight) of apple our choice in the purchase offruit 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 relativelutritive values and the relative prices to enable us to make

choices which will take us nearer the objective of the bestpossible 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 produc-

tion and prices so that the choices are improved in the desired.directions. Otherwise, the individual households will base theirdecisions 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 theaccunrulated savings over the years and borrowings and the righthand side comprises the capital items of expenditure, as illus-'trated below:

' Receipts

Accurnulated savingsBorrowings

Expenditure

LandHouseHigher educationMarriage

While selection of items of expenditure, the inter se prioritiesf,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 capitalbudget. The accumulated savings and the money that one can

borrow at any time are not likely to be adequate to meet allthe 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 indi-vidual items on the right hand side u.", ,uy, nr,-A,OOO fo, tt"land, Rs, 15,000 for the house, nr. fO,dOO foinighr eOucationand Rs. 12,000 for the marriage. The housebold Jannot, tnere-fore, 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 arbitraryallocation of Rs. 5,000 for each ofthe four items on the righthand side. If the household does so, it will find itsetf in thepiquant situation where ir would have advanced money fbr thepurchase of land but has no money to complete the formalitiesand take possession, where the son is sent home by the collegeauthorities because he has not paid the fees, where tie barat partyhas arrived but there is no money to serye them khanal No onsconducts his afairs so senselessly, but the point is worth notingbecause when the affairs of Government are conducted in asimilar 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 aperiod of time but also enhance its ability to meet tbese obliga_tions. For example, if Rs. 6 thousand is invested on the tand, itstarts earning some revenue, which will appear on the left handside of the revenue budget in the shape oi either rent from theshare cropper or net income if one is cultivating himself. In anyeve4t, the effect ofspending on the capital buJget item land isthat the revenue surplus item in the ,auaooa bud-get is increasedwhich will, in turn, go to increase the left hand sid-e of the capita}budget, namely, accumulated savings. The household can thenturn 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 budgetand further increasing the ability of the householdio meet therem_aining capital obligations. Thus, a careful phasing oFcapital expenditure enables the household to establish a propernexus between objectives and physical parameters and betweenthe latter and money resources.

Government budget

. Government budget, in the simplest terms, is that portion ofincome in the household budgets which Govern."oi *op, up

BUDGETING 7

and spends on their behalf for comnton good' For example' the

CentralGovernmentspendsaboutRs.2500crorespelannumon1f," a.i"o.. of the country, this is' al alerry: of about

;p;;; ;;;ty per head, because individuallv the citizenscannot

".'"^"ir. ttre defence of the country even if each of them spends

;;il;;;;rtv on purchasins a weapon or two' The defence

of the country is so complicated that it is necessary to collect

,ntr""t"*V from the household into a common pool and orga-

ri.. ,fr" alf"*e. Likewise, organisation of health'. education or

otherwel|aremeasuresormeasurestodeveloptheinfrastructureiu.ifi i"t like power and transport need pooling of resources to

be utilised for common good'-- Aou.toa.ot buikls this common pool of resources mdinly

th;;gh i;;"t collected from the households' The relationship

is illustrated below:

, I' No rAx srruATloN

Hoasehold budgetRecelpts 400 ExPenditur" @

TorAL 4oo 4oo

Government budgetReceipts 0 Public ExPenditure 0

TorAL 0 o

lI. GoVERNMENT IMPosEs AN INcoME TAx Ar 10% or TNCoMB

Household budgetReceiptstrers incorne tax

TOTAL

Government budgetReceiPts fromincome tax

Torll

Household budgetRecelpts

400 Expenditur€40

360

360

360

40 Public ExPenditure N

40 40

IIL GoVERNMENT IMPosEs AN ExclsE DUTY AT 25% oN ALL GooDs

400 ExpenditureExcise levies includedin the Prices at whichgoods and services arepurchased

400

320,

80400

8 PrnronuaNcr Buocrtnc ron pr,eNxro DrvrroplrcNr

Government budgetiReceipts fromexcise levies

80 Public Expenditux€ EO

TorAL g0 80

Since excise levies increase the prices the household buysIess to the extent of the levjes. Thui the impact of either typeof tax is to effectively reduce the private expenditure of house-holds, that is, tbeir consumption expenditure, and providerevenues to the Government for public expenditure. The onlydiference is that in the case of direct taxes like income tax thetransfer from the household budget to the Government budgetis directly from income side to income side; whiie in the case ofindirect taxes like excise levies the transfer from the householdbudget to the Government budget is from expenditure side toincome side.

Bulk of the resources raised by Government are throughindirect 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 commonman. For example, the customs or excise duty levied on motorvehicles an.d parts is not directly payable by the man who doesnot own a motor vehicle. But, these duties increase his busfare. (Ifthe local Road Transport Corporation does nor cor-respondingly put up its fare and incurs losses, the StateGovernment concerned will have to bear them in some form orthe other. If the State Government does not make up the Iossesthrough some other form of taxation it will have to get thismoney from the Centre in some form or the other. The CentralGovernment can do so only by further raising the excise dutyon motor vehicles and parts or some other commodity). Simi-larly, the truck operators who bring consumer goods to thetown would also pass on to the consumers the extra taxes thevhave to pay. So will all the firms producing goods and serviceswho own or operate any kind of motor vehicle like pick upvan or staff car. Thus, the excise and customs duties are, ingeneral, paid by the common people. Only where the concer_ned goods are finally consumed by particular sections, as in thecase of alcohol or cigarettes, can it be said that the tax burdenis not borne by the common man. The levies on even the so_called luxury goods Iike petrol and air conditioners, used by

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

conditions obtaining in our country, the tax brirden is passed on

to the consumers through charging correspondingly higher

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'

A11 public property symbolised oppression. In such a context'

uuuding r.nanut or makiirg an easy rupee on the sly from the

public expenditure programmes or wanton destruction ofpublic 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

resources.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 itscitizens in taking decisions including those on budgetary allo-

cations. But, since the resources placed at its disposal belong

to the entire conmunity it is incumbent on Government to en-

sure that decision making in Government is as rational as

possible and, in any case, is not guided by the non-rational'attitudes, if any, of members comprising it'

l0 Pm.ronuaxcs BuocrrrNc pon pr,eNnro DEVELopMENT

The citizen too has a responsibility in this regard. He shouldhelp improve the efrciency in the allocation of iesources pooledwith Government. It is the citizen,s responsibility to ensurethat his representative in the Legislature brings toiear on theprocess of allocation of resources his objectives and priorities.This_is achieved, first,. by ensuring rhat adequate knowledgeald information are made available to the members of Legis-lature, and second, by himself gaining access to them anddebating the issues involved publicly so rhat the presentation ofsuch knowledge and information to the Legislature does notdegenerate into a ritual.

The Constitutional provisions relating to Governmentbudget are detailed in Appendix 1. It may be seen therefromthat the Constitution adequately provides for the control of theLegislature over the Executive in the matter of both raising theresources and spending them. What is not provided is the kindof information and the level ofdetail that should be furnishedin the budget documents. When the activities of Governmenthave become multifarious and where the needs of the situationmay change rapidly, it is also not possible to provide for thesedetails in the Consititution or laws framed thereunder. Thishas to be worked out from time to time through mutual good-will and cooperation between the Legislature and the Execu_tive. Wbat is really important is the acceptance of thephilosophy ofsharing the knowledge and information relevantto the activities of Government to improve decision making all_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 freshtaxes, both of which they may do in the interests of the con-stituents they represent. They should also examine the effici-encies and economies implied in the budget proposals on theexpenditure as well as receipts side. For this purpose, theywill be well within their rights to demand that the variousbudget estimates should be properly analysed and presented tothem. Thus, a legislator interested in more funds for the edu_cation programme should concern himself not merely rvith thatprogramme, but also with the economies and efrciencies im-plied 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 en-

courage 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 pro-

giu--. 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 Consti-

tution makers have made the provision for the submission of a

comprehensive annual financial statement (popularly known as

budget) incorporating estimates ofall receipts and all expendi-

ture 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 tothe 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 objec-

tives. Efficiency is not an end but a means. Neither can itexist in isolation nor can it be a facade for exploitation. A11

enterprise is not efficiency. The efficiency claimed sometimes

is nothing but the result of exploiting others through

shifting costs, buying at unremunerative prices, selling insheltered markets, operating at liberal margins, or contriving

deman$ through high pressurc advertising. Or an enterpisinggroup 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 arriveat genuine efficiency, such exploitation has to be subtracted.a

Efficiency is enterprise minus exploitation.

*Besides denoting the elementary mathematical operation subtraction

also refers to a common light phenomenon. Tbe selective absorption ofcolours 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 optimumdevelopment of resources and their .qoitubl. distribution tosatisfy the aspirations of the people cannot be easily achievedif decisions in these respects are left entirely to private indivi-duals, not merely because some or many of them may beselfish but also because individuals or groups will not have allthe knowledge and information necessary to see that theirdecisions do not conflict with those of the others_somethingwhich should be ensured even in their own interest. Someoverall 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,foreigo exchange; d) avoid wastage involved in excessiveinvestments in the production of goods and services with lowpriority for the people at large; e) prevent avoidable lagsbetween investments and returns through ensuring balancedgrowth in the economy as between different sectors and indus_tries; and f) reduce economic inequalities as between differentregions and different income groups.

The instruments at the disposal of Government to achievethe objectives of planning include (l) legal and administrativecontrols; (2) monetary policy; and (3) fiscal.policy.

Legal and administrative controls (sometimes called director physical controls) include licensing of investment and tradein specific goods and services, restrictions on possession ofproperty, restrictions on movement of goods, regulation ofwages, incomes and prices, rationing of goods, etc.

Monetary policy is aimed at ensuring that the aggregatemoney supply and the pattern of credit flows subserve theoverall economic and social objectives.

Fiscal policy deals with decisions relating to taxes andborrowings 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 the courfirY

Since the basic purpose 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 utilis-ing 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 belittlethe achievements we have made or to spread cynicism. Quitethe contrary is the purpose. The idea is to see whether we

can do better and, somehow, reach the destination. Let us

proceed. '

People are our most precious resource. We are more than600 million now. Of these, more than 20 milllon are wholly

unemployed. Apart from this, on the most conservative esti-

mation, 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 totalgeographical area of 328 million hectares, the cultivable land

l4 PERFoRMANcE BuDGETINc FoR PLANNED Drvtr,oprr.ratr

is reckoned at about 165 million hectares. The net sown areain anyyear is, however, only abot 140 million bectares.

'Only 40 per cent of our utilisable water resources, estimatedat 870 billion cubic metres per annum, are put to use. Thegeneration of hydro-electric power is less than 15 per centof the ultimate potential of 216 billion kilowatt hours peraonum. Against proved reserves of 25,000 million tonnes ofcoal and 150 million tonnes of mineral oil, thc two otherpstablished sources of energy, the annual production is ofthe order of 100 million tonnes and l0 million tonnes respec-tively. Our reserves of iron orc at ZI,S0O million tonnes arestated to be about 25 per cent of world's reserves but ourproduction of iron ore accounts for only 3 per cent. The listcan be extende d ad nauseam.

It is not only that we have inadequately tapped our re-sources but also that the efficiency with which we work thetapped resources is low.

For a country 70 per cent of whose population derivesfustenance from agriculture the productivity ofland is woefullylow as may be seen from the data below:

TABLE IAvrucr YrELD oF LnNo, 1975

(quintals

RiceWheatCotton (lint)Groundnut (in shell)

Saurce: Statistical Outline ofLimited.

per hectare)

India Highest in the world18.3 61.9 (Japan)13.4 38'9 (France)r.6 9.4 (USSR)9.2 28.8 (USA)

India, 1978, Bombay: Tata Services

Let us look at our animal wealth. Twenty-five per cent ofworld's cattle (cows and bulls) and 50 per cent of world'sbuffaloes live in India. Ilowever, the average milk productionof our cows and buffaloes is only 300 litters per annum com-pared to the yields of 3000 to 4000 litters per annum obatinedin some of the "developed" countries. Despite the vast coastlineand several rivers, the catch of fish at about a million tonnesper annum is said to be only 10 per cent of the potential catch,

PleNullc .q.lo Buocrtilc

One of the principal objectives of planning and, hence,

of fiscal policy, should, therefore, be to secure a larger and amore efficient use of resoutces already available to the com-munity. This will, in turn, enhance our ability to tap moreresources because financial resources in real terms are nothingbut an index of the level of development already attained inmobilising human and physical resources.

National income accounts

An inrportant branch of economics basic to the understand-ing of planning and budgeting is the national income account-ing. also called social accounting. Appendix 2 explains thenational income accounts. lt may be seen therefrom thatthese accounts are based on the concept of circular flow offinancial resources-from consuming households to producingfirms which, in turn, pay factor incomes to households enablingthem to pay for their consumption. The reader is advisedto grasp this concept well, if necessary by ref'erring to anystandard book on the subject.

P lanning for economic growth

When we plan for economic growth we expect the nationalincome (please see Appendix 2) to increase from the present

level to a desired higher level as illustrated below:

VALUE ADDED sy DrrnnrNt Ssctons(crore rupees)

Present Future level Increase GrowthIevel planned Rate

Agriculture andallied services

;Industry, mining,power, transport,

Trade, Banking,Services, etc.

Net DomesticProduct

27,0002 7,810 8r0 3.o%

20,000 2r,600 1,600 8.O%

l5

^Ihe value added by each sector isproduction /ess the value of bought

18,000 18,84065,000 68,250

840 4.7%3,250 5 0%

the output or the value ofout raw.materials, power,

16 PERFoRMANcE BuDcETTNG FoR PLANNED DrvnopurNr

components, services etc., bought out from other sectors. Thevalue added by each of the myriad industries comprising asector worked out similarly add up to the value added of thatsector.

At the time of preparing a national plan on a long termbasis we must necessarily think in aggregative terms andplan for an overall growth rate. But, if we want to improveupon our past performance in planning what we need to dois to break up this overall growth rate into specific targersyear by year, sector by sector, industry by industry, plantby plant, and instal a, management system whereby each ofthem does, in fact, produce what is targetted for it.

Planning "models" postulate the relationship of the desir-ed growth rate with a) savings or investment in the economyexpressed as a ratio to the national income and b) efficiencyof 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 producteither by increasing the capital equipment through additionalinvestment or by improving the eftciency of the capitalequipment already installed. Suppose the present net domesticproduct of Rs. 65,000 crores is the result of aggregate.capital stock of Rs. 2,00,000 crores in the economy produc-ing at an average rate of 32.5 per cent (i.e. capital stockRs. 100 lakhs producing net output or value added ofRs. 32.5 lakhs in a year). If we continue to work at the sameIevel of efficiency, we can step up the value added byRs. 3,250 crores (a growth rate of 5.0 per cent as desired) byincreasing 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 addi-tional investment,

In actual practice the arithmetic is not that simple. In anvcase, we may have to step up both investment and efficiency.But, unfortunately, we have paid far too little attention tothe 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 k is the incremental outputlcapital ratio,

PLANNING AND BUDGETING t7

existing capital stock. This is all the more regrettable because

in a poor country the capacity to save and invest, that is to

step up the other ratio, is severely limited'indeed, one way of stepping up the savings or investment''

ratio is to enlarge the national product through increasedi

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:

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 tothe 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 forcurrent 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 hisheight in inches, the growth offertilizer industry by the additionalquantity of fertilizer produced. But, we have necessarily tomeasure growth of the economy as a whole in terms of money-

This 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 the-

consumption 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 furtherthat our food habits are simple and we insist on taking foodr

18 PenronuaNcl BuocrrrNc ron pr,aNNto DnvrlopueNr

of the same qrlality and quantity. Nevertheless, we may haveto pay rupees twenty for the meal. The value of this meal-€nters the national income accounts at twenty rupees, that is,ten times the value of the first meal, although the quanrity orquality 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 theeiutritive value of food or what it means to us in real terms. Itis, therefore, necessary.to go into real contenl of productionand consumption implied in the estimates of national incomeprojected for the future.

Planning for economic developmentDevelopment is considered a wider concept than growth.

Development incorpcrates the qualitative aspects of growthalso. When we talk of growth, we can say, referring to theabove example, that the output ofhotel sector has achieved atenfold growth. However, if our concern is development we areboundto 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, weshould demand a more precise statement of pattern and qualityof 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 ofeducation, medical care, public health, water supply, sanitation,recreation, cultural activitives, etc. Our planning effort includesconsiderable public expenditure outlays in all these fields.

Public expenditure in the national economyFrom the point ofview of the economy, public expenditure

is complementary lo private household expenditure as witl beclear from tbe following presentation relating to expenditure ofhouseholds and Government in the field ofhealth.

Houqenoro BuocErRece ill ts

XXXXXX

Rupees

X

XX

Expencliture

XXXXXXXXXXXXHealthXXXX

Rupees

XX

PX

XX

PteNNIuc elqo BuocrltNc

Receipts

GovtnNMel,lr

Rupees

Flnl,Irn's Buocrr (BEFoRE CovERNMENT DEcIsroN)

Price charged for produce P Cost of fertilizerOther CostsFarmer's net income

Frice charged for produee P-X Cost of fertilizerOlher costsFarmer's net income

19

Rupees

XXXXX

XX

X

XXXXXXXXXXXX

BUDGET

Expenditure

XXXXXXXXXXXXXXXHealth

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

'operates on a large scale on the product side of the national

€conomy also, that is;'aJl public evpenditure can no longer be

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'

BC

p P:A+B+C

Fnnrratn's BuDcET (A!-TER GovennltlNr DEcISIoN)

Ahernative I (.Farmer paises on the beneft to consumer)

A.XBC

P_X P.X:A-X+B+C

20 PERFoRMANcE BuDcETrNc FoR PT,ANNED DEvnopunNr

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

Other costsFarmer's net income

A-XB

C+XP p:A_f B_f c

It will be obvious from the description hitherto of a Govern_ment budget that whether a tax is imposed or an expenditure isincurred, in the final analysis, it is an jncome transfer operation.Taxes are collected from the incomes of some; the moneys socollected when spent on different programmes add to the incomesof others. How much to collect and from whom are importantquestions much debated by economists. On what programmesand to whom the resultant incomes accrue are the-concerns ofthis book.

There are no theoretical limits to the quantum of taxes to becollected or the quantum of public expenditure either in absoluteterms or as a proportion of the national income. In our country,the proportion of expenditure to the national income is lessthan 20 per cent, although we have accepted socialism as anational goal. The proportion in some ofthe countries which donot glorify socialism as a national goal is higher. In the UnitedKingdom, for example, it is about 50 per cent. This proportionis obviously reiated to the resource base ofeach country andthe degree of modernisation of the economy in the sense oflarge 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 ofpublic expenditure will be inevitably low.

What is more important is to look into the composition andultimate beneficiaries of public expenditure. ln the ierminologyof the economists, a ..disaggregated" approach is more relevantto developing countries. The questions to be asked are morespecific and they should be asked in respect of each block ofexpenditure. There is littte doubt that answers to many of thequestions will need collection of a lot more information than ispresently available to Government. There is some cost involvedin collecting such information. But, there can be no improvement

PLANNING AND BUDGETING 2I

in budgeting without in depth analysis based on such informa-

tion.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

Planning attempts to translate long term national goals intomedium term operational objectives and make allocation ofhuman, 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 inthe annual budgets of different tiers of Government.

Moreover, in a static view of planning, objectives remain

.constants and optimisation of resource allocation gets prime im-

portance, 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

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 Constitu-

tion,ii; permit decentralisation of planning activity, and iii)provide an effective feedback to planning.

22 Prnronrr.reNcn Buocrrrxc pon prennro DrvEr,opurNr

_ A_word on the coverage of plans and budgets. The coverageof the Five Year plans generally extends

-to all investmentprogrammes. Besides, all the new programmes included in aFive Year Plan for the first time in fields like education andhealth, even though they may not be investment programmes,are treated as .,plan,' programmes. On the otber hand, allother expenditure including maintenance or continur.ng expen_diture on,'plan" investment completed or .,plan,, prog;ammesterminated prior to the cument Five year plan are treated as"non plan" progr4mmes.

This classification of expenditure as ,.plan', and .,nonplan" has the built in disadvantage tbat as we go throughmore Five Year Plans the maintance or continuing expenditureon programmes completed in the earlier plans increases pro-portionately. However, in public mind all ,.non plan" expen-d iture is "non development" expenditure and even t-he inevitableand not at all undesirable, inorease in ,.non plan', expenditureis viewed with disfavour. This gives rise to a) lack of managerialattention to maintance of projects and institutions already builtup, and b) denial of adequate funds for maintenance. Thepitiable state of many of our irrigation systems, no! to speakof schools and hospitals, due to lack of resources and propermaintenance is proof of this neglect. It is, therefore, veryimportant that there is no artificial distinction between ..plan"and "non plan" programmes. In any event, they should beconsidered together in the matter of allocatjon ofresources. davto day management, and evaluation.

The relative roles of planning and budgeting are not reallythat the former is primarily concerned with the plan or invest.ment programmes and the latter with the non plan or mainten-ance programmes but that, in relation to each sector of economicor social activity, the former is concerned with the resourcesconsumed and returns obtained by Government as well ds non_Government agencies, while budgeting is primarily concernedwith only the activities, of Government. Both planning andbudgeting should have a long term perspective.from the res_pective angles. Likewise, both planning.and budgeting should beconcerned with the investment and mainlenance progranmesunder each sector.

PLANNING AND BUDGETTNG 23

For example, budgeting should concern itself vith the invest-

ments in and maintenance of textile factories under Government

;;;;i;; planning should take into its broad view the invest-

*""i ""J _^rrt.nu*. policies and programmes of the. entire

iei"tii;'l;dt."y. rrt"t' in respect of public sector textile

;;;;;;.;;rh" "onc.rned

Departments of the central and state

C.""t"-."" would function as decentralised planning units'

^ ,.rp-titif ity which they will discharge through the annual

budgetarY Process'

EfficiencY in budgeting""ii".""i. -"[:*ti* of Government in formulating publio

expenditure programmes ls to use the budget as an instrument

foi prornotiog the overall developmen-t of the economy' the

".r"ipi "i.miiency in the allocation of resources in Govern-

*."iitag" gets widened on two counts' First the expendi-

ture incuried by and benefits accruingtothe entire community'

not merely the Government, would have to be considered'

Second, besides assesstng the expenditure .and, benefits in

nnuo"iul terms, physical resources like land' Iabour' water'

power etc. available or accruing to the community as a whole

have to be taken into account'

ftt" metttoOology evolved and successfully used in the private

inOustriat sector by-individual firms to maximise their profits oo

other benefits acciuing to then through a more efficient alloca-

tionoftheirresourcescannotthusbe..adopted''inGovernment;;;;t"t. What the Government has to maximise are not the

retuins ir benefits accruing to it but those accruing to the

".*-""iVasawhole. A private producer ofsteel is concerned

;t;;1t. profits he makes' A Government'producing steel is

;;;;t;.i with the benefits to the communitv' even as it must

keep in mind the returns accruing to Government budget' To

o,ri'lt aif"r.otty, while the firm optimises from the producer's

it;J;il;;ilif ni.*,Government has to optimise fromthe

iooru-"ri' (not its own) point of view' But' ths- methodology

"un ".rtuinly be "adapted" to suit the needs of Governme

i"ag.u"g bi a suitable definition of the "costs" (as incurred by

the Iommunity as a whole) and "benefits" (as accruing to the

communitY as a whole)'To illustrate the point, let us look at a simplified profit and

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 presentationof household and Government budgets we will showthe receiptson the lefr hand side and expenditure on the right hand side).

Sale value of the product(in lakh rupees)

60 Cost of bought out raw-materials, power, components,services etc. ZOWages and salaries 14Depreciation 10Interest 4Profit 12

60 50

From the point of view of the firm, the ,profit' earned is Rs.12 lakhs. However, from the point of view of the economy the'value added'by the frm is Rs. 30 lakhs (value ofthe productof Rs. 60 lakhs /ess the cost of bought out raw-materials etc.of Rs. 20 lakhs and depreciation of Rs. 10 lakhs). It is thisvalue added which is counted in computing the national incomeaud wbich should concern the Government.

Further, while the private industrialist is concerned withmaximising the profit with reference to the capital invested byhim, Government is concerned with maximising the value addedwith reference to all the capital resources employed from thepoint of view of the economy. We shall discuss in detail this€riterion for judging eficiency from the point of view oftheeconomy in the chapters on Analysis.

Income distributionDoes 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:moment, that it consists of individual human beings. And,there are wide disparities in incomes accruing to differentgroups of individuals. The uneven distribution of incomes isonly partly due to their unequal efforts or differences in indivi-dual efrciency. For the rest, it is the result of factors beyondthr control of individuals. A Government committed to wel-

PlaNNrNc eNo BuocnTtsc

fare of the community as a whole must,' therefore, correct this

uneven distribution of incomes and, if possible. correct thefactors 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 withouta corresponding change on the income side. For example,

under the present pattern of income distribution in the countrythere 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 oltbe pattern of production of goods and services. If incomes

areto be redistributed, therefore, pattern of production willalso 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

25

26 PERFoRMANcE BuDGETING FoR PLANNED DrvsropNlnNr

rupees 30 (at 1960-61 prices). Goinga step further, ifthe 30

per cent who are poor today are assured a monthly income ofrupees. 20 (at i960-61 prices) each, through an appropriatepolicy 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 indivi-dual income required to meet the basic minimum needs.

However, such a redistribution of incomes may not be apracticable proposition in lhe existing social and politicalenvironment. 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 pro-grdmmes. We, therefore, need to explore ways of ensuring thatthe programmes improve the income distribution to the desired

extent.It must be ensured, at the very minimum, that income distri-

bution with <iifferent blocks of public expenditure programmes

will not be worse than income distribution without src}r' pro-grammes. Programnes may be justified on the basis of benefitsaccruing to the community as a whole. But, if they are takenup regardless ofwho benefits from them there can be increasingpressures to undertake programmes that will benefit the morepowerful groups leading to adverse economic! social and politi-cal consequences.

CHAPTER III

PERFORMANCE BUDGETING

THr rrnu rERFoRMANcE Budget was originally coined inthe United States by the' First Hoover Commissionin 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 toobjects of expenditure and (b) providing work cost measure-

ments to facilitate effcient performance of prescribed activitiesreducing, as far as possible, the work cost data to discretemeasurable units". It was designed to be areflection of whatthe Government was doing, how much, and at what cost.

Attention was focussed on the ends to be served by Covernntentrather than the amount of money spent.

In his book Government Bwlgeting (1956), Jesse Burkeheaddefined performance budget as follows: "A performancebudget is one which presents the purposes and objectives forwhich funds are requested, the costs of programmes proposed

for achieving these objectives, and quantitative data measuringthe accomplishments and work performance under eachprogramme."

Preparation ofa budget in its bare essentials is determininghow much money to raise, from what sources, and what are

the items on which the money so raised shall be deployed, thatis, 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. Theoriginalconcept of performance budget emphasised this linking ofphysical and financial aspects of programmes and is, certainly,very relevant even today when we are dealing with budgets ofvarious organisations, whether a household, firm or a Govern-

ment department or agency. Nothing written in this book

28 PEnronulNcr BUDGETING ron PrlNNro DEvELopMENT

should be construed as minimising the importance of tbisapproach.

However, when we are dealing with budget at the level ofGovernment as a whole mere linking of physical and financialaspects, while still very necessary, is not adequate. A householdor a firm may not make an explicit statement of its objectivesand priorities. But Government needs to for the reasonthat Government does not have needs and aspirations of itsown. Rather, Government budget will have to reflect the needsand aspirations of all the people who are governed. More-over, the amount ofmoney raised by Government, the sourcesfrom which it raises the money, and the programmes on whichit spends the money have wider implications because of boththe magnitude and the comprehensiveness ofthe taxation andexpenditure programmes. The manner in which these program-mes are inplemented havd, likewise, wide ramifications. It istherefore, necessary to emphasise the objectives and purposes ofGovernment, to lay down the manner in which the programmeswould 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. Theemphasis in such a system is on analysis of programmes toprovide an organic link between objectives on one side andphysical targets and achievements on the other, investing somecontent in the form er and imparting some meaning to the latter.The degree of sophisticated techniques that may be used in suchanalysis depends not only on the nature ofthe programme andits objectives, but also on the availability of relevant data andthe cost of collecting and analysing data.

As the concept became more broad based new terminologywas coined. A task force of the Second Hoover Commission inthe United States coined the term Programme Budgeting (PB)in mid-fifties. The new approach was embodied in the termPlanning, Programming and Budgeting Systems (PPBS) adoptedby the U.S. Department of Defence under the leadership ofRobert S. McNamara, now President of the World Bank. Itsmain goal was to rationalise policy making by providing a) dataon the costs and benefits of alternative ways of achievingproposed objectives and b) output measurement to facilitate the

PERFoRMANcE BuocrrtNc 29

efective attainment of the objectives selected out ofthe pro-posed ones. lt involved considerable analysis for identifyingand selecting long term objectives, determining alternative pro-grammes to achieve those objectives undertaking cost benefitanalysis, making long term investment choices and structuringthem into budgets specificaily indicating programmes, activities,etc. The new systems incorporated ideas from economics and

"systems analysis" while the earlier attempts in PerformanceBudgeting derived the techniques mainly from cost accountingand "scientific management". While the accent of performance

budgeting was on implementation of a work plan or cost basedbudget that of PPBS was on planning and its integration withbudgeting.

The new system received powerful support from the U.S.President in 1965 who commended it in the following words:

Once in operation, it will enable us tof. identify our national 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 pro-grammes;

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 theUnited 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 mannerin which it was implemented. There can be no greater proof ofthis than that such systems, under different nomenclatures,have since been implemented with greater success in othercountries, notably United Kingdom and Canada (to confineourselves to the English speaking world).

The United Nations Manual for Programme and Performance

Budgeting, brought out in 1965, quoted with approval the defini-tion 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 theoriginal concept of Performance Budgeting. Subsequent deve-lopments widened the concept. The UN Manual took no speci-fic note of them. Indeed, it gave an incorrect and somewhatrestricted definition to the term "Programme Budgeting" sayingthat it was a system where "the principal emphasis is on abudget classification in which functions, programmes and theirsubdivisions are e$tablished for each agency and these arerelated to accurate and meaningful financial data." On theother hand, it argued that "Performance budgeting is an allinclusive concept embodying programme formulation as well as

measurement of the performance of work in accomplishment ofprogramme objectives." The Manual, however. claimed thatProgramme and Performance Budgeting represented a man-agement approach to budgeting.

ln the United Kingdom, Programme Budgeting and PPBSare used synonymously with another term "Output Budgeting".A Department of Central Government defined the latter as aformal system for establishing:

l. what a department is aiming to achieve, what its objectivesare, 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 activi-

t ies;4. what is actually being achieved or what the outputs arc.t

With whatever nomenclature, some departnrents of theCentral Government and many "Local Authorities" (rvhere thepattern of Government is similar to that in our municipalitiesbut 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 sixassumptions:

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

PERFoRMANcE BupcrrrNc

l. Decisions will be better if you know rrhat you are tryingto do-if objectives are stated and activities devoted to the

accomplishment of a particular objective are grouped to-gether.2. Decisions will be better if information is available on howresources are at present being used-by major objectives, byways in which objectives are being carried out, by the type ofpeople being served and so forth.3. Decisions will be better if the effectiveness of the presentprogrammes is evaluated.4. Decisions will be better if alternative ways of accompli-

shing 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-tofollow 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 objec-

tives of a P.P.B. system as follows:

1. 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 pro-

posed 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

I J.M. Britlgeman, "H'M. Treasury in the Planning, . Programming,

Budgeting Systems", O&M Buttetin of the Civil Service Department

(London; (Novernber 1969).2 Efecth,e Management through P.P.B,S, Treasury Board of Ontario

(October 1969).

31

32 PrnnonueNcn BuocBttllo Eon PleNnEo DrvrloplrarNt

The htdian contextIn India, a Working Group of the Administrative Reforms

Commission stated that the primary purposes of performance

budgeting were:

a) to correlate the physical and financial aspecls of everyprogramme or activitY;D) to improve birdget formulation, review and decisionmaking at all levels of management in the Governmentmachinery;c) to facilitate better appreciation and review by the Legisla-ture;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 closelytogether through a common language."l

The Administrative Reforms ,Commission itself stated: "Per-formance Budgeting, which in essence, is a technique forpresentiDg Govetnment operations in terms of functions, pro-grammes, activities and projects, seeks, among others, to achieve

the following important objectives:

a) to present more clearly the purposes and objectives forwhich 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 thebudget by the Legislature;c) to improve the formutation of the budget and to facilitatethe process of decision making at all levels of Government;d) to enhance the accountability ofthe management and atthe same time to provide an additional tool to management

control of financial operations; ande) to render performance audit more purposeful and effec'tlve.- -

1 Appended to the Report of the Study Team of the AdministrativeReforms Commission on Financial Administration (1967).

t Administrative Reforms Commission Report on Finance, Accounts andAudit (1968).

PenEonr.reNcB B ooorrnc

The Commission emphasised that planning and budgeting

should be brought much closer than had been the case in thepast but did not spell out how these could be brought closer inan integrated management system of the kind Governments inother countries were attempting. What was being attempted inother countries was to extend the budgeting systems to incor-porate ideas of long term-planning on the one hand and techni-ques of modern management on the other. The Indian context:

was different. We had already adopted a framework of plan-ning with ideas borrowed from the Socialist countries. How to'flt in a budgeting system as originally incorporated in the Con-

stitution into such a framework and whether improved budge-

ting systems based on modern management techniques being

attempted elsewhere could also be tried in our country arequestions which were, and still are, open.

The techniques of rnanagement

As mentioned above, in the improved budgeting systems irother countries attempts are made to graft the techniques ofmanagement, especially the quantitative techniques, successfully

employed in the private industrial sector into public administra-tion. We shall refer to some of them. But, it is appropdate atthis stage to recall some 'cultural' differences between private,

industrial sector and public administration especially in thecontext of performance budgeting.

First, the goals of management in private industry areprimarily internal. Even where it becomes outward looking, thepurpose is only to serve the internal goals. The goals of publicadministration, 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 an-

elitist 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.Third, in the management of private industry, budgeting is :

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

JJ

34 PmlonlraNcE BuocrrrNc non pleNNro Dnvruopr.rENr

'public administration, on the other hand, because of the"value" considerations predominating. the public expen<litureprogrammes and because control of the purse is regarded as the.quintessence ofa denocratic system of government, budgeringis the highest level activity. Hence, it must rank higher in the-"warrant of precedence". The budget document of Governmentds 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 fechniquedwhich earlier provided inspiration or can be useful for improvesbudgeting systems.

Systems approachThe term "system" i's usually defined as any set of inter-

related elenrents, for example, the solar system, the politicalsystem, the economic system or the eco sysrem. By definition,a system has a "boundary" in the sense that all the inter_relatedelements fall within it. The system can be closed or open. Aclosed system is one in which there is usually no entry of freshelements; the solar system is a closed system. An open systemis.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 areopen systems. Since most such organisations ar6 a combinationof man and machines they are also known as ,socio-tecl_mical'

systems. The purpose of such open systems is to receive and togive, to transform inputs drawn from the environment into out_puts given out to the environment. The three ingredients of sucha system, therefore, are input, process and output. The transfor_rnation process ofa system is facilitated by its i) structure (theway its elements are organised); ii) communication sub-system(which provides the right information at the right place at theright time); iii) decision-making processes; and iv) feedback'mechanism.

The efficiency of a system is. measured by the efficiency with.whicli the inputs are transfornred into outputs. [n order tomaintain 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

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 maintain-

ing the efficiency of the system.

There is no great complexity in the ideas behind this appro-

ach 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 techni-ques is linear progtamming. It is one of a family of optimisation

techniques which are intended to help inthe best allocation ofscarce input resources. Along with input-output tables (which

give, on the basis ofpast experience or known technology, the

Quantum of inputs necessary fcrr a unit of output), lineat pro-

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'

Blandly stated, planning attempts to maximise human welfare

under given l.imitations of human, physical and financial resour-

ces. Where human welfare can be reduced to so many kilogram-

mes 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 resour-

ces. 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 programmingtechniques, will itself yield the outputs of diferent sectors,industries, plants and organisations, and nothing is left to bedetermined as part of any other system such as performancebudgeting. Such total planning is, however, not feasible not onlyfor political reasons but also because the data requirementsof such a system are so vast and the computational capabilitiesnecessary so complex that they arejust not avpilable in develop-ing countries. But, linear programming technique itself isneutral to the level at which it is applied. (It can, for example,bea pplied by the housewife to determine the best nutritive foodshe can give to her family for a given amount of money. Herdata requirements are the nutritive values of different food itemstheir availability, and their prices. Her computational require-ments are high school algebra, paper and pencil.) In the improv_ed budgeting system we are discussing, linear programmingcan be used to determine the outputs or .objectives, at differentlevels keeping in view the input constraints.

It wiil be obvious from the above description that if effciencyin public administration were to improve significantly we needto adopt a systems approach to ensure that each unit ororganisation works at its optimum effciency. At the same time,each limb of the administration must be looked upon as anelement in a "grand system" that is Government, in which thedifferent 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 hierarchyof objectives and targets down the line by departments, divisions,units, sections and, ultimately, individuals. Objectives are set bydetermining what shall be measured in each area of activity andspecifying the yardstick of measurement. The essential philoso-phy of management by objectives is participation of all membersof the organisation in setting these objectives and targets, andestablishing suitable control systems to permit regular compari_son ofactual results with the stated objectives and targets inwhich process, again the members participate. AII units andall individuals do not, ofcourse, contribute to allthe goals and,objectives. But identification of the goals and objectives to

PERFoRMANCE Buocr flNc rl

which they are not contributing will itself snul t!em. to make

"ff"ti, i. lt."aen their roles' is has been said' the idea is to

;i;; ;;iin;"; not onlv to the abilitv of .each

individual,.but also

i;';;-";;t;anship of each function and specialitv' This

;;il, ;;;ic'h peter Drucker has beenthe sreatest exponent

is, again, relevant to puolic expenditure proerammes in the

;il;;.t of repeated assertfons regarding the - failure of

;;;;;;;;"y" to d]eliver the goods' Greater participation bv

the civil servants in settrng the objectives and closer identiflca-

tion ofindividual civil servants wiih particular tasks ought to

improve the Performance'

CorPorate PlanningAlsoknownaScolporatemanagementorlongrangeplanning

thttl;;;;;;gen"ric-tetm which does not signifv anv parti-

cular technique or organrsational form but focuses attention on

iil" ioi.r*oon.ction between the planning and management

roles of different depa ments ofany big organisation relating

themtoitsoverallobjectives.Twotypesofplansareprepared:i;;##;;ill,:":.'U:1ff ffilii,:"',,1ill'ti,1l,',,111;product improvement P^l i market_ilan, "t".

and, (2) operational plans compnstng

i"t-'pf"", production plan, etc' The "plans" are treated

.as first steps to management under these heading to be followed

by other steps in the cyclical management process' namely'

"ir-i.i"g, ,tumog, directing, controlling' etc' Thislechniqrre is

ofrelevanceto prrUr," tott'itises which are' in the nature of

things, the building Ufocks of the planning apparatus in the

countrY.

Value analysislValue e ngineerinB' --An essentially engineering technique' it is used in manage-

ment to look at the ptoduit from the point of view of tbe

Jorto*.. unO determine what function each component part

Derforms in relation to tris lneeds'' The value of each part is

#;;i;; H"d of marginal analvsis'.A part is notionallv

;ii;tr"J. The assessed iiff.."o.. in price'rhe customer would

i.*pt.p"t.a," pay for the product wih the part -and

tiithout

in.'p"iii"rn"'uuio"'n"lt-tu"hes to the part' If the cost of

p."[t..g ,t* part is higher than this 'value" it is just as well

38 Prnronlaancr Buocerrlc roR prerNro Drr.,rropupNr

that the part is not produced because the resultanf saving incost can be added to the profit o, ,t ur.o ritt, ttre customer.The same holds good if the part *, ; ;;;;.0'u, ,.r, .or,without effecting its .value, to the custome'r. -J"rn"

"f the ques_tions asked in this technican ir be mad e sinpre r? :H:,T ; #"'*d:!.?.x'#ffi,,."1;can itbe replaced by a standard panf

"an'li Ue'made usingstandard material? and so on.As stated, this is essentially an engineering technique. But,the basic concept is important. A private inairtriai firm looksat its product from the point of view

"i-ifr.".rrtonier evenwhen it wants to maximise its profits. l" prUii" iirnioirtrution,of course, we are concerned solely wirn trr" i*ii derived bythe customer or the citizen receiving the services. And, it is notfar-fetched to suggest that cetain lr..ui.rrij-.un be trimmedwithout making any.diference to the citizen. In respect oftangible goods supplied by public .or.t;;; ,*h t.im*ingought to be carried out more iigoro"rry t.""rr" ,.li:pu.tugiog,of essential goods to enhance *n*_.. upp*i l,

-rron"cessary,

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,"

"f;."ti"e of textilemills in the pubric sector rs to produce croth for the massesthese processes could well be eliminated unJ- ti. iloit, ,ora utcheaper prices. And, if the .frjfls, iou;;";;-.;arketing,,public services, beautifyinL1'affi ;i;;;;;il:#":'"'# jiff :;,::',:H:ii"',T:i':of our ways of thinking than of lack ofknowledge ofany techni-que.

Performance Budgeting_a total management systemIt will not be possibre to exhaustively a.rt witr, utt tn"ma]la.gegent t€chniques within the curnpu*, of a book on bud-getjng. suffice it to say that the techniques il'rr"'potentialto enhance the capabilities of public adminirt*ti., to for*ufui"and implement public expenditure. prog.u.."r.- il;;';;little to borrow from the developed .Joot.i...'the tevet of'development of a country has nothing to do with il ;il;;' ;;use modern management techniques.lndeed, Iower the i;;;1 ;;development greater should ,be the ..pay off; f.orn-irr.i. ur"

PERFoRMANcE BuocertNc 39

providedwe adapt them to suit the conditions in public adminis-

tration.Since the receipts and expenditure of all organs of public

administrationpassthroughannualbudgetsapprovedbytheLegislature, management techniques built around

. this impor-

ff; ";;'ilt*tull" "v"1' of administrative activitv have a

gl."r.. "tt""""

of getting assimilated into the "g1and system"

ihun .poruOi" effoits to graft this or that technique'

The scope for the use of management techniques in public

administralionisnaturallybound-edbysocialobjectivesandp"-iii" "".""*ability'

Performance Budgeting provides this

iru-.*.rt. It is a kind of umbrella system to project and

enhance rather than detract from the usefulness of any manage-

ment technique. In an.v event, it does not compete with any

technique for attention, effort or resources'

Theeffectivenessofmostofthemanagementtechniquesinthe private industrial sector, ranging from the principles that

,tto.,ta gon".n the decor of an e-xecutive's office room to the

ntost siphisticated mathematical programming for decision-

;il";,;";ultimatelv be judged bv the profit made bvthe

nrtn.itpfoving the techniqueJ' This m-easuring rod is rarely

,""if"Ur" ln puUti" administiation' The effectiveness of nranage-

*""i-*ft"iq*.s in public administration can' therefore' be

.i"Jg"J .tfy in the context of a system which delineates

ifl""oU;..tiu"t and incorporates within. itself the means to

."urrri" the achievement ofthose objectives'*-W. nuu" often heard it said that our plans and budgets are

all well prepared and it is implementation that goes wroDg'

iii. i, , p""irl trurh. If implementation goes wrong it is partly

t*uor. ihe planning and budgetary process do not take

ua"qou* u".orrot ofthe organisalion and structure-of' and the

"oortrulnt, on, the implementing .machinery'

-Performanceiil;;G we will be discussing is intended to fill this gap' lt is

oot i -.t1 statement of physical targets and achievements' It

o.tr to focus attention orthe very fundametals. of Govern-

.ro, poli.y related to each area of public administration so

ib;th" objectives of Government policy at various. levels are'

andcanbeseentobe,relatedtooneanother.Itwillspelloutin adequate detait the data collected and analysed and the

assumptions made in selecting the particular programmes in-

40 prnronuexcn BuocrrrNc; FoR pLAr.rNED DsvrrotrapNr,cluded in the Budget. O1r.:

"O:rl our- wjll be how programmes;are proposed to be monitored,.by whai *rr.rr""il" success orfailure of the programm€s will.. be judged and how the datarequired for such evalua

such an improved o"ii1l'I]'ib"."ollected on a reliable basis.

.arotar"'""*._.",",J',i:11';'1.fi ';Ii:11:TT..Xi"rl;*:lidi-.-r*t^ ar the simple reason

-that all management activities4o get reflected in the businl any ;"**fi ; ,x::f :*,"Tffi:Ji' J"u"?:?,,il"tr?it is obvious thar we are not attempiing-to-",",r"J,iJ. anythingnew. Rarher, the artempr i, to ,;ha;; l; ," rn.., ,fr" dynamicneeds of the organisatiori und transfo.-m it rri.'ui"#nuur Ao.u_,rnent to a comprehensive management system.

,Sta_ges of performance Budgeting

-^^1r:l:t:tu*gement systemit ls dificult to spell out discrete.sequenlial stages since the wiro]e pr"".* i, "iiii*iin the first'instance and even as one step.foflows the othei .there are freshopportunities to review and, if need u", ,.i..." ini ."urri.. ,t.p.Moreover, performance budgeting ,y"._ "rri" f rtroCuced atvarious, levers, starting from a small departmenta.r unit to thenational level. The system at any lower level;s to Oe organi"afly

-":r:.:.r..d with the system at the next frigfrer f*.i f, the sensethat it should be derived fr

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

J:T_l:lT:,# i::*:fhe performance budsetins; : i;*;;; " ;ff lt.'J*:# ;iffi ,ff *ff.H:ffi ::X1::il]i"i,ll spelt out, in quantrtative and measurable terms as farHj:fi'j::,:.,tins

them against tong_ie;-;*, il'goals of2. Analysis. The lone-term strategy and the short-term tacticsf,or achieving- the objeciives are considered, possible alternative,programmes identified, the costs and benefits of tne iiterrrativelprogrammes worked out and programme, ..t".i.A.

- *'3. Budgetlctassifcatnn. rie {r"sr;;;;;;i; up for imple_mentation are classified with,:efireice,;;"rrfi#oo.r.,"_

so as to facilitate allocation ofresources ,",.f""J pr.rrammec.rhebudget so prepared must€o *.*il;;';;rJriiio nro"._dure ofpresentation, approval and sanition.

PERFORMANCE BUDGBTING 4l

4. Organising. Tbe roles ofdifferent organisalions in achiev-

ing the siecifiedobjectives are demarcated and the financial rules

and accounting system are remodelled to effectively implement

the programmes.i. frafuation. Criteria for evaluating the programmes with

reference to the objectives are evolved and proper information

anJ.epotting systems on financial, physical and economic data

relevant to the programmes installed so as to monitor the pro-

grammes during execution and evaluate on completion'

The interaction between the different stages of performance

UuJg"tlng mentioned above is quite apparent' Only when we

.unul-yr" tie specific programmes and work out their costs and

beo.fit, w" ui" likely to realise that all the objectives which we

have so enthusiastically accepted cannot be achieved within the

,i." ,pun, originally thought of' This leads to lowering of sights'

dir"orrioo on-inter se prioiities, and redefinition of objectives'

Analysis of programmes in general economio.-or social terms

withoui reference to the specific activities contributing to them '

*iii t. -.u"i"gless. Further, programmes designed to achieve

particular objectives must be examined alongside programmes

io u"ttl.u" reiated objectives. An overall framework of budget-

ary classification is thus a necessary adjunct to programme

analysis'--enatysl, also gets sharpened with the demarcation ofroles of

different instruments of public policy'

ihe specific activities of any programme must either fit into

the existing organisational set-up, its rules and procedures' or

;;y;h""ft be-modified or the activities, and, consequentlv' the

.pro!.urn-., and even objectives must be reexamined taking'iheJe

timitutions into account. Hence organising cannot be

divorced from analYsis.-- However laudable the objectives, however carefully chosen

the programmes and the attendant management system' not

i"ft.-q"""trv, monitoring of programmet Tu.y show that

bottlenecks have developed requiring, at the minimum' rephas-

ing of programmes. A more th oto'tgh ex post evaluation at the

end of the year may show that the objectives sought to be

..t i"n.a are iot being fulfilled in adequate measure or certain

other unforseen co[sequences have followed' This must surely

lead to review of programmes and even redefinition of objectives'

42 PrnronueNcr Buocrrruc pon PLANNFD DBvrropurNr

Also, evaluationl is closely linked to the analysis stage be-cause the assumptions made at the time of ,, orrr"inaysis mustbe tested for their validiry in the course of io,n"uirlnlo, q, por,evaluation. The methodology fol.lowed in "* onr"-uoulysis canitself be sharpened in the iight of tfre exp#n.l"guin"A incollecting necessary data for ex post evaluation.

. Thr:, we cannrt pursue any single aspect of performancebudgeting in isolation. We will be Air.usslng the Ji#"r"ot ,tug",sequentially in the following chapters Jnty a, u _utt.r ofconvenience.

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

r The dictionaly meaning ot evaruation is .deciding the varue of,-Technically, therelbre, it can be used .v"onyrnou.i, *ir, o-.i."i "po."r_sal or cost benefit anarlsis as many authors havi done. Hlwever, ttrepracdce in our country is to use the term in the conte", oipiog.u.rn."

already selected and being implemented.

4\PnRroruteNcB BuocntINc

Diogrom I

FIVE STAGESOF

PERFORMANCE BUDGETING

OBJECTIVES

EVALUATION

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

PERFORMANCEBUOGETING

CI{AprrR IV

OBJECTIVES I

OLt": r3lt stage of performance budgeting we are concernedwith clarifying in our minds the purposJs oi-puUitl^i"p".raitur"programmes and specifying them. These purposes may bequalitative or quantitative.The plrposes may be variously termed as functions, aims,goals, objectives, targets, norms, etc. One can keep arguingabout the terminology. However, we shall,

".-;;';. possibleuse "functions,, todemarcatethe area of operati;;, ;ui111r,, uod"goals" to deal with long_term purposes itr quantitative orqualitative terms, .,objectives"

to deal *itt pu.p*o, quantifiedas- far as possible, with reference to a tirne ,f*, ;,turg"tr,, torefer .to the quantitative purposes of each component oftheorganisation; and .,norms" to refer to standards J

"m"i.ory.The purposes are, therefore, spelt out io O....uriog order ofgenerality in terms of functions, aims or goals, "objectives,targets and norms. This. cannot be a on._tim. operation.Definition of purposes, their review to U" *o..- pr"cise, shouldbe a continuous process in order to bring about'greater ctarityand precision as time progresses and to secure continued rere-vance to the environment.

Sp-ecification ofgoals and objectives is only a necessary, nora sufficient, condition for the success of public ""f.oJitu."

pro-fluT.r.r. .The other stages of perforrnance budgeting we will:.^_o,::or:toC.

are equally important. But, the sicond genera_uon efiorts in performance budgeting particularly emphasisspecification of goals and objectives tecause, as sbmeone said,as much money can be wasted in doing a wrong tning emcienttyas in doing a right thing inefficiently.

, We shall now proceed to seek answers to the following ques-tions concerning the specification ofgoals and objectives. Whois responsible for their specificationi Wnut io".s uoO conflictsanse ln their specifcation? When is public expenditure a fitinstrument to reach the.specified gouio, ofj*liu"f How are

Onmcttvrs r

the goals and objectives of public expenditure programmes tobe relared to the organisations which implement them? What

are the criteria for defining the objectives of individual pro-

grammes so as to facilitate anaiysis of different alternatives and

selection of one of them? Finally, how to specify the objec-

tives 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 inadministration 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 con-

ceivable 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 itis unwise for the civil servant to pretend that there is a body oftheories 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

it. 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 makejoint, 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 unemploy-

ment, 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 thischange can be brought about within the specified time withthe minimum allocation of financial, physical and human

resources or, to be more practical, to suggest the quantitatively

45

46 PERFoRMANcE BuDcETrNc FoR Pr_ANNED DEvrr_opueNr

maximum change that can be brought about within the specifiedtime with the resources that can be mobilised during that period.Thus, what is attempted is harmonisation of tle desire forchange or developmeut, the time span and the availability ofresources- -It is the duty of the civil servant to provide theanalytical framework for this harmonisation and it is the dutvof the politician to define the degree, texture and fabric of'change that should be brought about keeping in view the timeaqd resource constraints. The relationship bitween the politi-cian and the civil servart in the context of development is,thus, functional in contrast to the traditional master_servantrelationship.

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 takinginto account the resource constraints since non_attainmentofchange to the desired extent cannot but recoil on the politi_cal leadership, This is not to suggest that resource constraintspointed out by the civil servant should be accepted without ques_tion. Sometimes, the constraints can themselves be modifiedthrough skilled operation of the political levers. But, again,the politician needs to be realistic about his capacity to operarethose levers.

Confict of goals ond objectir.esDef,nitition of goals and objectives should be done with sreat

care since specification ofone can conceal its inherent .oifli.twith others. One of the goals, for example, may be to promoredevelopment ola backward region. No exception can be takento such a goal. However, unless it js also simultaneouslyspecified that this development should narrow down,_ at leastnot widen, the disparities in incomes accruing to various groupswirhin the region it might well happen that the developnrentof the region aggravates the problem of disparities within theregion. The political and social tensions that this might createmay eventually conflict with the goal ofl economio developmentof the region itself.

The conflict can be between two objectives like growth andequitable distribution or overall growth and regional growth orbetween 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 inthe long run. The time dimension is important.

Let us now highlight some possible conflicls in the specifica-tion of goals and objectives in some sectors by way of illustra-tion. Let us take the agriculture sector first. It is not merely aproducing sector producing certain quantit!es of cereals, etc. butalso an employing sectorproviding sustenance to about 70 percent ofour people. lf, therefore. we specify the productionobjectives for this sector without harmonising them with the.employment objectives a conflict might arise between the twosets of objectives. It may well be that more employment canbe generated in agriculture sector only at the cost of moreproduction.

Where an integrated view is not taken, we may make themistake of assumrng that the agriculture sector will cater to a'smaller proportion, if not a smaller size, of the population,without specifying how the implied transfer of the balance popu-lation will be employed in the non-agriculture sectors. Notmerely that, we may fail to speli out the further consequencelike increased housing, drinking water and otlLer facilities theywiil require in their new locations This point deserved to be

brought because the induction ofonly 8 to 9 million householdsinto urban areas in the first twenty years of planned develop-ment without any concomitant steps to provide for such basic.amenities has aiready converted our towns and cities into vastslums. The consequences of any further unplanned transfer of'population from the agriculture to non-agriculture on urban:sectors are unimaginable.

It has been recognised that nearly half the number of people'living off the agriculture sector, ormore than 30 per cent ofthe total population, do not, on the basis of existing strategies.and techniques of production, derive incomes sufficient to meettheir basic requirements including, principally, food. In deter-mining 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 thetotal population being transferred to specified non'agriculture:sectors) and the pattern of incomes this sector would generate

ihave to be taken into account.

48 PERFoRMANoE BuocgrNc ron PlaNNro Drvrr.opturNr

Fuither, there can be a conffict between the productionobjectives themselves. The ultimate objectives of the agricul-ture sector is to provide adequate and balanced nutrition to thecitizens. The production objectives ofthis sector are, therefore,derived from the consumption objectives of the population.According to the .balanced diet' recommended by the IndianCouncil of Medical Research (1968) the average ,norm' is 2450calories and 74 grammes of protein per head pcr day. The con-tribution of different food items to this ,balanced diet' were pro-jected by the ICMR as below:

THE .BALANCED

Food item

CerealsPulsesVegetables: Leafy

Roots and tubersOthers

FruitsMilk and milk productsEggs, Fish and MeatFais and oilsSugar and jaggeryCalorie contentProtein content (gms)

Souncr: National Institute of(Hyderabad, 1971).

TABLE 2

DIET': AVAILABTLITy nNo RrqunrunNt(in grammes)

Balanced dietrequired

37664

116

61

69

40t89

38

3942

245074

Availabliity'(r970)

395

51

l718

1844

10812

1040

1945

49

Nutrition Diet Atlas of India

Another source compared the consumption of principalitems of food in India with consumption in other countries.(see Table 3).

It may be seen from the above data that our cereal consump-tion is highest among the countries compared and is higher tbaneven the standard provided in the balanced diet suggested byICMR. 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/l5thofthe quantity of milk yielded by cattle in .,developed,, count-

Oslscttvrs I

TABLE 3

Colqsr,laprtox oF PRrNcrpAL ITEMS oF FooD rNwrrH orHER CouNrnrss

Country Per capita daily consumption

@ms)

49

INDrA: A Covpenrsorq

Per capita in take\gms)

Sugai Milk Meat Calories Protein,

IndiaFranceWest GermanyJapanUKUSA

384 49219 94189 95

352 73

200 1,36

176 1,40

1,990 493,270 1033,180 832,470 773,170 873,330 99

SouRcE: ,ttdtistrcal Outline of India, 1978, Tata Consultancy ServicesLimited, Bombay.

ries and our catch of fish is only 1/l0th ofthe available fsh_And, how much does it cost to grow leafy vegetables in ourgardens in the consumption of which there is such a wide gap?At present, there is a good deal of snbstitution of cereals fornon.cereal foods due to non-ava ilability as well as higher pricesof these items. The question is whether they can be produced inadequate quantities and at reasonable prices so that such substi-tution as may be consideled undesirable by the nutrition.experts is avoided,

There is thus a conflict between the objectives for additionahproduction ofcereals and those for additional production of,non-cereal foods because resources, particularly budgetary"resources, will not be sufficient to achieve all of them at thesame time. Resources can be allocated and the conflict resolve&only with reference to higher level objectives in regard to con*sumption needs of the people.

The production objectives should thus be specified in respecrof 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 broadLdirection. If we did have this kind of broad prospective, maybe, 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.

116630

567137

592689

240185

28201294

50 PrnronueNcs BuncBrrNc FoR PLANNED DpvnloplrrNr

Let us now turn to the education sector. In respect of educa-tion one objective was clearly specified in the Constitutionwhich provided that the State shall endeavour to provide free.and compulsory education to children up to l4 years of age by1960. 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. Ofithese, only 80 million or about 60 per cent were enrolled inschools. Of those enrolled, the actual attendence in class onewas said to be only 70 per cent. The attendance in higherclasses was even less. According to one study only 30 per centout 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 hadcommitted to provide ltee and compulsory education up to theage 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. Onthequestion of funding education in general the Kothari Commis-.sion on Education ( 1966) recommended that education should,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 ofothers go down.

However, what we are concerned with is whether the goals

and objectives of the education sector have been clearly speltout in order that the limited financial resources allocated to theeducation 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 anover-riding objective and, hence, a first charge cn the lesources

allocated to the education sector. But, a typical State Govern-mgnl 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 thejbalance on higher education. [f we take into account the.resources allocated out ofthe Central Government budget for

Onlrcrrvrs r 51

higher eCucatton (channelled through bodies like the University

Gr-ants Commission) the relative proportion of resources allocated

to primary education would be even less' This paltern of alloca-

tion of resources does not conform to the objective so unambigu-

ously specified. One can modify the objective' One can add

other objectives. All that we are sqggesting is that whatever be

the objeciives they should be clearly spelt out keeping in view

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, economi-

cally weaker, sections' Since there is greater poverty in the

country side than in the towns one would expect allocation ofa 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 ofallocation 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

resolved by merely specifying all of them' Their inter se primacy

is of great importance. ln the example of regional develop-

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 goals" should have precedence over theother and to what extent.To^tatr<e another example, if supply of coarse cloth at cheaprates for the millions is an over-riding objective it must be sospecifled in the performance budget for the National TextileCorporation. This will lead .to acquiring

""A ,"_i"frlrg .particular set of machines designed to proiuc" "oa.." "fotn on

:. -us_ scale. If the objective is not so specified we cannotblame the corporation if rt acquires a different set of machineswhich will produce cloth of such quality and qu.aniity tt at islikely 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, ureal conflict between the objective of making profils and thesocial objective of clorhing the milions. If Goielnment oesiresthat {^he

-latter shourd get precedence over the former it shouldspecifically say so. Not merely that, it will have to state it as along-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 profitcan the Corporation forgo or how nuch loss can it incur to pro_duce cloth for the millions. Suppose the Corporation is able toproduce coarse cloth for the millions only by incurring a loss gfRs. 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 themto each other. It js true, as some say cynically, that consistencyis not a very great virtue; but, neither is inconsistency. ffreefforts,towards consistency will at least ensure that one objectiveis not defeated by another.

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

Suppose, for some reasons, consenEus on overall goals andobjectives could not be reached or there is reluctance to specifythem precisely. What do we do in performance budgeting? As

OwrcrtvEs I 53

discussed in the first chaptet, the pattern of allocation ofresources 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! orof any of the programmes with what the public expect the

overall goals and objectives to be,will become apparent. Thismay itself help the process of formulation of overall goals andobjectives. Thus, though specification 9f objectives shouldnormally be a "top down" procedure, a "bottom up"'procedurecan also help,

Is public etpendfture justif ed?

As mentioned earlier. Government has a number of instru-nents at its disposal to secure its objectives of planned develop-

ment. These include legal and administrative sanctions, price

and distribution controls, credit policy, direct and indirect taxes,subsidies, public expenditure and public investment. lt isnecessary, therefore, to examine a problem or developmentgoal carefully to decide which instrument or which combina-tion 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

a tax concession given, whereas the objective can be achievedor problem solved at lesser cost through other means. Forexample, where irrigation potential created by a project is notbeing fully utilised it is not necessarily because the extension

services are inadequate or the water rate is high. We may spend

more on extension services ,or lower the water rate but stillflnd that utilisation is not picking up. It may be found on fullerexamination that several other factors are responsible for notfi.rily utilising the irrigation potential, e.g. unremunerativeprices for the produce, lack of credit, lack of timely supply ofseeds 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 with-out any compensation except a token relief by way of remissionof land revenue. If therefore, irrigation potential is not beingutilised, or adequate fertilizer is not being applied, the reason

54 PERFoRMANcE BuDcETINc FoR PLANNED DrvrlopurNr

may well be lack of risk cover or insurance in case of cropfailure. If that be so, why spend more money from the budgeton extension services and,the like?

Ainong the various instruments availhble lor achievine thegoals and objectives ofplanned development, public .*p"ojit..r.involves the maximum drafr on public resources and should beselected 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. Theseare:

l. Since public expenditure is financed mainlv from resourcescollected through taxes, tbe first point to be noted is that apubltc expenditure programme is an alternative .to non4mpo_sition (or reduction) o.f tax of an equal amount. However, anexpenditure programme has administrative cost: non_imoosi_tion of tax has none. It should, rherefore, be undertakenonly if itcanbe established that the contr.ibution of. such airogramrne to the overall objectives is Iikely to be more thanwhat a non-imposition (or reduction) of an equal amount oftax can achieve.

2. It may well be that the effect of some expenditure itemis cancelled out by the effect of some tax revenue item. Fotexample, it is meaningless to levy customs and excise dutieson fertilizer and, simultaneously, mount an expenditure . pro-gramme for subsidised sale of fertilizers. ln such u .ur., itmakes sense to omit both of them and save the administrativecost.

3. Public expenditure services should not be subsiclised in-disoiminately. For example, people are generally prepared, ifthey are able, to pay for the health care service; they directlyreceive. If the Government introduces a general health serviceit is important to ensure that people will not be required tospend less than what they would have been willing and able to.pay. If this js not ensured, we c€n only finance the ser.vicethrough a general tax burden, which includes the duties includedin the prices we pay for kerosene, sugar, tea, coffee, razorblades, cloth, matches and footwear. Thus, if a well_to_doman, able and willing to pay for his health care, is not chargedor 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

))OBJECTIvES I

service through the excise duties' Thus a free or subsidised

;;il ;;;iliiu.. ,.*itt should be undertaken onlv if the

beneficiaries cannot do wlrnout it but are unable to pay for it'*;;;-il"tly' fublic cxpenditure on programmes which go to

t-;;;;; tle'productivity of human beings like educational

io.ifi i". shoul,il not be stretched too far' A case in point is the

""p*airor. on college and university education' Beyond a'

;;1;;, ;. benefit deiived bv the students is both specific and

sizeable and, hence, increases his own earning capacity"fhere'

i, rro ,"uroo why such education or other facilities should be'

highly subsidised. If these students (or their prospective emp-

i;;;6 "* not paying for their education, we are all paving for

iiinait..try. A morelustiflable course in such cases is to provide

.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' ri'*prnd.irrrn. Since public expendilure programmes are financed

by rfr" itp..ronal':they", there can be great waslage of public'

u.rd huna" national, resources in real terms' For example' ifwater is supplied free to our homes we will not be taking as

much care to minimise its use as we would'bave taken had the

water been charged. An interesting point to be noted here is tbat

if water is chargcd, not according to the actual volume used' but

at a flat rate there can, again, be a lot of wastage'' 5. Research and Development efort s thtough public expendi-

,urr'prosro^ rs should be financetl by the b7ertc1ari.ey Research

rnA a"*fopt.nt efforts by Government include^(a) exploring

the availability of real resources like prospecting for new mine-

rals, etc. (b) promoting research to improve the technology to

expioit the' iroved resources more efficiently' However' the

resultantbenefitsdonotalwaysaccrueonlylop'.rb|icauthori-ties. lf private enterprises make use of the new resources or

;;ild. new techn;logies, they must pay for benefits' Indeed'

o .o.. dynamic approach is to locate areas in which such

*p1"t"f.it ot ,.r.ui"h is promising and wotk out a scbeme of

noun.iog in which all the intending beneficiaries participate' A

."i""". una technology plan, and a design and development plan'

derived therefrom, are essential ingredients of this approach'--

6. Public expenditure programmes should induce' not dis'

56 PERFoRMANcE BuDcETrNc FoR PLANNED DrvrLopuENr

courage, private savings. The case ofgrant ofloans for construc_;tion of houses at subsidised iot...rt ,ui., o.;;;;;;" subsidiesillustrates this point. Large_scale commitment on tne part ofGovernment in these areas may substitute rather than promoteprivate savings. Before undertatingsu;h;.;;;;;;, we musrcarefully anaryse the criticar factors r.rpoorili. r- the row leverof !o_us]ns activity. The criticar f""i.r, ;;;;;;;bry, is theavailability of land, mainly.in u.Uun u.*r-Luilultty in ,urutareas 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 toland and house property that if a suitabl" lou." rli.-i, provided

people may make extra efforts to increase their personal savingsto take up the construction of house. This wlll increase thetotal 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 attemptshould, therefore, be ro limit public sector iutLy ro thatlevel as would still ensure maximum possible personal savings.

7. Tokenisnt should be ayoided. Many ;xpendrture pro_grammes, with sizeable administrative overheads, are taken upmerely to reflect Government's concern with some problem.Such schemes abound in the social services sector. Where theproblem is of such dimensions that it is not possible forGovernment to tackle it effectively within a reasonable periodof time keeping in view the likely resources available, it does notmake 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 removethe social constraints via the political process.

8. Public expenditure programmes have cost dynamics of their,own. Once a programme is taken up expenditure thereon mustincrease at a certain rate partly due to increase in prices andpartly because of the time scales of staf and the expandingbenefits being conferred on them. More important, the initalprogramme outlay would be determined on the basis of a certainservice to be rendered to or in respect of a certain level of phy-sical parameter like the number of children likely to attendschools, number ofpatients likely to attend a hospital or numberof vehicles for which traffic arrangements are to be made*

OBJEC rIvEs I

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 pro-gramme. This cannot be considered either extravagant orunproductive. 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 toimpossible to give up the programme. No body can be retren-ched. We have not even been able to shift men from one

completed irrigation proj€ct to another. Thus, public expendi-ture programmes can be altered in the short run, withoutentailing wastes, only at a very narrow margin. Utmost thotlght:should, therefore, be given before undertaking new commit-ments and new progJammes.

10. Public investments already made tend to be neglected. \Yehave 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 theirinternal 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 publicexpenditure is the bes[ instrument to tackle the problem at handor reach the goal in view.

)t

CH APTER V

OBJECTIVES II

SprclrrclrroN oF GoALs and objectives as discussed in the earlierchapter is essentially a part of the ,,planning" function. Thisdoes not mean that a centralised body like the Planning Commis-sion 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 decentra-lised planning function. This rvill strengthen rather than weaken.the planning process. Performance budgeting as we are discussingis thus complementary to planning and provides an effectivefeedback to planning itselt.

Orgonrsat ions and ohjecIi'tesIn the complex modern world, Government, as indeed other

segments of society, needs to be organised into smaller, nore,manageable units. oalled organisations Administration ormanagement is the process through uhich the activities of eachorganisation are guided to achieve the purposes for wbich itexists or is created. lf objectives are specified without takinginto account the organisational set-up, there will only be con-fusion in the first instance and much avoidable time-lag in taking.up the programmes later.

Thus, purposes or objectives of public expenditure pro-grammes should be specified with reference to the organisations.which are to implement them. If an organisation has theresponsibility for more than one programme the total situationshould be considered and the objectives specified delineatingthe role of the .organisation in respect of each of the pro-grammes.

For an organisation to be successful its objectives should beclearly known to all the people working within the organisation.The more clearly the members of an organisation understandits objectives and the more firmly they become committed tothe objectives the more effective they will be. This effectiveness

OBJEcrrvEs II

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

ineffective, therefore, one must 'look into how well its objectives

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 theobjectives 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 administra-tion. But, another kind of commitment is necessary in Govern-

ment organisations. The people whom the organisation intends

to serve, whether they are farmers being served by a-n irrigationproject 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 organisa-

tion 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 theobjectives. i

Tbere is always a certain inertia in the matter ofdefining thepurposes of public expenditure programmes, Very often theyare not defined. If defined, they lack in clarity and precision.

But, the worst that happens is that organisations implementingthem 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 propor-tion of thei( time. Very soon the limited purposes become the

actual goals for the groups and individuals concerned ard the

59

60 PrnronueNcr BuocgrrNc pon prexNro DEvaopnrnr

original purposes for which the organisation exists arejust for_gotten. Sometimes a further perversion takes place; goals areparaded merely to serve as a facade for the unstated and se.llisbgoals of the people controlling the organisation. ini.r.r, grolrp,are formed; and their main pre-occupation becomes preservinga:rd building the organisation itself rather than helping it servethe original puTposes. The organisation then degenerates intoa "bureaucracy" (pejoratively defined as the ,.pathology oflarge organ isations,,). It becomes inward_lookini unless thediscipline

,of periodical spring,cleaning of goals aid ob3ectives

is imposed upon it.There is yet another, and more unfortunate, .,bureaucratic,,

tendelcy. It arises not from lack of commilment to objectivesbut because of it! In the ..grand system,', that is Governmenr,often, each element tends to function unmindful of the impact ofits activities on other elements. An organisation connected withthe beautification of a lown may do an extraordinarily thoroughjob of clearing the slums with the utmost zeal and lnthusiasmbut without realising that another organisation connected withthe rehabilitation of the families displaced is not correspondinglygeared to discharge its f,unction. In the jargon of economics andrn^auagement this is ..suboptimisation,,_improving

the efi ciencyof a part without contributing to efficiency of the whole. Whilethis is essentially a matter for coordination in tbe l.mplementa_tion of programmes, an essential pre-requisite for such coordina-tionis the specification ofobjectives in an inlegrated mannerso that the objectives of diferent organisations are properlyrelated to each other.

O bj ect ives of individual prbgramme sAs noted earlier, public expenditure is nothing but the

common expenditure on behalfl of all the citizens for commongood. At the same time every public expenditure programme,besides serving the particular common purpose, gives rise tocertain incomes. For example, a hoarding put up to give publi_city to a small savings campaign does serve ih" .o*rrJn purposeof promoting savings. But it aldo provides incomes to the sellerof tinsheet, the seller of paint, the painter himself and the agencywhich 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 byeach public expenditure programme conforms to the broaderobjectives of Government in regard to income distribution. Thisdoes not always meiin giving up certain programmes where theresultant income distribution is unfavourable. For example,the objective of defending the frontiers ofthe country cannot becompromised no matter what the resultant income distributionis. But, it does mean that the programmes should be soformulated that the income distribution becomes as favourableas possible. For example, it is possible to put across the samemessage regarding small savings or family planning eitherthrough a T.V. network or through film shows or through aseries ofperformances in folk arts like tamasha or burra katha.The three alternatives give rise to three different patterns ofincome. The first criterion for defining the objective ofanindividual public expenditure programme is thus its havingimpact on income distribution.

It follows lhat the objectives of public expenditure pro.grammes in the fields of production and distribution of commo-dities, such as grant of fertilizer subsidy, should take intoaccount the costs of production and the likely behaviour of theproducers or distributois in passing on the benefit to theconsumers. In the case of fertilizer subsidy, for example, itwill not be adequate to say that the objective is to producemore fogdgrains because the expenditure has the impact ofaltering tbe incomes pattern of the farmers and the consumers.It is not a question of being pro-farmer or anti-farmer, but ofmakirg explicit the objectives in terms of the impact on incomedistribution behind the public e:,penditure programmes.

Further, while it is true that such programmes have the efectof increasing production through the incentive of larger profitsto farmers, the manner of giving such incentives can sometimesbe counter-productive. It may happen that the incentive maygive rise to expectation of further incentives rather than inducethe recepients to produce more. The second criterion, therefore,is to ar.oid giving the impression, as unfortunately we seem tohave created at places, that Government will do everything.

The third criterion is to recognise the complementarity ofpublic and private expenditures. Construction of canal distribu-tion systems in irrigation projects is a case in point. Before

62 PrnronueNcn Buoctrrxc Eon PleNNro Dgvrroprr,rtNt

Independence, Governncent irrigation systems provided forconstruction of canals up to a discharge capacity of 5 cusecs(cubic feet per second). Construction and maintenance ofwatercourses 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, theutilisation of irrigation has not picked up in certain irrigationprojects as field channels necessary to convey water from watercourses to fields have not been constructed by the farmers. Weare not discussing here the justification for a particular Govern-ment decision. We are on the limited point that in defining theobjective for the irrigation project it should be brought out that(a) Government would provide irrigation for a specified area andconvey water up to a w.Iter course of 5 cusecs (or 2 cusecs or Icusec as the case rnay be) capacity and (b) the complementaryobjective ofconveying water beyond that point would be achiev-

ed through programmes to be taken up by the farmers and thiswoukl be ensured through adoplion ofspecifled legal, adminis-trative, extension, liscal (tax/subsidy) or economic (price) instru-rlents.

In defining the objectives of individual progranlmes theirconflict with the objectives of the individual households orcitizens should also be taken into account. This is the fourthcriterion. If the objective of private household expenditure P

on any function, say, health, conflict with the objective ofpublic expenditure Q and, as a result, there is a mutuallycancelling effect the econonly does not derive the full benefit ofpublic 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 requir-ed to be put in, in order to achieve the objective of the publicexpenditure programme. For example, a public expenditureprogramme to construct cement tankers for collecting refuge

at street corners conflicts raith the traditional habit of hotue-

Osrrcrrvrs rr

wives of throwing the refuge out of the window. Little purpose

will be achieved in constructing such dustbins unless it is

recognised at the outset that the programme will be successful

only if the housewives can be persuaded (or compelled, if thatwere pcssible) to deposit the refuge in the dustbins. Such a.delineation of mutual responsibility is necessary for the success-

fui implementation of programmes.The fifth criterion is that the objectives for individual pro-

grammes should be neither too broad nor too specific. Suchbroad terms as "to promote economic development", "to se cureisocial justice", or "to serve the poor" are not good enough as.objectives. At the same time we have to guard against theopposite danger ofspecifying the objectives in terms of means

rather than ends. For example, "to combat malaria" is notprecise enough as an objective to facilitate formulation of pro-grammes; 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 ofpreventing the disease. Insecticide y may not be the best avail'able for the purpose. Quantity x may not be optimum quantitywith reference to the likely volume of incidence. An objectivemust serve the purpose of stimulating the search for variousalternatives, evaluation of relative "beneflts" and "costs". Tooararrow a definition particularly specifying the means, willpreclude the consideration of other, possibly cheaper, alter-natives ofachieviag the same objective. In the present case,

one could start with a definition like "to reduce the incidenceof malaria from p number of cases in 1000 population to qnumber 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 levelobjective (like providing balanced nutrition 1o population). But,-we cannot define the objective of every activily as the highestlevel objective because operationally every link in the chain ofactivities must be programrned separately. Thus, we cannotspecify the objective of the programme of distribution of seed

as balanced nutrition.

63

64 Prnronua.ucn Buocnrnc ron Plextro DnvrlopueNr

The seventh criterion is that objectives should be realistic andattainable. Too ambitious an objective, especially where thepolitical leadership becomes publiciy committed to it, can onlylead to window dressing of programmes, false reporting onachievements and, eventuallv, general disillusionment when theprogrammes fail to have the desired impact.

The last, but not the least important, criterion is that theobjectives should be capable of being evaluated to determinethe success or failure of programmes. Collection of data forevaluation costs money. The objectives should not be so specifi-ed that it becomes impossible or prohlbitively costly to evaluatetheir 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 overa period of time. For example, one ofthe qualitative objectives.of a telephone service is to provide a disturbance-free telephoneinstrument to the subscriber. But, the number of occasiols onwhich the subscriber gets the disturbance and the number of'subscribers who make such complaints over a period of timeclearly quantify this objective which can be measured andevaluated. Similarly, prompt attention by the doctor in theout-patient department may appear to be a qualitative objectiveof a health scheme since the time taken by the doctor must varyfrom patient to patient. But, over a period oftime the qualityof service can be quantified by computing the average waitingtime of the patient through systematic collection of data orsamplq surveys. The objective should be specified in terms ofthe 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 objectivesshould 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 annualbudgets. Changes in economic or social conditions, changes intechnology, or changes in inter se priorities arising from internalor external political developments must lead to rethinking onproblems 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 objectivesIn 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 unitcost 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 andconveyance 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 develop-

ment of a State. The volume of electricity generated and suppli-ed determines the level of industrial (and partly agricultura}.activity in the State. More important, the high cost of electri-city will result in higher cost ofthe output inindustry and,

alriculture which will have multiplier effect on the costs ofvarious capital and consumer goods. It is thus important thatmaximum electricity is generated and supplied at the minimumcost possible.

The Electricity Board in an imaginary state has an optimum'generating capacity of 5000 million units (kilowatt hours). Thegenerating 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 tosell 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

losses cannot be brought down to, say, 20 per cent. This willmean that the Board will be able to sell 2800 million units instead'of 2100 million units, an increase of 33$ per cent withoutany additional investment in generating capacity.

This is only a hypothetical case. In actual practice, the gaintrray not be so substantial. Even then, it will be sizeable enoughto take the trouble of examining the eftciencies in the workingof the Electricity Board once a year. Thus, when the StateGovernment wants to augment its resources by cutting downthe losses ofthe Electricity Board, it should sit with the Boardand determine what efficiency improvements are possible. Thisis not enough. Government should obtain periodical repbrtsfrom the Board, say, on a quarterly basis in the foilowingsimple format:

This year,slevel

Efficiency in generation 60%Transmission loss 30%

Projected Actual levelIevel for qchieyed uptothe ext the quarter

j'ear70%20%

The other possibility before the State Government for cuttingdown the losses oF the Electricity Board is to increase.the electri-city tariff. This is re:illy a'.soft" option, not a ,,hard" one assome people believe. Increase in tariff will benefit the Boardand the Government but the burden is borne by solneone elsein the economy. Who are the beneficiaries of the present lowerrate and whether they could be asked to pay more withoutdisturbing their economies and their contribution to growth ofthe 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 inrprovethe efficiency.

.Efficiency objectives in the agriculture sectorApart from the production and employment. objectives

djscussed earlier there are certain efficiency objectives whichcan be set for the agriculture sector. lndeer,l, attainment ofsome of these efficiency objectives can help in faster attainment

"of both the production and employment objectives. We will

Onrecrtves tr

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" farmertoday has one hectare of land distributed into 5 parcels of 0'2hectare each located at five different places.

According to the State-wise data furnished by Dr. Minhasparcelisation was high (the average number ofparcels in 1960'61

vas 7 to 8) in Orissa, West Bengal, Bihar and Uttar Pradesh' Itmay 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 inmanaging 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 wettedperimeter rather than the area. Thus the 1655ss will be higherifthe 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 con-

solidation 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,

67

68 PERToRMANcE BuocrrrNc pon prANNro DevrropnrNr

some . of the land may not be cultivable during the mainkharif season as it may be water-logged; but may become culti_vable during the rabi and summer seasons, Further, some areasmay be "reclaimed" for cultivation through drainage and otherprogrammes. The gross cuhivable area is, thus, estimated atabout 200 million hectares, counting each area as many timesas the number of crops that can be raised. Against this, thegrass cultivated area reported is about 165 million hectares,Land utilisation is thus about 82.5 per cent. We can ill affordthe shortfall of even this ordbr when 30 per cent of our peopleare starvirg. Further, on a base production of about l l5 milliontonnes of foodgrains, a 10 per cent utilisation of the gross culti_vable area alone can result in additional production of morethan l0 million tonnes. The objective should. therefore, be toensure utilisation of all cultivable land.. And this needs littlecapital investment!

The importance of this efficiency objective in respect ofirrigated land can be gauged from the fact that the averageyields in irrigated areas are nearly twice the average yieids inareas 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 sertargets for land utilisation, State by State, district by district,block by block and even village by village for each crop seasonseparately for irrigated and unirrigated lands.

3. Efficiency in water use. -Ihe area that can be suppliedirrigation facilities deperds on a) the availability of water atsource, b) efficiency in water use, and c) cropping paftern.While there may be no control over (a), the latter two factorscan be controlled. Efficiency in water use is determined by thearea irrigated per unit quantity of water. Depending on thesoil conditions, the optimum .,duty" or ,.delta" (area irrigatedwith reference to water used) can be assessed fairlv reliablv.Sereral field studies have shown that there is great *ur,ug" ofwater due to poor water management. Specific objectives inregard to efficiency in water useunder each projeci and eachdistribution system are, therefore, required to be specified.

As mentioned earlier, public expenditure may not be themost efective instrument to achieve all objectives. ln any case,its efi-ectiveness may be enhanced if it is used conjointly with

Osrrcrtvrs u 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 tax-

ing land that is not utilised or a combination of both' Simi-

laily, 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 ofholdings). 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 ofiand (the landless rural households and the marginal farming

households number 45 million) there can be any under utili-

sation of land ? Can we formulate programmes ln sucn a

lnanner that they simultaneously secure our production, em-

ployment 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 farm-

in'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 arrange-

ments are properly tiedup, there can then be no under-utilisa-

tion of land oi irrigation facilities because these marginal far-

mers cannot afford such in.difference. The layout of the land

in the cornmand area may, therefore, be arranged with refe-

nence 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 simultanc-

ously 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 ofAgriculure, 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 almsis all that we ar.e capable of doing_most public expenditureprogrammes concerning weaker sections have been nothingbetter than that-let us first line up the niendicants along thecanal banks.

Object ives of public enterprisesPublic Enterprises are now at the centre of the country,s

economic activity. Their revenue budgets aggragate to Rs.15,000 crores, as much as the revenue budget of the CentralGovernment. The aims and goals of public enterprises may bestated as follorvs:

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

regional imbalances;iii. 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; andvii. to give, censistent with above goals, reasonable returns on

the investment made.

Since profit is mentioned last, it does not mean rhat thefinancial working of public enterprises is nobody,s concem. Ifa public enterprise makes adequate surplus it goes to the bene_fit of Government budget either in the shape of dividend or inreducing the demand for further funds for renovation, expan_sion, etc. If a loss is made, on the other hand, it will have tobe met by Government budget sooner or later. If theentorprise continues to make losses it will eventually eat up thcpublic money invested in it as share capital or loans. In thissense, we all have a stake in the efficient working and profi-tability of public enterprises.

However, since public enterprises are set up as part of theplanning process, profit is not the only index of efficiency.When product lines and prices are predetermined externallyprofit is not solely determined by the actions of management orefficiency 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

engineering and technology' Rarely has a challenge been left

unanswered in fields so diverse as making a missile and pro'

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 objec-

tives. The product objectives specify the nature and specln-

cations 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'

foreign exchange, labour, natural resources to be used in pro-

ducing the desired outputs at the specified costs' Efficiency

objectives specify the process and other efficiencies in making

use ofthe aisets and other resou{ces placed at the disposal ofthe enterprise. R & D objectives specify the present state oftechnology 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, how-

ever, 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 pro-

cess is inevitable. Above all, the responsibility of the enter-

prise itself in independentiy working out and suggesting

72 Panponu,qNcn ButcrrrNc Eon plANNEo DsvnroprlrNr

appropriate product objectives can never be over_emphasised."This kind of feedback is essential for realistic planning.An enterprise may make a loss, among other reasons, when

its product price is fixed low or it is working ineffciently. Ifformer be the case, the planning authority must take note ofand suggest suitable legal/administrative/fiscal action tocorrect the plice situation. For example, if the export price ofiron ore is fixed low, for whatever reason, the NationalMineral Development Corporation uill make losses no matterhow efficiently it is managed. While the effcient managers getdemoralised, inability to correct such imbalances or at least torecognise them while setting the cost objectives for the enterprisewill provide a perfect alibi for the ineficient managers. Thesame situation prevails when an enterprise is compelled to buyits 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 intooutputs. And,, it should not be forgotten that losses incurred bypublic enterprises are truly in the nature of subsidies, to eitherthe buyers of the products or the sellers ofthe inputs, from outof public funds.

While losses made by enterprises usually attract some arren-tion and lead to pressures to remove the demand/pricedeficiencies in planning, profits made by them can lull us intoa 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 isable to borrow funds from the market), it means that either it' is able to sell its products at unduly high prices which mustsurely be efecting tbe firms/individuals who are buying theproducts 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 andrservices to the enterprise. Where profits made by a public,enterprise are not the result of genuinely high standards ofefrciency and productivity, their true character is a concealedtax on the customers or suppliers as the case may be. Thus,unless it be a matter of deliberate policy to tax the concernedfirms/individuals, Government cannot pgrmit the enterprise toexploit them. Planning authorities must intervene to correct

Oslrcrtvrs t 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 Govern-

ment 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 work-

ing 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 oftheannual 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 enter-

prises should also be on a long-1erm basis. In fact, it is desir-

able 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 buildingbiocks 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 ofmaximising 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, per-

formance 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

prises should take into account (a) the current trends in thsefficiency of enterprises producing the same or similar goods andservices in India and abroad and (b) the past performance of theenterprise 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 enterpriseor Government to fix low standards on the Dlea of beinsrea listic.

Performance budgeting sysrem with its ernphasis on explicitspecification 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 mightbe 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, en-able them to identify rhe likely shortfalls in the utilisation of'cap:.city and the levels of efficiency which they hope to reach inrespect 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 removebottlenecks and deficiencies, to correct demand and price de-ficiencies in planning, tci plan for optimum utilisation of nationalresources-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, andeach unit for the forthcoming year. On-going activities, neglectedhitherto, deserve as much emphasis as activilies that necessitateinvestments for the future. lndeed, future investments. shouldfirst be made to remove the bottlenecks in making fuller use of'the existing investments.

Specification of objectives as discussed in tbis and theprevious chapter often require detailed cost-benefit analysis.As observed earlier, the diff'erent stages of performance budget-ing cannot be considered in watertight compartments and, cost-benefit analysis, which we will be discussing in the next twochapters is itself a kind offeedback to specifying objectives.

ANALYSIS II I lJ

(in rupees)

Proieci IL

1,06,700r

21,200,

Project A

60,80017,2A0

Capital employedValue added per annur4Cumulative pr€sent value factor at

10 per cent discount rate (fromthe second table in Appendix 4)

Present value of value addedover years

VACE*

xto denote that the ratio

4.87 7.61(for 7 years) (for 15 years)

83,764 1,61,332.131.8% 1s1.2ya,

is worked out on cumulative value added.

the net present value, ignoring the distinction between capitaland revenue accounts, has some significance only if we arecomparing the values across the projects or sectors. If the ideais merely to select one of the available alternatives to achievean output determined by the Plan in a specified sector orindustry in a predetermined time frame, a percentage or aratio adequately serves the purpose. It is much easier to talkto and convince people in terms of a ratio. The ratio which iswell understood by every one is that ofnet revenue benefit orprofit to capital. We have only pleaded that the net revenuebenefit and the capitai should be worked out from the point ofview of the community. Thus, if we discount the future costs.and benefits for the purpose of applying our criterjon, we slallrdo so separately for the .value added'or the numeratoi and,_if need be (where project construction is spread over a numberof years), for the denominator and still apply the VACEcriterion as a ratio, as illustrated above.

For the interested reader a word of explanation on thedistinction between the ,,internal rate of return (IRR)', (seeAppendix 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 compar-able with the IRR because both are interest rates on moneycapital. 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 benefitderived by the entire community, not merely the investors of-capital. Hence, the two are not comparable.

nl4 PERFoRMANcE BuDcETrNc FoR PLANNED Drvrroplrrxr

Discounting plays a crucial role in the choice among alter-native projects only if the projects have very diflerent Iife spans."(ln the above example, Project B would not have becomepreferable if it yielded benefits over l2years instead of 15years). 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, assumptionsregarding uneven spread of benefits, which are common in textbook illustrations, are not very realistic in practical life.

It may be useful to recapitulate at this stage the swingingfortunes of the two alternative projects, A and B, as rve deve-loped the criterion step by step.

Project A Project B

l. When the ROI criterion of tho private sector is used:

-4ry- ,, .o., 6'@n2o'ooo '-'"" ffi' tsoT

2- When Value Added is compared with Capital Employed:17.000 22.v _ r., ,",so$5: :+07 eo,ooo--''"

3. When Value Added is corrected for its impact on income distribution:17.200

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

4. When Capital Employed is corrected for scarcity of capital and foreignexchange:

17.200 21.a0_,o o.,60"800:

26'5 'i17ur6- tt'v7"

-5. When Value Added by the Project ov:r its life span is taken intoaccount:

83,764 "^_ ^^, 1,61,332

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 regard-ingthe demand for the product, the price adopted for valuingthe output, the life span over which the proiect is expected toyield the output. Equally. it is necessary for the PlanningCommission to prepare explicit guidelines on the correcriohfactors to be applied for achieving the income distribution

"objcctives, on shadow pdces to be adopted for conserving the

Auar-vstg n

use of scarce inpuls like capital, foreign exchange and, whereappropriate, other commodities and the discount rates to beused. These are not matters to be left to the analyst becausethere is no known methodolcgy of cost benefit analysis whichcan subsume all these within itself.

,S hadow p r ic e i fo r fo re i gn e xchangeTo conclude our discussion of the selection criterion one

further point needs to be made. Where a shadow price is fxedfor foreign exchange a suitable adjustment is necessary in the'revenue' account also. Thus, if there is a net outgo of foreignexchange (the expenditure in foreign exchange being more thanthe earnings) an amount worked out on the basis of the differ-ence between shadow price and unity is required to be deductedfrom the value added by thc project. On the other hand, ifthere is a net inflow of foreign exchange due to the project asimilar amount is required to be added to the value added bythe project. This is independent of the exercise ofvaluing thebenefit or output of the project on c.i.f. ot' f.o.b. basis, as theoase 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 exchangewith the following data pertaining to an import substitutionproject (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.wagesinterestdepr€ciation

The raw-materials include imported raw materia,s valued at Rs.5crores. 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 centpremium).

115

50.0025.00' to.oo

6.004100

5.00

116 PrnronlraNcE BUDGETTNG FoR PLANNED Dsvrl-opr4rNr

CnI.cur.lrtoN or VACE (wrrHour sHADow pRrcEs)

VALUE ADDBD BY THE PRoJEcT'

.R s. crzresValue of the product

(at cost) 25.00 Wages-LeJ.r Raw materials, etc. (10.00) Interest,Ler,r Depreciation (5.00)

TorAL 10.00

Capital employed by the project: Rs.for which no details are given).

50.00 crores (ignoring other items

Rs. trores

6.004.00

10.00

10.00vAcE:5 o:20.0%

CALcuLArroN oF VACE (wrrn sn.nrow rnrcrs)VALUE ADDED BY THE PRoJECT

Value of the productr 30.00 Wages.Less raw materials, etc.3 (12.50) Interest.Less depreciation (5.00) Net benefit due to

earning foreignTorAL 12.50

Capital entployed by the project: Rs, 65 croress

No le5:1 c.i.f. value of the product (Rs. 20 crores) plus 50 per cent premiumfor foreign exchange.

I cost of raw materials (Rs. 10 crores) plus 50 per cent additional costfor imported raw materials (Rs. 5.00 crores).

e capital cost of the project (Rs. 50 erores) plrs 50 per cent additionalcost for imported equipment (Rs. 30 crores)

. vACr -## : D.z%

The net benefit due to earning foreign exchange (Rs. 2.50 cro-res) on revenue account reflects the excess of social benefit overits market price, i.e. the official exchange rate. In respect ofthecapital costs, the choice often is betwe--n importing equipmentor substituting with indigenous equipment at higher cost. Withthe shadow price for foreign exchange frxed at 1.5, it paysto substitute imported equipment costing Rs. 30 crores inforeign exchange if the indigenous equipment costs less thanRs. 45 crores because, up to that price level, capital employedwith indigenous equipment will be less than that with importedequipment on the basis of shadow price for foreign exchange.

6.004.00

exchange 2.5012.50

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 notas if, in the absence of a shadow price, a decision to substitute

imports is 'neutral' to the value of foreign exchange. Forexample, if we decide to substilute imported equipment withc.i.f. value of Rs. 30 crores with indigenous equipment costingRs. 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 opport-unity cost/benefit of foreign exchange is twice its official,exchange rate. If we offer such a high premium we may wellbe able to earn moro foreign exchange by exporting or irnpottsubstituting 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 foreignexchange is more than its availability at the ofrcial exchange

rate.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 fromthe point of view of fficiency in the economy because the

VACE ratio with shadow price is less than the VACE ratiowithout 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 self-

reliance, 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; other-wise, reject. The criterion can be applied at any level of"decision making.

Ifthe planners are reluctant to fix 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 bejustified if the shadow price is 1.56 or above, i.e. only with such

a premium on foreign exchange it will be worthwhile taking upthe 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 betraycomplete lack of faith in decentralised decision making.

The advantage of fixing a shadow price, apart from helpingto decentralise decision making, is that with a sufficiently highshadow price it should be possible to bring into play a marketmechanism to substitute for some of the more cumberson oadministrative procedures .to 'control' or .arlocate' foreignexchange. This presupposes, as mentioned earlier, a comple-mentary tax/subsidy mechanism in respect of the privale sector,

ImplemeitationWe should not minimise the conceptual difficulties involved

in defining the costs and benefits, or the computational difficul-ties involved in measuring and attaching value to them. Wecannot also ignore the cost involved in collecting and analysingthe data. Any sizeable effort or expenditure on this will beworthwhile only ifthere is a reasonable chance ofthe analysisdetermining the fate ofor substantially altering the content ofthe programme. If those in power are committed to a particularprogramme to be implemented in a particular fashion, there isno point in collecting and analysing data for window-dressingpurposes. This isa question of basic honesty ofpurpose andintellectual integrity.

Some of the public expenditure programmes may not givethe desired level ofbenefits or achieve the desired objective ofa more equitable income distribution, but it may be necessaryto take them up because of their linkages with otherprogrammes. In such cases, programmes should be groupedinto appropriate packages for purposes ofanalysis. The moremanageable such packages the better will be the quality ofanalysis and, indeed, their management.

In some cases, we may be considering replacement, additionor alteration to existing production capacity. In such cases wedo not make cost.benefit analysis for the entire project, Theanalysis is to be confined to the additional or incrementalbenefits, because only the question of additional investment i$under consideralion.

Likewise, in some sectors many input programmes will beinvolved. In agriculture, for example, different types ofirriga-tion, 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 invest-

ments in one or more of these input programmes. If we are

considering a number of alternative schemes, we have to workout 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 toselect the one which requires the least investment. It followsthat 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 begin-

ning. 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 timeof 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 inrespect 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 isperiodical spring-cleaning. Certain selected programmes fromamong the existing ones can be taken for in-depth anaiysis

every year. In the United Kingdom, for example, they under-

take Programme Analysis and Review (PAR) of seiected pro-grammes 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, thata programme should be given up, it can only be ..phased out',gradually, just as every new programmg has a take off pericdof its own.

Creating the right environment and finding the data base forsuch analysis will take some time. Improriements can comeonly over a period of time although one must hasten to add,that since the pay-off is likely to be great (much more in deve-loping countries than in developed countries) it will not beadvisable to be too slow in making progress.

Last, but not the least important, cost_benefit analysis shouldpromote decentralised decision making. lndeed, this is thejustification for using cost-benefit analysis as an adjunct toplanning process. Once the parameters regarding 1) the nature.and extent ofcosts and benefits that should be taken into account,2) the methodology to be used for their varuation especially forfixing the prices ofthe outputs, 3) the shadow pricis. ifanv tobe used,4) the weights to .be attached to incomes u"".uing todifereht income groups, and 5) the need for and the method of,discounting the costs and benefits are laid down centrally by'different Central Departments. State Governments, autonomousunoertakings and local bcdies can take the decisions regarding'allocation of resources at their disposal to achier,e the overalland sectoral objectives set by the planning Commission. Thisvill 1) reduce the work load on the planning Commissiondeaving 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.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 madesquarely accountable.

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 toachieve its objectives. Production ofcloth in atextile mill, forexample, 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' Inrelation 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 pur-

pose. All the component activities of a progamme are, thus,

interdependent.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. The activity can be identified with a particular wingorunit of the organisation.

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.

In the terminology of management accountancy, differentactivities may be identified with differenr ,,responsibili ty centres".However, the concept of responsibility centre ."l"ounr to.activities classification is that it is identified with a managerialtask in its totality. Identification of relevant costs, revenues orprofit is subsidiary to the task itself. ln other words, thepoints at which costs are incurred or revenues earned shouldnot be the sole guiding factor for determining the activityclassification. Also, in the process ofevolving an activity classifi-cation, it rnay become necessary to remodel the payment andaccounting arrangements in order that the accounting system ismore closely aligned with the managerial tasks.

Sometimes, however, an activity classification is more amatter 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 thedeta.iled pro"..rdr in the spinning department ,u"h u, blowing,carding, coprbing, drawing, etc. as activities contributing to theprog.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 theyare treated as separate programmes. And, when we are con_sidering the plethora of public expenditure programmes under-taken by Government there should be some way of arrangingthem in a logical and orderly manner. It is, therefore, necessaryto evolve a classification in a hierarcbical arrangement buildingup 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 ofGovernment, therefore, is to evblve a functional classifcationby

CresstrtcetloN 123

functions and programm es, a iunction being defined as a major

segment of .the total organised effort of Governnient such as

po'iice, education or agriculture' Thus, a function comprises a

number of programmes even as a programme is broken up into

a number of activities.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 ofcost-

benefil 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'

therefore, to evolve a functional classification which wiil permit

allocation of resoutces by Colernment, the Executive and the

Legislature, on the basis of certain broad value judgements' Itshould permit a "town planning" approach to resource alloca-

tion, 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 functions or programmes with possible "trade off" within the

same allocation block, For exanple, if we spend more resources

on prevention of diseases we need eventually spend less on

curing the diseases, Again, for preventing the diseases we can

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

-abroad 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 necessaryto decide on the inter se primacy of the different objectivesand classify a programme with reference to its primary objective.It sometimes happens that more than one proirurnrn. is takenup to achieve the same objective. This is undesirable for thissimple reason that we wi.ll not, then, know which programme iscontributing 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 thoseefforts also even though public expenditure may not be incurredon them highlight the totality of effort involved in achieving thatobjective.

Finally, the classification should be operational. It is undesir-able to a programme classfication which is theoreticaliy soundbut which will necessitate (a) extensive restructuring of organisa-tions, (b) extensive reshuffiing of personnel, or (c) extenstveretabulation of accounting data to arrive at the cosis of oro-grammes or other performance data.

A new classffication in IndiaThe considerations mentioned above are, at times, mutually

conflicting. A certain judgement is involved in deciding on theactual classification. Further, a specific problem faced in ourcountry was that the Planning Commission adopted its ownclassification for plan programmes, while the budgeis were baseclon the traditional accounting classification which remainedunchanged for nearly hundred years, barring some amplificationmade in 1962 and some minor changes from time to time,Under such an arrangement, extensive reclassification ofthebudget heads was necessary even to arrive at the outlay fixedfor a plan programme. In such a situation it was almost impossi_ble to keep a watch on the progress of expenditure on vanousplan programmes.

On the recommendation of Administrative Reforms Comm-ission, the task of evolving a common classification lbr thePlan and the Budget was entrusted in March 1969 to a jointteam of officers representing the Comptroller and AuditorGeneral 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 classifcationsevolved, on a selective basis, by the various Central and State

Government Departments as part of their eflorts to introduceperformance budgeting to which Government of India became

committed in i968. The Team held extensive discussions withthe officials of the Central and State Departments in order toevoive a uniform classification as it recognised that, while theclassification 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 fromthe financial year 7974-75, the first year of the Fifth Five-YearPlan.

That it could be smoothly and successfully adopted withinabout a year of the submission of the Team's Report was in nosmall measure due to the democratic approach followed by theTeam. The point is made here not for any self-glorification butto emphasise that for efectively implementing any adminisha-tive reform, commitment and leadership at the top shouid be

matched by understanding and involvement down the line.Incidentally, by coincidence, the Central Government of theU.K. also revised their budgetary classification from the year1974-75. They did not have any problem of coordinating withState Governments. (The Local Authorities were making theirown efforts separately.) Considering the mammoth task we hadundertaken in our country, the comparative outcome gives usreason to feel gratified.

The basic attempt in the new classification was to transformthe traditional accounting classification based on tbe nalureofexpenditure, which facilitated itemised control, to one basedon the purpose of expenditure to factilitate its linking with theobjectives of Government.

The Team evolved a hierarcbical five-tier classification forall Government transactions comprising (1) Sectors, (2)Major Heads, (3) Minor Heads, (4) Sub.heads, and (5) DetailedHeads. Sectors indicate grouping of functions, while majorheads broadly represent functions. The general scheme for thelower level classification is that minor heads broadly correspond

126 PenronunNcr Buocprtr.lc ron plaNNEl Dsvnr,opvnwr

to sub-functions or groups of rolated prograrnmes undertakenby different Governments (and even different Departments andagencies 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 olassi-fication 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 thesuperstructure of classification was oriented. (The reader whois interesred may refer to Appendix 5 which explains the newclassification in greater detail.)

With such a classification it is possible to adopt a .,townplanning" approach to resource allocation. Thus, the first levelallocation is among the sectors, that is, General Services.Social and Community Services, and Economic Services. Thesecond level allocation is to sub-sectors, if any, within eachsector, for example, agriculture and allied services, transportand communications, industry and minerals, etc. under the,sector, Economic Services. The next level allocation is to diflerentmajor heads within each sector, for example, education, housingand social security and welfare under the sector Social andCommunity services.

As we go down the hierarchy of classification, the ourpursbecome more and more comparable, i.e. their money valuescan be expected to reflect more accurately the relative import-ance attached to thero. It will, therefore, be possible to use cost-benefit analysis or other techniques as aids to allocation ofresources.

It is worth mentioning that the Constitution envisaged thethe prescription of a uniform classification of transactions forall 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 changesin the composition of different Goverments so as to build a timeseries on expenditures and revenues of different Governments.This no doubt means. that such a uniform classification has tobe 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 tobuild a budgeting system which is operationally flexible at themanageriaI level.

In accordance with the above, which was also the pastpractice, only the sectors. major heads and minor heads wereproposed and adopted in the new classification. The fourthtier classification, namely, subheads, we lefi t<i be determined bythe respective Governments and Departments. In a sense thejobof the Team was town planning and demarcating areas for.development of industries shops, residential houses, and publicrecreation etc. It was not expected to, and did not, go iDto thearchitecture of individual buildings. This has been left entirelyto the operating Departments and agencies. However, even as

buildings have to conform to town planning regulations, theprogramrne subheads have to be evolved within the broad fram e-

work of major and minor heads.

Demands for grants

Attention has already been drawn to the Constitutional pro-visions relating to the presentation of Government budgets(Appendix l). The budgets are broken up in Demands for Grantsat the time of presenting to the Legislaturo to emphasise thewholesome principle of each Ministry/Department being madeaccountable for the funds placed at its disposal. However,allocation of business and of lunctions among the variousMinistriee and Departments in the Central and State Govern-ments do notfollow a uniform pattern either as between theGovernments or, over a period oftime, even within any Govern-ment. The structure of Demands for Grants cannot, therefore,be prescribed on a uniform basis. Moreover, the AdministrativeReforms Commission noted that the Demands for Giants beingpresented did not duly reflect the principle of accountabilityof individual Ministries/Departments. Further, it wanted that,€ven within a Demand for Grant, each wing should be identifiedand 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 onaccounting classification) which was examined and accepted,

128 PBnnonueNcn BuocBrtNc ron pr,aNNEo Drvlloprlpwr

with some minor modifrcations, by the Estimates Committee ofthe Lok Sabha in their Twonty Fourth Report (Fifth Lok Sabha).The re port was implemented with the Budget of the CentralGovernment 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 publicenterprises and grants and loans to . States in the Demands forGrants of various Ministriesi Departments. (These were earlierincluded in two omnibus Demands for Grants of the Ministryof Finance).

2. Increasing the number of Demands for Grants being pre-sented by each Ministry/Deparfinent, wherever justified, takinginto account the enlarged functions (in the spirit of the newclassification on the anvil)-

3. Presenting a composite Demand for Grant for all exoendi-ture (revenues, capital and loan) relhting to each function undera single Demand for Grant, with the stipulation, as earlier, thatfunds would not be reappropriaied between tevenue and capital(including loan) sections.

The purpose of the entire exercise was to make the individualMinistries/Departments squarely responsiblefor the budgeting oftheir programmes. Their reappropriation powers were enlargedwherever justified. Underthe new arrangement, an administra-tive MinistryiDepartment presents separate De mand for Grantfor each of its major functions and a residuary Demand forGrant for all other functions. It is, however, possible that abroad function like social welfare, denoted by the major head288 Social Security and Welfare, may be the responsibility ofmore than one Ministry, one in charge of scheduled castes andtribes, another in charge of the rehabilitation of displacedpersonsanda third charge of the pnysically handicapped. Themajor head will, therefore, beoperated by all the three Ministries.The functional classification in accounts and the budget ensuresthat all expenditure on social security and welfare is broughttogether under a single major head so as to facilitate overallallocation of resources, while the distribution of provisionsamong the Demands for Grants of the conoerned Ministriesensures clear identification of operational responsibility with aconcomitant control over funds. Since the classification ofbudget outlays within a Demand for Grant is by the standard

Cr,lssrprcenoN 129

accounting classification there ls no partrcular difficulty in pre-paring a 'cross walk' to arrive at the outlays for individual func-tions and sub-functions.

An important consequence follows from the scheme of break-ing up the expenditure budget estimates into Denands for Grants.-Once the money resources are allocated as between the variousDepartments, 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 Deparf-ment which may be spending less, it has to go to the Legisla-ture and seek a supplementary authorisation. Thus, the structureof Demands for Grants presented to the Legislature plays asignificant role both in the management of Government financesand in the control by the Legislature. Every scheme of present-ation of Demands for Grants uniquely determines certain.freedom of action, i.e. power to reappropriate funds, even as itimposes certain restrictions. Let us illustrate.

Suppose a hypothetical State Government takes up only threeprogrammes, 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 A

Demand IMi or Irrigation

Unir of appropriation

1. Rampur district2. Sitapur district3. Lakshmanpur district

TOTAL

Demand 2

/nirnal Husbundary

Unit of oppropriation

l, Rampur district2. Sitapur district3. Lakshmanpur district

ToTAL

Budget Estimate.

5.004.003.00

12.00

Budget Estimate.

3.006.00200

11.00

130 PrnponueNcp BUDGETTNG ron Fi.*Nxro DEvELopMENT

Demand IFisheries

Unit of appropriation

l. Rampur district2. Sitapur district

.3. Lakshmanpur district

Unit of rryforyiation1. Minor iffigation2. Animal htisUandry3. Fisheries

Ufiit of appropriation

1. Minor irrigation2. Animal husbandry3. Fisheries

4:rnn o{ appropriqtion

,1. Minor irrigation2. Animal husbandry-3.. Fisheries

At-tsnNllvr B

Demand IDevelopment of Rampur

Demand 2

Development of Sitapur

Budget Estimate

4.003.007.00

TorAi' f4.00

Budget Estimate

5.003.004.00

Tour- 12.00

Budget Estimate

4006.003.00

ToTAL 13.00

Budget Estimate

3.002.00700

TorAL 12.00

Demand 3

Devel opnlent of Lakshmanpur

Under alternative A, funds can be reappropriated within thesame function, 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 ison the development of specialised programmes in the State as a

qryhole. The decision making in this case is at the level of State

Cr,AssrFrcATIoN 131 r

Government Departments. The emphasis in the second alter-

native is on integrated development of districts, funds being :

allocated to programmes on the basis of the contribution to,the development of the district. The decision making in this ''

case is at 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 expendi-

ture 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 inthose 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 ofexpenditure 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 ofbefore 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 divid-

ing 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.

REcErprs

1. Customs duties onfertilisers.

132 PpnponueNcE BuDcETING FoR PLANNED Drvnloputnr

EXPENDITURE

Revenue Budget

import€d 1. Promotion, €xtension and dislri-bution services in the field offerdlisers.

2. Excise duty onindigenous fertili-SETS.

3. Lrterest and Dividend re:eiptsfrom the public sector fertilisersfacto ries

4. Interest and Dividend receiptsfrom the private sector fertiliserfactories, if any.

2. Subsidy on fertiiisers.

Capitql Budget

3. InvestmeDt in public secfor fert-ilisers factories.

4. Long and short term loans topublic sector ferilillers fac-tones,

5. Investments in and loans toprivate sector fertiliser factoriers,if any ,

However, one has to bear in mind not only the principle ofLegislature's control over the Executive but also the fact, that,inevitably, the responsibility for the collection ol taxes will bewith one Department, that for promotion, etc. services and grantof subsidy with another, and the invesfment in fertiliser factorieswith a third. ln the circumstances, all that one can attempt is tobring these aspects together in taking decisions without disturb-ing the formal arrangements for Legislative or administrativecontrol.

H APTE R IX

O RGAN I SING

NoBTLITy oF AIM does not. as sorreone said. determine theeffectiveness of programmes. It is easy to incorporate a publicexpenditure programme in the budget, but unless a series ofdecisions on the organisational structure, personnel and manage-ment systems and procedures are taken the results will notstart flowing. Indeed, one may have to.go beyond the internalstructures and procedures of Government and look into theinstitutional changes necessary outside the Government tomake the programme a success.

Demarcat ion of ro IesWe have already discussed the larger question of the role

Government can play in achieving a specified objective. ortackling a specific problem, and the various political, social,legal, administrative and price controls, credit, taxation, sub-sidy or public expenditure instruments available to it. Theinstrument of public expenditure involves the maximum draft onpublic resources and should be selected only if it is distinctlysuperior to the other instruments,

As with different instruments, it is important to recogniseand demarcate the relative roles of tbe Central and StateGovernments, public enterprises, private organisations andindividuals in respect of any objective or programme. Anylack of clarity in this will either delay the programmes ormake them less efective. The absence of demarcation of rolescan also lead to leakage or mis-utilisation ofpublic funds. Thestory i! not unfamiliar that a farmer obtained, for the samewell, a taccavi loan from a Government department, a secondloan from a co-operative society and a third loan from a,commercial bank. There is then the story of an ElectricityBoard electrifying the same village twice over financed by twodifferent agenciesl The present brganisational structures withtheir 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 enter-

prises, more than one Government Deparlment or publicfinancial institution invest money. Wbile this may be one way

. of spreading the "risks" of the enterprise (typical of afreenrarket economy because private individuals have to bear suchrisks) it is a moot point whether such a procedure is conduciveto efficiency with which public funds are being used because"

even as the risk is spread, the responsibility for ensuring thatthe enterprrse subserves the social objectives on the one handand functions at optimum levels of efficiency on the other alsogets diflused. It is desirable that, where public funds are'invested, one agency, may bethe agency with the highest stake,is made to accept this responsibility. Better still would be to.

. 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 weshould thus consider, if not already done at the objective oranalysis 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 buildingsboing entrusted to Public Works Department, and maintenance

" oftransport fleet to another specialised agency. The ideal . situa-tion undoubtedly is to make each programme the exclusive

' 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 comprehen-sive programme. But, instances are not lacking where more'

' than one programme administered by a more than :one agencyare operated simultaneously to achieve the same.objective.' Targets are fixed for diferent agencies even where they do not

ORGANISING 135

individually result in any benefit. The proliferation of para-

Government organisations andbodies is not a little responsible

for the spread of this malady. It is aggravated by the.fact that

most of ihese agen.i"t have parallel hierarchies running right

up to New Olthi and coordination, spiritedly accepted in

theory, cannot be achftved in practice' What happcns is that

the apex organisations finalise their targets with some coordi-

nation at the top level, but each of them breaks down these

targets to correspond to the lower formations according to itsowi information and procedures. At the ground leVel there can

be serious disharmony in the targets themselves not to speak ofthe disharmony arising from uneven achievements by tha

different organisations. This is targetry, not performance bud-

geting.One of the pay-offs introducing performance budgeting

oo.uld, therefore, be the identification and elimination of areas

where there is overlapping of responsibility for achieving the..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

move from place to place, particularly from Secretariat and

"headquarters" offices to field offices' The latter is, in turn' due

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

d) the concept of organisational hierarchy within the Govern-

ment *h"reby even a junior offcer in a Secretariat or "head-

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 developmentThe need for localised coordination and ieadership in agri_ .'cultural development programmes is obvious. Area-baied

. ,economic and statistical studies into the structure of landownership, parcelisation of holdings, and physical features ofland (high, low, undulating, water-logged, etc.) should form thebasis for any planning or formulation of programmes. Area-based surveys on water resources, cljmate and soil conditionsshould, likewise, be part of the planning process. Local foodhabits and availability oflocal foo<i must be taken into accounrin conducting research into nutritional values and specifying'nutritional objectives. Location-based research to arrive arsuitable cropping patterns and appropriate qualities andoptimum quantities of seeds, fertilizers, pesticides and herbi_lcides is the essence of modern technology. Distribution oflcredit 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 rishtsequence, and (2) conflicts belween the objectives and program_mes of different agencies concerned with different services andinputs have to be avoided.

Centralised planning and the process of implementationthrough a Iong hierarch]r of command cannot but ignore localrealities and variations which, in the field of agriculture, maycritically determine the success. For example, the optimumproportions of nitro_een, potash and phosphate in the fertilizerrequired by the soilin a remote are in north Bihar, for eachseason (as soil condition changes after every crop), cannot bedetermined 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 (thatis, for the additional outlay proposed); in another it may be adrainage scheme ; in a third one it may be multiplication of thelatest variety ofseed. An optimal allocation of resources. thatis, one which maximises the return at the margin on the proposedoutlay 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 a

centralised agencY.

Centralised coordination is, however, essentially a question

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 reason-

able to assume that district is the highest desirable and lorvest

feasiblo level at which planning and budgeting should be un der-

taken 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 Ywifl 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 require-

ments of the activities, in quantitative lerms, envisaged in the

district plan or budget. Distribution of credit is next in impor-

tun." 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 distri-

tution 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

/

I 38 Prnponrr.rebrcr Buocrrrltc non puNnro DeveroplrsNT

level. And, if some one seriously suggests district level planningthere is bound to be a chorus suggesting that it should actuallystart at the block level or even village level. But tbe question iswhat is the lowest level at which we can station our civilservants, scientists and other experts? For example, we needreasonably competent economists, statisticians and accounranrsto do the '.staff" work required for any genuine planningexercise atthe district level an4 for making the kind ofcost_benefit analysis we have been discussing, assuming that decentra_lised planning will imply real decision making, not mere datacollection. It will be impracticable to station such competent civilservants, scientists, and other experts at a level lower than thedistrict.

P rob Ie ms of de c ent ralis at ionIn respect of many other public services also, it is desirable

to organise on an area basis instead of organising them on depart_mental lines with hierarchies running up to the State capitalsand New Delhi. This has the advantage that the citizens can,dirsqlly or through their representatives, help in raising resour-ces and participate in the formulation and execution of program_mes. This is the concept of ,local government.' Local bodies aresupposed to be "cradles of democracy.'

The urban municipal authorities that we now have werecreated by the British as .,safety valves" for growing pressuresfrom educated middle class for participation in Government. AfterIndependence, we have not taken them seriously. The Constitu-tion does not recognise these authorities as the third tier of Go-vernment. No taxes or other sources of receipts are ,.reserved"for them. The Panchayati Raj institutions created afrer Indepen-dence as local bodies for rural areas have fared no better.

Many of these bodies have become hotbeds of petty politicsand corruption. State Governments have not rectified the situa-tion at the political or administrative level. On the <_rther hand,nost of them have been superseded on narrow and partisanconsiderations. Meanwhile, a plethora of departmental andother agencies have been created to take charge ofspecificservices thereby not only increasing overhead costs but alsocreating problems of coordinadon. Neither the ..cradles ofdemocracy" theory nor the ,,safety valve" policy operates any

OnceNIsrxc 139

longer. The casualty has been the citizen-almost in a literal

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

have not succeeded in evolving political organisations and

structures based on mutual trust with the result that any

subject with which Government has anything to do must have

a district level organisation, a State level organisation, and a

Central level organisalion call them Departments, Ministries'

Corporations, Boards or whatwe like. The result is that all the

pathological tendencies ofa large organisation creep in and

ite tasic purpose of serving 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 toge-

ther 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 super-

ior 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 ofCentral taxes is generally less than one per cent; that of State

taxes about 5 to 6 per cent on an average (ranging f'rom 2 per

centin sales tax to about 20 per cent in land revenue), while

the cost of collection oftaxes of local bodies is at times as high

as 50 to 60 per cent. There is' thefefore, a strong case to pro-

gressively replace local taxes by State or Central taxes' The

f.".ru..i agai$t enhancement of rates will also be less' How-

ever, it is one thing to have sources of revenuo allocated on the

principle of economy and efficiency in their administration and

iuite another to deny the local bodies and, consequently' the

citizens the funds needed for the essential services or to make

the administrative arrangements so complex as to become self-

defeating. The situation can be remedied by specifying that

certain taxes will be levied by the Central or State Govern-

ments, as the case may be, but the proceeds shall accrue to the

140 Prnronrra,tNcE BuDGETTNG ron pran-tlo DtvrtopurNr

local !90ie1 on aper.capira basis in respecr of the popularionto which they are expected to cater. The Ceniral and Stateuovernments can announce in their budgets the per capita rateat which grants wili be made to local UoAies. On the Uasis ofsuch announcements the local bodies .uo pro...d with thefinalisation of their budgets. The mechanics are not that impor-tant. The principle that the Central and State Gou"romentscontribute certain sums on a per capita basis for the welfareof the citizen, to be organised localiy, around trim and with hispan icipation, is important.

Thus, when we talk ofperformance budgeting we ought to bevery clear_about the organisation of the ,erui.1, at the appro-priate 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 beimproved only through decentrarised declsion rnaiing ano thatthis process of decentralisation can be ,tr"ogth"n"J ;! u p"rfo._mance budgeting system in which budgeis at various lavelsare 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 ofanyscheme of decentralisaltion. Hopefully, such u syst.m will alsoenlist greater pubric cooperation and elicit higher order ofsacrifices in the form of larger savings.

The attempt in such a .system is to push the responsibilitylevel.for. each objective as lower down as possible'and, afterconsidering the various alternative p.og.uJ.r., for achievingthe objective, to push the responsibility level for individualprogrammes still further down. While doing so, however, careneeds to be taken to see that no Cichotomy develops betweenthe so-called policy making and the so_calied implementation.Implementation must act as a feedback to policy'making, andthis 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 asto make such participation really effective.

OncnusrNG

Financial pou,ers

In order that decentralised decision making is effective, dele-gation of financial (and other) powers should be based on theprinciple that 'authority should match responsibility'. Once aperformance budget, setting out the ob-lectives and targets aswell as the cdrresponding requirements of resources, is approvedat the beginning of the year, the officer in charge should havethe necessary powers 10 incur expenditure and acquire inputsnecessary for the successful execution ofthe programme. Thereshould be no itemised control over his activities.

Unfortunately, because of the hierarchical, not functional,concept on which our administrative system is based their isexcessive 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 ofexecutive power in the following words: "The Executive Powerofthe Union shall be vested in the President and shall be exer-cised by him either directly or through officers subordinate tohim in accordance with the Consitution". Thus, for example,the station master, the clerk in tbe post office and the extensionofficer ir. the community development block have no inherentauthority to serve us or achieve results. They can oniy exercisesuch authority as is delegated or redelegated to them from thePresident downwards. It thus becomes all the more necessaryto take deliberate steps to match authority with responsibility-

As many observers oi the administration system in ourcountry have noted, the question of delegation of adequatepowers to the field officers is critical for the success ofdevelop-ment programmes. It is the case of this book that real pro-gress in the matter of delegation of financial (and other) powerscan be made only in the context of a performance budgetingsystem with clearly specified objectives and a clearly definedorganisational set-up. Let us consider an illustration.

In a big irrigation project. a Chief Engineer may be inoverall charge ofthe entire project, a Superinlending Engineerin respect of a branch canal system, and an Executive Engineerin charge ofa distributary system. The Executive Engineer'sfunctions are: (a) to irrigate maximum area possible in hisDivision-a performance objective, (b) to achieve the highesteffciency in the utilisation of water as judged by the area irri-

t4l

142 Prnr<-rnulNcn BuocerrNc FoR PLANNED Dnvrropurtr

gated per unit of water supplied-an efficiency objective, (c) toachieve (a) and (b) at least cost and (d) to ensure the collectionof revenue due to Government on account of area actuallyirrigated. The performance budget of the Division for the nextyear should be discussed with the Executive Engineer and theobjectives and targets spelt out in physical and financial terms,as appropriate. Once this is done, on the basis of mutual dis-cussions, there should be no restriction whatsoever on theExecutive Engineer in the matter of inviting tenders, placingcotrtracts and purchasing stores. Going a step further, he shouldhave full freedom to decide the manner in which he canachieve his objectives and targets. In other words, once theend is specified, the means should be left to him. He can, forexampie, consider whether greater efficiency in water utilisationlies in (a) reducing the number or the size of outlets, or (b) pro-viding gates to them, or (c) raising the banks of water courses,or (d) clearing the bed of water courses, or (e) lining the watercourses, etc. Each one of these measures can help achieve hisefficiency objectile of betler water utilisation. He has to makea cost-benefit analysis of the various alternative courses open tohim and choose one ofthe activities or an appropriate mixof the activites.

It may be added that analytical capabilities necessary forperformance budgeting can be built up only if such exercises

are carried out in the field to tackle lower level resource allo-cation problems. Training courses in techniques can supple-ment but not substitute for such experience.

Thus, the vexed question of delegation of powers can besettled satisfactorily only if we make a precise assessment ofthe powers necessary to get a job done. What happens now isthat in case of an emergency, as when a river or canel breaches,all powers are delegated and all rules relaxed; but, in day-to-day working there are far too many restrictions and prohibi-tions. lf we desire to tackle the problems facing us on a "warfooting" we certainly need to look into the question offinancial{and other) powers with reference to the tasks entrusted andnot on the basis of rvho will get what powers.

Just as we have spokert of pushing down the responsibilitylevels for each objective ard for each programme, it is necessaryto push the'competence' level (in terms of financial and admi-

OncaNtsrNc

nistrative powers) 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 infor-mation or special expertise at his disposal. This should be

subject to the further safeguard that such information andexpertise cannot be made available to the lower authority forreasons of (a) cost involved (b) shortage of skilled manpowerand (c) security. Consideration at (a) shoutd however, be weighedLrgainst the'cost' of the likely delay if a reference is requiredto be made to the higher authority. Where the higher authorityhas no additional information or expertise there should be noquestion of shifting up the 'competence' level to him.

Delegation of financial powers should thus be undertakenas a genuine "bottom up" exercise to matcb authority withresponsibility.

Accounting sl stem

Accounting is the iife-blood of financial management system.IJnfortunately, a certain dichotomy has developed. in ourcountry between "finance" and "accounting". While they aretwo aspects ofthe same system, "finance" has been treated as aquestion of distributing patronage and "accounting" has beenreduced to a question of keeping records. One can possibly say

that finance is accountingp/zs; but it is certainly not .account-ing minus, except totant must get overwarranted.

The result of the

say in a rhetorical sense that the accoun-his concern for details where it is not

dichotomy is that neither function really

143

got involvedin management. Government of lndia have recently.r. j taken steps to integrate the two functions and take them closer

to the administrltive Ministries. The formal transfer of thefunctions was completed by October 1976. Similar action ispresently contemplated by the State Governments. However,as in the case of delegation of powers, it is not,enough if thefunctions are transferred from the Finance Ministry (and, inthe case of accounts, from the Comptroller and AuditorGeneral of India) to the administrative Ministries. The func.tions should be transferred down the line to the lowest opera-ting unit which has a performance budget of its own. Let usillustrate.

144 P[,RpoRMANcE BUDGETTNG FoR PLANNED Dsvgr,opvr]lt

In the case of the irrigation division mentioned earlier it willbe necessar5, for the Executive Engineer to have informationcompiled in his office on the expenditure incurred in the cons-trucfion of the various minors and water courses in the waterdistribution system under his control and the maintenanceexpenditure being incurred on them. A rnacrolevel reform ofthe classification system was done by the Team of officersreferred to in the previous chapter. The Team had also, inci-dentally, suggested that under each major irrigation project,each major component like headrvorks, main canal, distribu-taries should be treated as subheads to facrlitate booking ofexpenditure accordingly. This was with a view to correlatingfinancial outlays with physical targets. Unfortunately, nofollow-up action has been taken in many States. Even thesuggested sub-heads have not been adopted and expenditurecontioues to be recorded under the old subheads like A-Preli-minary, B-Land, C-Bridges, etc. which give the nature ofthe structures built. This classification, which is the traditionalinput-oriented accounting classification, may be useful forsome limited purposes but is wholly inadequate to correlatethe investment made in each branch canal, distributary, to the'physical progress during construction and to the benefitsderived (that is, area irrigated) on completion. Under the exist-ing arrangement extensive reclassification of accounts is neces-sary to determine the capital or maintenance cost of any sub-system, for example, the value of capital assets placed at the dis-posal ofthe Execuiive Engineer and the cost of maintenanceof each minor, water course, etc. To introduce performancebudgeting at that level it is necessary to modify the accountingclassification as well as the procedure for compilation. Theaccounting system should also enable the Executive Engineerto analyse the expenditure under various items of work likeraising the banks or lining ofthe canals in order to enable himto make an analysis of the relative benefits from various pro-g:ammes of work as compared to the costs.

Unless, thereforq the finance and accounting functions arealso decentralised to the lowestpossible level, the desired resultsfrom introducing performance budgeting system will not beforthcoming. This, however, implies transfer of staff to field

ORcANISTNG 145

offlces which poses certain problems to which we have alreadyalluded.

It must be added that the accounting requirements ofDepartments and agercies for the purpose of improving per-formance will vary and it is no longer feasible to have auniform system for all of them. There is need to have consider-able flexibility in this regard. But, it needs to be emphasised,each Department must work to a system designed to suit itsrequirements. A system is no guarantee to success (because,

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

Tho ethoi oj peribrmcnce budgetmgWhat is important in performance budgeting is not so much

the use of sophisticated econohric, statistical or accountingtechniques of quantification and measurement but the shapingof a critical and questioning attitude. What is it rle are tryingto do? Whai are the d.ifferent ways of doing it? Which is themost effective and least cost way? How do we ensure that resultsare achieved? What is the feedback mechanism? What are thepremises on which the objectives were based and programmesrformulated? Do they continue to be valid?-Asking these"questions is not an exclusive task of the accountanq it is centralto 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 pretendithat he can prepare a meaningful performance budget witlioutsuch a perspective. There can no longer be any question thatthe accountant alone is cost-conscious or the executive officfAlialone is goal-conscious. Also, what is required, to begin with,-is not so much the knowledge ofthe detailed techniques ashonesty 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 super-

vision. lt consists of merely seeking clarification on what theobjectives are, how their accomplishment sbould be measured,

vhat is the periodicity and yardstick of such measurement andvhat 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 ottake corrective or retributive action. If eforts are made tointroduce performance budgeting with such a clear notion ofmutual responsibility of the functionaries it will be possible toenlist enthusiastic participation at various levels.

The resentrnent of the executive officials is not against beingjudged-most honest and efficient officials would like to bejudged and be rewarded or punished accordingly. Tbe resent-

ment 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 withoutsuch 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

provides an opportunity to "debureaucratise" public adminis-

tration. The emphasis in performance budgeting on explicitspecification of objectives, detailed analysis of programmes

including their time schedule, and an obligatory evaluation oftheir success greatly enhance the value of this opportunity.

t47

C HAP TER X

EVALUATION

EvalulfloN Is DoNE at two stages: (1) concurrent evaluationand (2) ex post evaluation, that is, after the event. The first isundertaken by the executive agencies internally and is designedto monitor tbe programmes, remove bottlenecks and make mid-course corrections in the programmes where necessary. Thesecond is undertaken, in respect of all Government and mostpara-Government agencies, by the Audit Depafiment under theComptroller and Auditor General of India. Its purpose is tomake an independent and objective evaluation of the pro-grammes with a view to assisting the executive authorities inremedying the defects, redesigning the programmes, and evenredefining the objectives where warranted. Both provide thefeedback necessary for any management system to adiust itseifto changing conditions.

The type of data and methodology used for both kinds ofevaluation ought to be the same as those used inthe ex anteanalysis of programmes at the formulation stage. If a programmehas been selected on the basis ofa certain criterion, the samecriterion, on the basis of the same assumptions, ought to beapplied for purposes of concurrent evaluation by the Depart-ment as well as ex post evaluation by the Audit. Unfortunately,all these exercises are presently done without any such coordi-nation. After funds are allotted in the budget Iittle effort is madeto collect data to check on the assumptions made at the time oisanctioning the programme.

The terminology and the criteria to be used for evaluationmust be consistent and explicitly defrned before including theprogramme in the budget. When the programme is alreadyexecuted or is under execution it is difficult for officials to bewholly objective in their approach to defining the criteria forjudging the performance. What has actually been achieved onthe ground is bound to influence their attitude towards defininghe 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 Possible-d) Economical to use and convenient to report.

ei Mutually exclusive so as to avoid duplicate counting ofwork.

/) Stable enough so as to be usefui for some period of time'g) Capable of audit so that the accuracy of the work count

can be verified.fi) Identifiable when seen and readily understood by those

who plan, schedule and control work'i) Suitable for use in the contemplated measurement system'

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 quantifi-

ed 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 example, it will be naive, even disastrous, to measure the

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.assessment will be considerably enhanced if outside experts and

user interests are associated with it. The evaluation criteriashould, thus, be related to the central purpose of the organisa-'tion even if it means specifying them only in qualitative terms'

At the same time, certain qualitative results acquire quantitative.dimensions over a period of time, as discussed in the chapter.on Objectives.

Collection of data for evaluation and evaluation itself costs

150 PEnnonuaNcn BuocrrrNc FoR PLANNED DEvELopMENT

money. The expenditure is worthwhile only if the appropriateauthorities use the results of such evaluation for the purposeof monitoring the programmes and modifying the programmesand even objectives, if necessary. Where no such action isforthcoming there is no point in wasting public funds on evalua-tion.

Evaluation criteriaThere are many types of indicators, indices and ratios on

the basis of which performance can be judged. In order ofsimplicity, but in reverse order of validity, they may be describ-ed as below:

l. Volume indicators. Also known as workload data, theymerely indicate the volume of work done, e.g. the number ofpatients treated in a hospital, the tonnes of fertiliser produced.They tell next to nothing.

2. Performance indicators or ratios, These are volume indi-cators p/rrJ the pre-determined targets for accomplishment, e,g.900 patients treated in the hospital against the target of 800patients,20 thousand tonnes of fertiliser manufactured againstthe production target of 30 thousand tonnes. Where no suchtargets are laid down, performance is compared with that duringthe previous quarter or year or with the performance of com-Parable rrnits.

The performance indicators are also usually expressed interms of percentages with reference to targets, e.g. ll2.5.r/o ofthe targetted number of patients treated in the hospital, 66$/"ofthe anticipated production achieved. They are then calledperformance ratios. However, if performance is expressedonly in terms of percentages certain imporlant information islost. Without the absolute numbers of anticipated targets andachievements we do nor really know (a) whether the targetsare deliberately fixed lowto show better performance and (b),whether performance compares favourably or unfavourably(i) with previous quarter/year and (ii) with performance of othercomperable units.

In respect of continuing programn0es, performance indicatorsor ratios are diferent from data giving absolute levels of per-formance. While the former measure the performance duringthe quarter/year, absolute levels give the cumulative per-

EVALUATToN 151

formance so as to indicate whether preformance bears some

relation to the long-term or fnal objective'

3. Efficiency iniices and standards' These usually measure

the effiiency in the utilisation of basic inputs or the second

level inputs, e.g' number of patients treated per doctor or per

oorr", ou*i"t1f patients in a quarter/year per hospital bed'

;;;b.t of tonnes produced per unit of raw material' per unit

of power consumed ol per staff emplol ed' Doctor or nurse is

u- duri" "inpur". Hospital bed is a second level input' The

f..-Jete.rrrineO levels ofthese indices to judge efficiency become

efficiencY standards or norms'

B"yond a point, improvement in absolute levels of per-

formance can, not necessarily will, lead to deterioration in

efficiency indices. For example, fertiliser gives improved yield

oi"rop. " The yield per unit quantity of fertilise-r--an efficiency

inar*,'*iff io.i.rr"tith increase in the quantity of fertiliser

"ppfl.a up to a point; beyond that it declines' But' the aggre-

gaie yield-a p"ifo.."on"" indicator, rnay continue to rise (with

l'.rr"i proportionate yield) in response to application of furthet

quantities of lertiliser.4. Unit cosrs. These are used aiongside performance ratlos

and efficiency indices to determine whether the programme$

are being operated on the principle of least costr e'g' cost per

patient day, cost per tonne of fertiliser produced' They are'essentially

used for making comparison between comparable

.roiir, uni are particularly useful in the case of standardised

services.They can also be effectively used for building a time serles'

that is, unit gosts over the quarters/years in the same unit' Care

should, however, be taken in such cases to use "price deflators"'

that is, to make corrections for increasb or decrease in prices of,.t.uuot commodities. Such price feflators may havd to be

specilically worked out for each category of service because a

general wholesale or consumer price index with set -weights

for

different commodities muy ,roi correctly reflect the increase/

d""r"ur" in costs of specific cornmodities used in the service'

The above four evaluation criteria <io not require collection

of external information by the Departments and Agencies' They

attempt to bring the financial and physical dimensions together'

ii.v .u" be used in al1 Government Departments and agencies

152 Prnronrralxcr BuocrrrNc FoR PT.ANNED DrvnorvnNr

as _part of the normal control activitv.

.- 5, Measures of EJfect i.t,enes". Even programmes with thebest performance ratios, highest efficien.y inoil", ana tor..tunit 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 reachingthe objectives is diferent from efficiency. Whi; rhe latter isessentially concerned with the technical efficiency or thequantitative relationship between inputs ald outputs, effective_ness is a broader concept. It is the relationship between theprogramme and its objectives. Sometimes this relationship canbe expressed only in qualitative terms.

Evolving criteria to measure such effectjveness is nof an easytask. In respect c,f commercial type of programmes, e.g. fertilizerproduction, the profit and loss u""ornt may depict the pictureof the effectiveness (as reflected in sales) to som" extent. But,in respect.of most other programmes a detailed search (if notresearch) 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 theprogrammes. As a general rule, only criteria evolved in ademocratic manner efter consutrting represefitative opinion onboth 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.

-6. Social cost-beneft analysis. Even where the litmus test of'effectiveness is met, it is possibie that the social benefits actually'derived from the programme mav not be commensurate withsocial costs, at least not to the extent anticipated at the time ofselecting the progra"mme, While rteasules ol. effectiveness saywhether a goal has been reached, social cost-benefit analysiswill 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 criteriafor evaluation should not be different from those used for exante analysis at the time of selection ofprograrnmes. In fact,the processes should reinforce each other. It is useful to remindourselves tbat the purpose of social cost-benefit analysis is tojudge 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 resour-

ces generated even as "costs" are seen in terms of real resour-

ces locked up or used. For example, if a financing agency like

a bank advances money for the purchase of a machine which

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 per-

formance should bring out this aspect.

Performance rePortingA 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 collect-

ing 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 constructionboth 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 inareas of synchronisation of investments and phasing of pro-

grammes. 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. Ifthere is unbalanoed or unsynchronised investment it does not

usually attract comment, though the loss to the economy fromsuch investments could possibly be greater than the losses involv-

ed in cases of outrigbt infructuous expenditure. This aspect,

therefore, must engage the most careful attention of the

executive agencies at all ievels.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 macrolevel relating them to the physical performance. Classificationat tbe micro level should also be so designed as to se e the-purposes 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 rigidclassification atthe micro level. Indeed. micro level classifica-tion should emerge out of the reporting system.

bI anagement I nformat ion Sy s t em

Facts are the basis of all reporting systems. However, facts,in themselves do not constitute information. Only facts mar-shalled properly and presented in an understandable formbecome information and inform the recepients. Further, infor-mation has also no intrinsic value of its own. Its valueisafunction of the time at which it is made available and the useto which it is put. The information regarding the expected time-of arrival of a train has value only if it is given before the arrivaland that too if we intend to travel by that trairr. The informa-tion that there is a big ditch on the road abead has value onlyif it is given to us in time to apply the brakes and the brakesare functioning. The information that we are likely to exceedthe budget allotment has some value only if it is given in timeto prevent such excess. Such information has no value if it issupplied on the evening of 3lst March (or later) or if we areunwilling to take steps to prevent the excess. The volume ofpaper used, is thus, no indication olthe information exchanged.There should be a proper system for the exchange of properinformation at the proper time. This is generally known asManagement Information System (M.I.S.).

The "intelligence" of a Department or agency is not theintelligence of the men working in it, individually or collectively,but the "information" which it possesses. Information sysrems,

developed in a big way wirh the advent of computers. Bat, theconcept of information slrstem can be very usefully applied even,

without using comput?rs.In a typical hierarchical agency the volume of information

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

EVALUAIION l5)

upon. lt is meaningless to put up to him bundles of statements

received from the field offices' He cannot, consistent with other

demands on his time, go through all the statements individually

to derermine the areas in which he has to act' The directives'

expected of him by the field offices, therefore, donotcone'Wirat little remedial action is possible wilh local initiative will

also not be taken. The situation after the prescription of the

statements could, therefore, be even worse than what is was

before.The golden rule for any Department or agency is that no

report ;hould be prescribed unless it is simultaneously decided

as to who will receive the report; in what manner it will be

compiled and consolidated; to whom will the compiled informa-

tion 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' Additionally, they lull the lower forrnations into a sense of complac-

"n.y j't., sending the reports. Reports should, therefore' be

called for only as a prelude to action.

An important management corcept relevant to managemenf

information systems is management by exception' Where

standards of performance are laid down, necessary inputs arrang-

ed 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 toiuch exceptions. An information system thus designed can

extend the vision of the top officials to "see" things happening

in the field sitting at their tables.

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 tocompile. 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 tendencyto report unreliable figures to show fulfilment of taraets. Let usillustrate. In one ofthe blocks in anarea where thJ nature of,soil was sandy to sandy loam, the target of acreage covered byrabi wheat was reported to have been exceeded. There was noregular "audit" of such figures. A detailed review made on oneoccasion revealed that less than 50 per cent ofthe area reportedhad identi0able sources of irrigation. The rest ofthe ur.u *u,unirrigated. Since the nature of the soil in the area did notpermit growing of wheat without irrigation on any large scale,it is obvious that there was some inflation in the figures of areareported to have been covered by wheat. Another interestingresult of the enquiry was that the ,,area sown', was worked outon the basis of the quantity of seed distributed by the Blockauthorities, 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 anunknownphenomenon. Undue emphasis on achievement of targets with-out realising the difficulties on the ground has only aggravatedthe problem. Even if other information which casts a doubton the correctness of the data supplied by the lower formationsbecomes available to the apex organisation. departmentalIoyalties come in the way of taking corrective action. And, atone stage or the other, based on the data earlier sent up,progress achieved would have been reported to higher authoritiesor even Legislature. It is difficult to go back on that level ofachievement without getting the Minister and the Depanmentinto serious trouble. No amount of sophistry in planning andbudgeting systems can be of ava^il, if based on such unreliabledata.

Apart from unreliable data, there may be other distortions inpublic expenditure programmes in the.process of implementa-tion. These may be a reflection of the dee,per malaise of lackof commitment of the politician and of the clvil servant to thebroader national goals or even the specific objectives of the pro-gramme or it may be due to pressures of vested interests. An€xample may be cited. A market yard was proposed to beconstructed in a State to protect the interests of farmers who.it was said, were being compelled to make distress sale of theirproduce 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 ofgrains, warehouse in whrch farmers could store the grain iftheydid not like to sell the produce at the ruling price, bank toadvance 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 itsentirety. It could be implemented only in stages. A review atone stage revealed that only trading platforms and traders'

shops had come up. Neither the warehouse for the farmers northebankwas taken up for construotion. The objective of theproject was quite clear: to alter the terms of trade in favour offarmers. But, what was the result at that stage ofdevelopmentof the yard? The terms of trade were further aitered in favourofthe traders who had secured additional storage space toimprove their bargaining position. The benefit to the famelswas negative. The situation that developed in this case mightwell have been wholly unintentional; but, the case brings outthe complexities involved in devising information and reportingsyste.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 outtbe kind of distortion cited above. It may, in fact, repoflprogress. Only a reporting sJstem closely aligned with the

objectives would bring out the negative benefit from the

programme.

Evaluotion of public ent erprisesWe 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 privateindustrial sector but Value Added to Capital Employed (VACE).As investnents are to be decided on the VACE cr.iterion, evalua-

tion 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 notadequate.

There is no attempt here to draw an artificial distinctionbetween the management of public and private enterprises. Thenature of internal management and the body oftechniquesrequired for it are the same in both. The contribution made tothe economy, and the criterion by which such contributionmay be judged, is also essentially the same. However, while themanagement ofa private enterprise can pay selective attention;to the latter arpect, the management of a public enterprise musthave its main focus on the contribution the enterprise makesto the economy.

Efficiency of a public enterprise ought, therefore, to bejudged, from the point of view of the economy, with ret'erence tothe /at4l resources placed at its disposal and the total benefitsderived from it bythe economy. The ratio Value Added toCapital Employed is based on this premise. It representscfrciency achieved in the generarion ofincomes by the enter-prise with the capital resources placed.at its disposal, which iswhat economic development is all about.

Now, to the measurement. It is worth noting at the outsetthat only the value added arrived at after deducting the cost ofmaterial inputs and bought out services is relatable to the capitalemployed by the enterprise because other enteiprises would haveemployed their own capital in producing the latter. There maybe no difficulty in valuing the ourput (at the sale price) and thematerial inputs including fuel, power and value ofjobs contract-ed 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 theoutput is to be taken as the value of production during theyear, that is, sales p/as closing stock minus opening stock. Inorder to work out the value added fron: the traditional profitand loss accouDt, a suitable classification needs to be evolved todecide whether an item of expenditure should be deducted fromthe value ofproduction as a bought out.service' or not. (Thereis hardly any confusion in regard to bought out materials). Forexample, travel expenses of salesmen and other emplo.v-ees onduty are to be deducted from the value of production, not takenas 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 measure-

ment, 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 ofthecapital employed) and, hence, valued at prices ruling from time

to time. Several altempts are being made by accountants tovalue 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 if there

is a break or bunching in the investment/replacement pro'gramme.

Since evaluation in purely financial terms is beset withcertain 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 : (Value added)

(value of Production)(ProductionF)

(Capacrtyx)

(Capacity*)(Caprtal employed)

apparent. Value added gives the contribution of the enter-

., (Value of production)

^ - F;d;ri-*) -_

x(The items with asterik are physical quantities) The significance of

each of the ratios for purposes of evaluation' of the enterprise is

Value of Productionprise to the value of the commodrty.value of productioti gives the unit value of the product.-

-proouilion*

Production+

Capacity*gives the utilisation of capacity in physical terms.

Capacity* is related to efficiency in converting money capital

Capital Emplovedinto physical capacity.

160 PrnronuaNcn BuocrrrNc roR PLANNED DrvnLopursr

A tricky problem in the evaluation of public enterprises inphysical terms is the assessment of ,,capacity". Capacity ismachine plus man. It is usually worked out onthe basis of man-hour "standards", i.e. the time required by a worker to completea specified operation on a specific machine. Obviously, thereare no "theoretical" standards.since the time required dependson the output of the worker in a given e nvironment. Manhourstandards can, therefore, be set anly on the basis of time andmotion studies made in specific enterprises. Holvever, thecapacities of many of our public enterprises were initially worked:out on the basis of standards recommended by collaborators.based on experience in their own (developed) countries. In manycases, the standards so recommended did not adequately take.into account (1) the efiect of lower nutritional standards ofworkers in India, (2) the time required by them to adapt toindustrial environment, and (3) the effect of lesser supportingfacilities, in view ofthe smaller size of the enterprises in India,on the productivity of both machines and men. This has led todilution 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 statedin the Project Report;

61 giving due importance to the industrial engineering fuac- ,

tion, primarily concerned with fixing standards, in the.management of the enterprise; and

c) submitting such standards, and the studies preceeding theirfixation, to scrutiny by an independent agency like Audit.

An incidential point that arises in the measurement of VACEis the method of depreciation to be adopted because this afl'ectsboth Capital Employed and Value Added. What is appropriate,in the context of evaluatlon in physical terms, is to work outthe depreciation on the basis of the intensitv rvith which theasset is actually employed rather than the period over which itis 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 ordeterioration in the quality of products, just as financial data canconceal physical efficiencies and inefficiencies.

While we have not concerned ourselves with the internaf.control systems 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 differentractivities 'within the same enterprise. Since capital employedlreprcsents the net fixed assets and inventories, they can beidentified with the different units or the different activities .on

which they are employed. Similarly, 'value added' by each unitor activity can also be worked out. Such a valuation is relati-vely easy where the inputs and outputs of the particular unitsare marketable e.g. cotton purchased and yarn produced by thespinning department of a textile mill. Where they are not,recourse, has necessarily to be taken to arrive at the 'valuEadded'at different stages on the basis of man hour standards.This is nothing new because the works-in-progress forming partof the inventories is already being valued on this basis for thepurpose of annual accounts.

Analytical exercises as above sre presently done as part ofthe cost accounting systems. However, the emphasis in perfor*mance budgeting is on efficiency of output in relation to theassets employed rather than on control of operating costs. Toput it differently, while cost accounting relates one side of profitand loss account depicting "costs" to the other side depictingi'revenues", performance budgeting in a planning context relatesprofit and loss account to balance sheet, both recast, as"

discussed in this book, from the point of view of the economgas a whole.

In the background of a systematic annual review of productand price objectives of pubilc enterprises as discussed in thechapter on objectives, VACE can be taken as a fair index oftheir 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 measurementproblems 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 of rhe perfor-.mance of the enterprises concerned.

Role of auditIn 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 shoullprogresssively devolve on the accounting organisations internalto the executive agencies. So should be the responsibility forwatching compliance of executive instructions issued by theMinistries and Departments. The organisation of the Comptroller& Auditor General of lndia should progressively direct its atten-tion to a review of performance and of efficiency.

The approach of Audit should be consfiuctive, directed atimprovement in the management of programmes and in thetechniques ofplanning, implementation and evaluation. Sincepublic enterprises seldom function under highly competitiveconditions, the consequent absence of a market discipline withits potential threat offorcing business into bankruptcy makes itall the more imperative that an external agency should assist inthe enforcement of highest standards of performance and ofefrciency. Since, in a performance budgeting system, much lar-ger powers will be delegated to the lower formations a greaterresponsibility will devolve on Audit. One of its important taskswill be to reconcile the need for such autonomy granted to theoperating units with public accountability iu a wider sense. In soreconciling, it should adopt the role of a ..check" as well as a"balance" in the scheme of checks and balances characteristicoi any democratic set up. Where Audit finds, for example, that,for the job entrusted to an executive agency, the powers d.elega-ted are not adequate it should not hesitate to make a mention ofit in the audit report.

Further, in a performance budgeting system, the task ol'Auditrpill be to make an independent evaluation of performance and.ofefficiency with reference to the objectives and targets set outin 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

they can serve as an effective feedback to the management at alllevels. The reports presented to the Legislature would thus dealwith only the results of evaluation at the macro level. Forindividual acts of omission and commission greater stress shouldbe laid on suggesting corrective aclion through reports madeto diferent levels of management. This is, ofcourse, not to'suggest that the discretion granted to the Comptroller andAuditor General of lndia by the Constitution in the matler ofreporting to the Legislature or the privilege of Legislature to getinterested in individual cases of gross irregularities should inany waybe fettered. Thisisonly a plea for the exercise ofsuch discretion or privilege against the background ofoverallperformance.

Can we have efficiency-cum-perforrnance audit for publicexpenditure programmes in respect of which performancebudgeting has not been introduced? The answer is a definite yes.

Indeed, such audit can spur the departments to make systematicand speedy arrangements for introducing performance budgetingand help improve the internal control systems. By pointingout instances oflack of clarity in the specification of objectivesand of conflict between objectives of different public expenditure programmes with those of non-Government and paraGovernment agencies, Audit can persuadc the authorities atvarious levels to do some hard thinking which they wouldotherwise be reluctant to undertake. By ittempting social costbenefit analysis of public expenditure programmes alreadyimplemented, Audit can focus attention on the methodologicalproblems as well as problems in data collection with a view tofacilitatirg similar analyses in future. Audit can bring out casesof lack of coordination between agencies working towards thesame or similar objectives, cases of avoidable ilelays incommissioning ofplants or lags in utilisation of assets createdwhich should help the Executive authorities to 'organise' better.In taking a critical look at the efficiency with which variousprogrammes are implemented Audit can foster thinking on theappropriate criteria for their evaluation.

There should be a single agency for the audit of programmesofall Governments and all public organisations. Perhaps, thegreater part ofjusti{ication for the existence of the organisationof the Comptroller and Auditor General of India lies in this

163

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

very consideration. Where there are multiplicity of deparrmenrsand agencies, both Government and para Government, workingtowards common goals and objectives, only a single, unified, andcompact agency can serve the pu{pose of underpinning the co-ordination efforts.

Lest the author should be accused of making a special pleaon behalf of an external audit agency, a quotation from a bookon the'situation in U.K. published after the Fulton Commissiontitled "Management of Government" written by John Garettmay be given. He was not a civil servant. He had no connec-tion whatever with the Exchequer and Audit Department orthe Central Government in U.K. He was described as a..leadingmanagement consultant with wide experience of the manage-ment ofcomplex institutions." In his book, John Garett observes:"Large bureaucracies have many strengths, but they are notgood at generating ideas for change and improvement. They arenot good at the critical evaluation of the continuing relevanceol their own purposes and activities. They are not the best judgeoftheir own efficiency and prefer not to have to demonstrate it.They stifle the searching examination, thc pointed question, theassessment of efficiency. They prefer stability, secrecy aadorderly growth. There are few incentives for improving efficiencyin a rigidly hierarchial arrangement of status and seniority,particularly one in which managerial expertise is not the mosthighly prized attribute. Top management prefer to keep theirown efficiency services staff in a subservient position and wellaway from the upper administrative levels. These staffare hea-vily depcndent upon the goodwill of their clients for their workand for their career pfospects and they take care to stress the"service" nature of their activity. If there is ever to be anydynamic behind the drive for efficiency in government, then thebureaucracy must be subjected to efficiency audits, backed bythe highest authority and by explicit sanctions, and carried outby experts."

It will be obvious that such efficiency audit can be con<juctedonly by men with the highest order of intelligence, knowledge,and commitment to basic national goals. Further, the men haveto be drawn from a variety of disciplines, not only accoun-tancy, economics, statistics and management but also the varioustechnological disciplines. One major risk in a technological

EvarueuoN 165

society is obsolescence-of both machines and men. This is as

true with nanagement techniques as with substantive techno-logies. The men in charge of the overall evaluation should keepthemselves abreast of these developments and should promotechange and innovation. What we need to do is to bridge the gapbetween management techniques used by us and those used bythe developed world. This cannot be secured if the evaluationagency is conservative and acts as a drag on the executive.agencies. In the matter of use of latest techniques Audit shouldassume the role of a management consultant, This is not afarfetched suggestion. Only an agency with a nation-wideresponsibility for the audit of all public activities can bring tobear on these techniques a social perspective. Otherwise, thetechniques would be used for sub-optimisation, that is, formaximising benefits for the indvidual executive agency much inthe same way as a private firm would maximise its profits. As wehave discussed, what is expected and necessary in public agenciesis something qualitatively different.

H APTER XI

CONCLUSION

Wrrn rsr coMplErroN of discussion on different aspects ofperformance budgeting, we can now summarise what it seeksto achieve. In relation to public expenditure programmes per-formance budgeting system(1) specifies the objectives of programmes, relating them to(a) overall economic and social objectives of Government,(b) objectives of other instruments of public policy, (c) objec-tives of the concerned citizen groups and citizens, and (d) oneanother;(2) selects programmes to achieve the specified objective takinginto accounq (a) benefits accruing to the community as a wholeand (b) flow of incomes from such programmes to differentincome groups;(3) presents budget. estimates in such a form that the Legislaturecan allocate resources in tune with the will and aspirations ofthe people;(4) streamlines the organisational structure, financial rules andaccounting system within the administration with a view toensuring the attainment of specified objectives; and(5) evaluates achievement of specified objectives concurrentlyas well as on completion of programme.

Performance budgeting system thus serves as an effectivefeedback to the planning system and permits decentralisationof planning activity.

ImplementattonIt, however, does not mean that all aspects of performance

budgeting will be relevant tb all sectors or that they can betackled all at once. In public administration, we just have noopportunity to write on a clean slate.

The first step, therefore, is to improve the presentation of. existing budget documents integrating all the material relevantto 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 widen-

ing of the data base ior the preparation of the budget' Such

widening is inescapable if efficiency ln the management ofresources-both allocation and utilisation-rvere to . improve

significantly.The third step is to take a close look at the role ofthe

organisation 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 pro-

grammes.The seventh step is to make a systematic search for the

criteria and standards that can be set for evaluating the pro-

grammes on implementation. Some of them may be qualitative'

F,valuation agencies outside the implementing departments and

agencies like Audit as well as the beneficiary groups should be

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 evalua-

tion 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 to improve the methodology of costbenefit analysis.

And, no one should pretend that performance budgeting is apanacea for all evils or will find solutions to all problems. Aperformance budget document can well be open ended in thesense of exposing areas where data is lacking or strategy isunclear. This will help in directing academic research lnto morefruitful channels than is possible now. It is a pity tbat, to day,there is not much interaction between the academician and thecivil servant. But, a beginning has to be made. One prelimi_nary step is to openly discuss, in the budget documents, thepolicies of Government and the informatr'on and analysis onthe basis of which they have been shaped.

While we have generally confined our discussion on theapplication of principles and techniques of modern manage-noent to public expenditure, it is apparent that they can also beusefully applied in other areas of economic management suchas taxation and credit. Indeed, rve have argued that all theseinslruments should be used conjointly to achieve the nationalgoals and objectives. In respect ofany chosen instrument therefrain is the same: specify the objective, analyse the differentalternative routes by which it can be reached, seek the appro-val of the appropriate authority for selection of the mostpromising alternative, organise well to ensure proper imple-menta.tion, and evaluate on implementation to provide thenecessary fcedback. However; management of all these instru-mants of public policy lLas to be dovetailed with the frameworkof the overall PIan.

Planning as management systemA Plan takes a community wide view of the resources

available and allocates them so as to best subserve thc goalsand objectives on a long term basis. . In a developing country{ike ours the capital resources available to the community, interms of both investible funds as well as their physical embodi-ment, namely, structures and machines, which alone help usenlarge the reasources available for the future, are severelylimited. Their efficient use is, therefore, of paramount impor-tance. That we have not been uniformly successful in achievingthis 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 UTILTzATIoN or Srr-rcrep INpusrRrES lN IloI'q' 19?6'??

Metallurgical

AluminiumCopperSteel castings

Mechanical Engineer ing

Agricultural tractorsRoller and ballbearingsDiesel enginesSewing machinesRailway wagons

EIec t r i c al Eng ineering

Electric Motors?ower transformersDry batteriesStorage batteries

Chemicals

Fertilizers:Nitrogenous (N)Phosphatic (P205)

Sulphuric acidCementPaper and board

S6un cn: StatisticalBombay.

Capacityutilised (Yo)

InstalledcapacitY

250 thousand tonnes57 thousand tonnes169 thousand tonnes

49 thousand nos.3l million nos'

288 thousand nos.534 thousand nos,

31 thousand nos.

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

1300 million nos.

2 million nos.

3.0 million tonnes0.7 million tonnes2.8 million tonnesZ1 miliion tonnes1.1 nillion tonnes

Outline of India (1978), Tata Services

844239

57

634862

6889

3872

39

bl6361

89

81

Limited,

If 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 produc-

tion. 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

170 PrnponM,cNcn Buocnrrxc FoR PLANNED DtvnropruBNr

or so in 1965-66. From the subsequent year onwards it hasremained stagnant in the region of 12,000.14,000 wagonsimplying less than 40 per cent utilisation of capacitv. Such asituation could not have continued if we had tak.rr r,"pr,oreassess the long term demand for railway wagons and to read-just or diversify our production capacities to produce somethingwhich we really needed.

Underutilisation of capital assets is not confined to the indus-trial sector. In the agriculture sector, a very substantial pro-portion of the plan investments have gone into irrigationprojects. The average area irrigated during the five years1971-72 to 1975-76 in some selected projects as a per centageof the area planned to be irrigated was as below:

rAsLr 5

Avnnacs AREA IRRTGATED DuRrNc 197l-?2-1975-76 IN SoMESrLtcrro PRoJEcrs As A pERcFNt46E oF tHE AREA

PLANNED to ne Innrclrto(in thousand hectares)

Area planned Arerage aiea percentageto be irrjgated irrigated utilisation

Project

Bhakra NangalChambalSarda canal systemKosiHirakudMayurakshiTungabhadraNagarjunasagarParambikulam

AliyarKakraparPurnaGirna

ToTAL

84,1 33

24.7 4022.3 39

3894.6 64

1381 .5566.8

1100 27 43.7

249.4289.5414.O

831 .6101.5

256.062.O57.2

6443.4

1421.1

299.3848 2135.1

240.9

248.8

30.1

103

5177l897IJ603930

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

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

CoNcl,usrox t7l

households are all taking decisions all the time which affect '

the economy one way or anolher. How to ensure that all of

them take their respective decisions in conformity with the

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.

The management of all 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

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 isproduced. There should be efficiency norms for all organisa-

iions achievement above which attracting rewards (say, a

higher profit margin) and performance below which attracting

punishment (say, a higher tax liability). Some of the instru-

ments 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

the other making losses goes scotfree.A 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 forwhich they work. There should be no question, for example,

of employees in a producing firm getting higher wages

if the value added by the firm in relation to the capital

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

question oftheir having to fight for higher wages if the value

172 PEnpor.ueNcn Buocrrmc poR punNEo DnvuoputNr

added goes up. A fair share in the value added, taking intoaccount the capital employed, can be a sound basis for smoothindustrial 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 econo-my are brought out in the accompanying pyramid. It is obviousthat efficiency in rnanaging the economy can be improved ifdecision making in different areas is harmonised so thatdecisions in one area do not counter the effect of decisions inothers. However, from the portions marked out in the pyramidit may be seen that the planning Commission is presentlv pre_occupied with only some of the areas in the entire nefA' ofdecision making. It can become more efective only by makingarrangements for decentralised decision making in the areas ofits 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 allareas. (see Diagram 2)

. It is time we recognise that the shortcomings in our planninglie: (i) in its narrow compass, (ii) in not linking up the macrolevel aggregates of savings, investment and capitut stock withmicro level capacities, efficiencies and outpuis, and (iii) inassuming it to be a one time exercise ratheithan a continuousprocess of managing the economy. As we approach futureplans what matters is not the size ofthe outlay oiihe machanicsof cheeseparing the limited financial resources commandeeredby Government but that our goals should be clear, our priori_tie^s right; that our policies in each sector of economic activityinformed by the overall goals and priorities; that the roles ofdifferent instruments like physical controls, monetary policy,credit_ planning, policy on prices, incomes and wages, taxation,subsidies and public expenditure in achieving the*overa goalsas well as the seitoral objectives are reasonably well delineated;and that the roles of different organisational entities, Govern-ment, quasi.Government and para Government, are welldemarcated with reference to the instruments they administerand the objectives they serve.

AntyodayaIt may be that we have neither the political mandate nor the

173CoxclusroN

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174 PsnnonlalNcp BuocnrrNc FoR PLANNED DrvnropupNr

managerial skill to switch over to such a total system of man-agement under the aegis of Government. 'fhe least that oanbe done, then. is to ensure that what Governrnent does. in thesphere of public expenditure as elsewhere, benefits those thatare in the bottom rung of the ladder. Gandhiji's concept ofAntyodaya is that the needs ofthe last man should come first.If this is accepted we should first decide the basket of consump-tibn of goods and services we would like to provide to thisgroup; then decide on the pattern of economic activities thatwill give this group the incomes needed to buy those goodsand service*; and then work out the least cost way of producingthese goods and services subjecL to the generation of incomesdcsired. In other words, planning should then be confined toconsumption needs of specific vulnerable groups.

We should then formulate programmes sector by sector,commodity by commodity and region by region, using analyticaltechniques down the line, delineate the organisational structures,supply the managerial skills needed for their execution, and en-sure, througheffective feedback mechanism, that the programmes

"do, in fact, achieve Lheir objectives. 'fhe particular technologiesused (labour intensive, capital intensive or intermediate) and thespecific patterns of organisation (smalt, rnedium or large scale)then fall into their places.

In the chapter on objectives we have seen what Antyodayaimplies when it comes to utilisation of irrigation water in theagriculture sector. Let us now consider another example. Inthe case ofcloth needed for consumption we should decide howmuch cloth and of what durability is required and work out thebackward linkages in terms of both the commodity flows, likeraw cotton or polyester yarnr power, chemicals that go into themaking of cloth as well as the cash flows, like investments,prices of products, and incomes, to select the set of programmeswhich will produce cloth of the quantity and quality desired atleast cost to society subject to the generation of desired patternof incomes. The administration or management of the pro-grammes, which is a continuous process of making adjustmentsall along the line, should tben ensure that the incomes are sogenerated and the cioth is so delivered.

CoNct usroN

U rgency of the problemPlanned development ofour country, which in a nutshell is

providing adequate incomes to large numbers through appro-priate 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:

Diogrom 3

AGE COMPOSITION OF INDIA'sPOPULATION, t97l

Age group Percenloge to lhelotol po pulofion

60 ond ooove

40- 49

30-39

20-29

o -9

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

t75

:,

r3

l5

2l

30

176 Pnnnonrrr.lxcr BupcnrINc ron Pr,lNNso DrvuopueNr

streets, as some of them already have. The other aspect is tomake them "employable" in jobs which will generate furtheremployment and thereby increase national wealth. Our educa-tion system hitherto has produced a latge proportion of youthwho are not employable in this sense-they are fit only forclerical jobs some of which, no doubt, carry a high prestige.

Unless rre take urgent steps to tackle these problems, thebottom bulge in the population pyramid will chase us. It isa wave today; it will be a flood tomorrow.

Appendix I

Constitutional Prcvisions relating to Government Budget-

The cardinal principle of democratic functioning of the-Government-Union as well as States-as adumbrated in theConstitution is that the Legislature, which reprcsent the will ofthe people, has the supreme prerogative of levying taxes and,authorising expenditure of the Government. Article 265 of theContitution says: "No tax shall be levied or collected except byauthority 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 Consoli-dated 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 andArticle 204 in respect ofthe States stipulate that no mone5rshall be withdrawn from the Consolidated Fund of India or ofthe respective States except under appropriations made by lawsenacted by the respective Legislatures.

The moneys received by the Government as a custodian, asin the case of provident fund and other deposits, notionally flowilto respective Public Accounts (under Article 266) and with-drawal of moneys in such cases does not require specifie.authorisation by the Legislature. But, to the extent these moneysare utilised for financing expenditure, the latter would requireauthorisation by the Legislature. In order that the Executive.may not have difficulty in meeting any unforeseen expenditurewhen 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 inany way putting fetters on the Executive in day to day wolking..

178 PgnronrrteNcr BuocrrrNc FoR PLANNED DrvrropurNr

In order that the Legislature may have a full picture ofGovernnrent finances before agreeing to pass flny law imposinga tax or authorising expenditure, the Executive is required toplace before the Legislature (under Article I 12 in the case of theUnion and Article 202 in the case of States) a statement of the,estimated receipts and expenditure in respect of any financialyear before the commcncement of that year. This is called the'"annuai financial statenent", popularly known as the Budget.Such a statement is required to distinguish expenditure on reve-nue account from expenditure on capital account.

Constitution further stipulates (Article ll3 intbe case ofUriion and Article 203 in the case of States) that the expendi-ture estimates shall be presented in the form of various"Demands for Grants" to facilitate proper discussion and votingby the Legislature. In other words, the expenditure side of thebudget is noi to be treated as a monolithic bloc but should beso split up as to facilitate a more detailed consideration andcontrol by the Legislature. The manner in which this splittiogup should be done is left to the Legislature and is, in practice,determined by the Executive approaching the EstimatesCommittee 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 smallerDepartments presenting only one Demand and the biggerDepartments more than one Demand. Thus, although theCouncil of Ministers as a whole are collectively responsible tothe Legislature (under Article 75 in tlie case of Union and Arti-cle 164 in the case of States) the Ministers headingthe separateDepartments become individually responsible foi the moneysplaced at their disposal.

The Constitution, in keeping with its quasi-federal characterwith a strong Cenre, has made a distribution of categories oftax revgnue between the Central and State Governments on thefollowing criteria:

l) Certain tanes and duties are required for the discharge ofresponsibitrities cast on the Union, e.g. customs and bulkof the Union excise duties.

2) Certain taxes and duties are more efficiently collected by

Appmorx r 179

a centralised agency with the Union, but the 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, enter-

tainment tax and State excise duties.

The Constitution recognises that (a) the principles of distri-bution of revenue between the Centre and the States, where

such distribution is provided, should be modified with reference

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 infavour 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 Commis-

sion every five years to determine these principles (Article 208).

Appendix 2

National Income Accounts

Income is the total money at our disposal during a givenperiod, usually a year, The cash balance with us at any pointof time may be only rupees hundred ortwo, but the annualincome may be rupees five thousand. The concept of incomeis thus not astock btt the amount offlow into and out of theannual budget. If we add up the annual incomes ofall thehouseholds in the country it broadly becomes the total incomeof the country for the year.

Incomes accrue to the households because we have (i) Ientour money (which gives us interest or profit); or (ii) let outour physical resources like land, property, etc. (which givesus rent); or (iil) offered our labour (which gives us wages andsalaries); or, (lrr) employed ourselves, that is, become self-employed (which gives us notional incomes which are a combi-nation ofprofit and wages).

These incomes are earned for supplying the ,,factors of pro-duction", namely, land, labour and capital to corporate bodiesor "firms" producing "goods" and "services ". Examples of"goods" are food and fertiliser; examples of"services" are busjourney 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 spenton co sumption goods iike food, clothing etc. Some paymentsare made to Government either as personal income taxes or ascharges for services rendered (like school fees, hospital charges).The rest of the incomes are saved, Thus, if the accounts of allthe households are added together they will look aS shown inthe table on the next page.

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

ApprNoix 2

Housrnor-o AccouNtst(AGGREGATED roR ALL HoUSEHoLDS)

(in rupees crores)

53,000r,000

1,000

9,000

64,000

'All figures in this table are hypothetical but are broadly based onthe national income accounts fot 7976-77.

farmers are both "households" and "firms". They producegoods and services as "firms" and at the same time earn nationalincomes as "households".

Now, the firm which intends to produce goods and servicesleases in land (which ternr includes all natural resources),borrows capitai for buying machinery etc. and engages menfor working the rhachines. Thus the firm's activities give rise tothe factor incomes ofthe households referred to above. How-ever, in addition to engaging the factors of production, thefirms have to buy raw materiais, power and components toproduce the goods and services. A firm's account will thus beas under:

t81

Incomes

A. Factors incomes

Interest and profitsRentWages and salariesIncomes of self-

employedB. Transfer payments

from GovernmentToTAL

7,4002,940

25,000

26,700Savings

2,000

64,000

Expenditure

ConsumptionTaxes paid to Govt.Charges paid to Govt.for services rendered

Receipts

Sale value of goods and services

Expenditure

l. Cost of bought out raw materials,power. components, and services

2. Factor payments made to thehouseholds.

Ifthe cost ofbought out raw materials, power, components,and services is deducted from the sale value of goods and ser-vices, the resultant sum represents the efforts of the firm or itscontribution to the economy of the country. It will at thesame time represent the factor incomes generated by its activi-ties. This sum is known, self evidently, by the term ValueAdded. 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 thepoint 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 food-grains produced /ess the value of bought out water, power,seeds, fertilisers, pesticides, etc. represents the value added bythe farm. The same value added, at the same time, representsthe aggregate rent, wages and interest etc. paid by the farmand the profit made by the farmer. The ploduct and incomesides are thus like two sides of the same coin.

The value added concept has another great advantage. Ifwewant to add up the contributions made by all the producingfirms in the economy, we need to avoid double counting.Suppose the value of farm produce of all the farms in thecountry 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 ofagencies supplying water and power, the seed farms and thefertiliser and pesticide factories, If re add up the output ofthese agencies and of the farms we will be inflating the figuresfor the economy as a whole. This double counting can beavoided if we total up the "value added" by each firm, insteadof the output, to get the total for each sector and for the entireeconomy.

For the year 797 6-77 , the value added by the diiferent sectorsand the value of output were broadly as under:

(in rupees crores)

Value added

27 ,O00

Agriculture and alliedservices

Industry, mining, power,transport, etc.

Trade, banking, services, etc.

ToTAL

Value of output

36,000

55,000

36.000

1,27,W0

20,00018,000

65,000

Whlie the sum Rs. 65,000 crores represents the real effort ofthe producing firms, the sum Rs. |,27 ,000 crores represents theexfactory value ofgoods and services exchanged in the economy.

Now, this exchange of goods and services actually takesplace 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 Govern-ment 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 bythem. These taxes are paid by the firms, in effect, on behalfof the investors because but for these taxes the profits wouldhave accrued to the inveslors in toto as factor incomes' Some-

times, the firms do not distribute the entire profits made bythem 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 by firms can be classifled as (1) goods

finally consumed by households (2) goods consumed by firms toproduce goods finally consumed by households and (3) capitalgoods like machines which will keep on producing goods under

categories (1) and (2). The total of all the three categories

represents the product oi the economy. Ftrowever, goods incategory (3) are not finally consumed in the year. The curnula-

tive 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 oftheeconomy. To the extent this happens. there is no adeiition tothe productive capacity, although there is production of cate-

gory (3) goods. We can thus talk of 'gross' value of the pro-

duct 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.The product accounts of all the firms in the economy when

aggregated thus look as shown in table on nexi page.

184 PnnronnaNcn BuocrrrNc FoR PLANNED DsvrloplrrNr

Pnooucr AccouNrs(,lccnlclrro ron ALL rrRMs)

(in rupees crores)

Receipts ExpenditureValue of goods and services (1ess I. Factor payments tovalue of bought out materials, householdscomponents, etc.): 2. Indirect taxesl. Agriculture and allied 3. Corporation taxes, servrces. 27,A0O 4. Corporate savings2. Industry, mining, power, 5. Depreciation

transport, etc. 32,00013. Trade, banking,

services, etc. 18,000

GRoss PRoDUcr 77,000 GRoss pRoDUcr

62,00010,0002,0001,0002,000

'77,000

linclusive of indirect taxes of Rs. 10,000 crores and depreciation ofRs. 2,000 crores

Definition af national incomeHaving discussed the household accounts and the accounts of

the firrns from the. point of view ofthe eccnomy as a whole weare in a position to define the various terms used to denote'national income'. The gross value added by various firmsvalued at market prices (that is, inclusive of indirect taxes anddepreciation), is known as:

Gross fJomesticl Product at market prices -Rs. 27,000 crores

If indirect taxes of Rs. 10,000 crores are deducted fron this figurewe get:Gross Don'lestic Product at factor cost -Rs. 67.000 croresIf depreciation of Rs. 2,000 crores is deducted fi-om this figure we get: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 withother countries which results in inflow and outflow of'goodsand services as also, correspondingly, outflow and inflow ofmoney. If these external transactions (which are somewhatmarginal in our country) are included in the computatioo, theDomestic Product becomes the National Product. The GrossDomestic Product becomes the Gross National Product and theNet. Domestic Product becomes the Net National Product. TheNet Domestic Product at factor cost (i.e. excluding excise

AppnNotx 2

NATToNAL INcoME AccouNTS(in ruPees crores)

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 "pro-ducers". Where does the Government stand ?

The concept of Government in economics is that it is a

"commoo benefactor" and a "common consumer." The former

because it transfers incomes to the needy like pensioners, handi-

€apped etc. (called "transfer payments"), the latter because it

"pbtrdr -on.y on defence, police, etc. known as public goods'

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 ofexternal transactions, this becomes the National Income'

Let us illustrate these aggregates with the broad figures for

197 6-77 .

INcoME

l. Household accaunts 1.

a. Factor incomes receivedfrom firms 62,000

b. Transfer PaYments re-ceived from Government 2,000

Government tccoutttsa. Direct taxes from house-

holds 1,000

b. Charges for services

rendered to households 1,000

c. Corporation taxes fromfirms 2,000

d. Indirect taxes from

EXPENDTIURE

Household accounts

a. Consumption 53,000

b. Savings 9,000

c. Direct taxes paid toGovernment I,000

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

2. Government accountsa. Consumption 10,000

b. Transfer Paymer.ls tohouseholds. 2,000

c. Savings 2,000

186 PnnponuaNcE BuocrtINc ron praNnrn Dpvnopurxr

firms 10,c00Torlr, 78.000 78.000

Less transfer payments bet-ween Covernment and

. ,househotds t.tt,,2t,2ul (_) 4,000 (_) 4.000

A_dd hrms'savings (+) 1,000 (+) 1,000Net Domestic Income at Net Domestic Expendituremarkct prices 75.000 at market prices 75,000

Less Indirect Taxes 10,000 10,000Net Domestic Income at Net Domestic Expenditurefactor prices 65.000 at factor prices 65,000

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

Savings and investnxentIt may be seen from the above description, that the gros$

savings in the economy taken as a whole are:

(rupees crores)l. Savings by households 9,0002. Savings by Government (i.e. surplus on revenue account) 2,0003. Corporate savings (i.e. earnings retained by the firms 1,0004. Depreciation provision by the firms 2,000

TorAL I4,00O

The amount when invested in machines etc., adds to theproductive capacity ofthe economy. The capital account oftheeconomy can thus be represented as:

SaringsHouseholds

Governlnent

Corporate

Depreciation

(rn rupees crores)

Inyestment

9,000 Agriculturat and alliedlservices

I2,000 Industry, mining, power, | 14,000transport, etc.

I1,000 Trade, banking, services, Ietc. )

2,00014000 14,000

Appr1orx 2 187

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 roiluc ti on- con sump t i on o cc outl t

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.

The two accounts can be combined to directly depict the

production-consumption relationship as below:

Px.ooucrron-CoNsuMPTIoN AccouNr(in rupees crores)

Pnooucrlot'l

7. Consumption of goods and sefiices

Agricultural and allied Iservices i

Industry, mining, power, | 63,000transport, etc. I

Trade, banking, ser' I

vices, etc. J2. Capital goods 14,000 2.

Gross Domestic Product atmarket prices 7?,000

CoNsUMPTIoN

1. Consumption af goods and services

By Government 10,000

By Households 53,000

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 Provi-sion by firms 2,000

Gross Domestic ExPendi-ture at market Prices 77,000

The circular flowFrom the above description it will be obvious that national

income accounts are based on the concept of circular flow offinancial resources. This circular flow may be represented

diagramaticallY as below:

188 PsnFonlaeNcr Buocnttuc FoR PLANNED Dsvnl,optreNr

Diogrom 4

CIRCULAR FLOW OF FINANCIAL RESOURCES

Desciption

1. Factor payments2. Transfer payments3. Purchase of goods and services

for consumption4. Savings by households5. Direct taxes and service charges

to Government6. Indirect taxes and corporation

taxes7. Purchase of goods and service

for consumption8. Savings by Government9, Savings by firms and deprecia-

tion provisions10. lnvestment (from savings) in

capital goods

To Amowtt

Households 62,000Households 2,000

Firms 53,0009,000

Government 2,000

Government 12.000

Firms 10,000

2,000

3,000

Firms 14,000

From

FirmsGovernment

HouseholdsHouseholds

Households

Firms

GovernmentGovernment

Firms

AppnNorx 2

The circular flow can be 'proved'as below:

(Rupees crores)

189

Firms(3)(7)(10)

Incomings

53,000 (1)i0,000 (6)i4.000 (9)

TorAL 77,000

Outgoings

62,00012.000

3,000

77,000

53,0009,0002,000

64,000

2,00010,0002,000

14,000

Households

(1) 62,000 (3)(z) 2.000 (4)

(5)Torar- 64,000

Goyelnment

(5) 2,000 (z)(6) 12,000 (7)

(8)Toral 14,000

National budgetingA national budget for a forthcoming period can be prepared,

in the same format as national income accounts, either from theincome (consumption) side or from the production side. Thefirst alternative will merely be the aggregation of all householdbudgets plus all Government revenue budgets. The secondalternative will be the aggregation of budgets of all firms produc-ing goods and services. The national budgets prepared on thebasis ofvarious aggregate appearing in the national incomeaccounts will, obviously, have a much greater element of statisti-cal estimation than lower level budgets. For that reason theywill also be much less amendable to managerial control.

We can combine the tlvo national budgets mentioned aboveto give a direct productiou-consumption budget in physicalquantities. Of course. the goods produced can be consumed onlythrough the exchange medium ofmoney, that is, through moneyincomes. But, this direct production-consumption budget willfacilitate planning to be done in physical quantities. Theprincipal objective of preparing a natiotral budget in physicalterms is to ensure that the pattern and quantities of goods andservices desired or demanded by the households or Government

190 PpnronrralNcn BuocBrrNc FoR PT.ANNED DpvrlopunNr

for consurnption as expressed in the household and Governmentbudgets are matched by the pattern and quantities of goods andservices to be produced by the firms as estimated in theirbudgets.

. Appendix j

Principles of Commercial Accounting

The first point to be noted in the commercial accounts of anyfirm is that it has a separate legal and administrative personalitydistinct from the individuals, organisations, or Goveanmentwho invest money in the firm. The money thus invested, there-fore, becomes a liability ofthe firm (owed by it to the investorsfor whom it is an asset). All the buildings, machinery and stocksfinanced by the firm from the money invested are assets ofthefirm matched by its liability to the investors. The second pointto be noted is that the business ofthe firm is conducted on behalfand at the risk, ofthe investors. Thus, the.profit made by thefirm is a liability of the firm (owed to the investors) and loss isa notional asset (owed by the investors to the firm).

When the firm borrows money, the lenders assume the charac-ter of investors and the money borrowed becomes a liability (owedto the lenders). Likewise, if the firm itself invests in, or lendsmoney to, any other firm jt creates assets for itself. Where thetotal moneys received by the firm are in excess ofwhat is requiredto 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 firmhas no way of creating such excess assets. It has to have recourseat least to short term borrowing like overdraft from the bank.These short term lenders also assume the character of investorstemporarily 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 supp-liers who supply goods on credit are known as creditors and thepersons to whom goods are supplied on credit are known asdebtors. The money owed to the creditors is a liability (owedby the firm) and the money owed by the debtors is an asset(owed to the firm). The difference between the cash receivedfrom 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, thatis, an asset or a liability.

Thus, the liabilities aud assets of the firm always match muchto 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 BalanceSheet. Normally, such a statement is prepared as on the lastday of the financial year for the business of the firm. Theitems appearing in the Balance Sheet are as below:

BALANCE Snrsr as

Liabilities

1. Share Capital2. Long term borlowing3. Short term borrowing4. Creditors

5. Profit, if any

oN 31sr MARCH (YEAR)

Assets

2.J.

LandBuildingsMachineryClosing stock of goods(inventories)

DebtorsCashLoss, if any

5.6.

7.

Items 3 and 4 on the liabilities side are known as Currentliabilities and Items 4, 5 and 6 on the assets side as Currentassets. These liabilities and assets are created in the course ofthe business. The excess of current assets over current liabili-ties is generally known as working capital, that is, so muchextra capital is required for running the business, besides thecapital necessary to finance the fixed assets (Items 1,2and,3on the assets side),

The Balance Sheet gives the position of liabilities and assets.

as at the end ofthe business period; it does not tell anythingabdut the operationr of the firm during the year-the expenses

incurred by the firm in producing the goods and services duringthe year and the amounts realised by it through the sale of'goods and services. This information is given in the Profit andLoss Account prepared for the year and takes into account allthe 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 salereceipts on the right hand side. This is different from the'

AppnNorx 3 193

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

The second, and really important, difference is that commer-cial accouats are prepared on accrual basis, oot on cash basisas is the case with the household budget/accounts and Govern-ment budget/accounts. Profit and Loss Accourit thus depicts th'erevenu€ earned. for the year not the sale value realised in cash.,during the year. Likewise, it depicts the expenditure incurreditfor the year not the actual cash payments. Thus, sales effectedr:on credit basis and purchases made on credit basis are also,taken into account. The value of goods so sold or the purchaserso made are treated as outstanding assets and liabilities andexhibited 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 thefactory is of limited llfe. It invariably wears or, not infrequently,becomes our ofdate. Therefore, some provision is required iobe made on the expenditure side so that by the time the equip_ment becomes due for replacement, there is sufficient money to.buy the new equipment. In any case, the value ofwear andtear is expenditarefor the year. Conceptually, the assets havebecn partly 'consumed' during the year. This is an importantconcept in economics as well as business management and hencedepreciation (which represents the money so set apart) is animportant entry in the Profit and Loss Account. Each year,sProfit and Loss Account of a firm is, thus. separate and lookssomewhat 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. Sales2. Rent for land and buildings (if

not owned) 2. Closing stock of goodsx3. Interest on long term borrow- 3. Loss, if any.

ings

*Opening Stock of goods is what ..this year'. has to pay the..previous.year"; closing stock ofgoods is, Iikewise, what,.this year.' has to be;paid by the "next year".

194 PnnronueNcn BuocsrrNc ron PrnnNEo DrvrLoplrrNr

4, IDterest on short term borrow-rngs

5. Raw materials end bodght outcomponents

6. Fuel and power

{a) Materials or charges forsuPPlY

"(bl Wages of labour7. Maintenance of Plant and

machinerY(a) Stores and sPare Parts(b) Wages of labour

8. Wages of Labour emPloYed onproduction of gocds and

services (other than 6b and 7b)

9. Salaries of administrative andsales staff.

10. Depreciation (as assessed)

ll. Profit, if anY.

To facilitate compilation of national income accounts dis-€ussed in Appendix 2, ihe profit and loss account shown above

€an be recast as under:

Expenditure Receipts

Cost of bought out raw materials, Sale Value of rhe Protluct

etc.(5 l- 6a f 7a) (Sales p/as closing stock tt.nar

Depreciation (10) opening stock)Fqctor Payments(2+3+4+6b+7b+8+epra,l profit, if any, rrlnas loss, if any)

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 inAppendix 2.

In case ofloss, or in case of profits (if tbey are not distributedto 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 anotional asset of the firm (which the investors have to makegood and hence owe to the firm) and profit represents a liability(owed by the firm to the investors). Two other items appearingin the Profit and Loss Account are also carried over ro theBalance Sheet. These are the closing stock of goods, which is anasset to the firm, and the depreciation provision. The lattcr, isusually 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 deprecia-tion provision does not represent a cash outgo, the efect ofproviding for it in the Profit and Loss Account (and therebyreducing the profit or increasing the loss) is to increase the cash

available with the firm. This is reflected on the asset side ofthe 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 financetheir working capital requirements. Iflhen gets feflected eitherin cash balance or in debtors or in inventories, that is, in one ofthe 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 offunds. The effect in the Balance Sheet will be to increase theitem under short term borrowings on the liabilities side with amatching entry .accumulated losses' on the assets side-anotional asset, The short term borrowing can usually be onlyon the basis of hypothecation of land, buildings, equipment orstocks. Thus, over a period of time, all the real assets on theright hand side will get hypothecated against the shorttermborrowings on the left hand side, with the result that there willbe no real asset remaining free on the right hand side to matchthe initial capital investment or the long term borrowings onthe left hand side. Thus, when a firnr strikes a bad patch, itinitially eats up accumulated profits, then starts the era of short-term borrowings. When the aggregate short-term borrowingexceeds the value ol curent assets the firm starts eating upthe capital invested.

196 PERFoRMANCE BUDGETING FoR PLANNED DrvsropMrNr

Revenue and capital budgets

We can prepare, under the same heads as the profit andloss account, estimates of,receipts and expenditure for the nextyear. This will constitute the firm's revenue budget for the nextyear. Likewise, we can proj ect the Balance Sheet items of thefrm for the next year, The estimated changes in the value ofassets and liabilities during the next year will constitute thecapitalbudget for that year. For example, additional investmentor additional loans proposed to be taken will resttlt in increase

in the liabilities side ol the balance sheet and hence come onthe receipts side of the capital budget. Likewise, the additionalmachinery proposcd to be installed or proposed accretion tostocks etc. will result in increase in the assets side of the balance

sheet, and hence come on the expenditure side of the capitalbudget.

Let us examine the revenue budget of the firm that is,

the projected Profit and Loss Account for the next year. Wemust first take a look at the receipt side which represents thefinancial earnings. The estimated earnings are the product ofthe quantity ofgoods likely to be sold and the likely prices. Thefirst exercise is. therefore. to make a realistic estimate of thelikely quantities to be sold and the likely process at which theycan be sold. Having determined the quantities to be sold we

come to the quantities to be produced keeping in view the pipe-

line stock necessary. The estimate ofthe quantity to be pro-duced will directly give the estimates bf the raw materialsrequired, the number of men to be employed, and the quantityof fuel and power to be consumed etc. The estimated value ofthese quantities are put down on the expenditure side. Theestimates under different heads thus finalised make up the budget,the difference between tbe revenue and expenditure sides beingthe 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 orbecause some of the expectations regarding levels of eficiencyetc. have proved to be either too high or too low. Conse-quently, budgeting process is closely interwoven with themanagement process. As management process is cyclical-sett-ing objectives, preparing action programmes, allocating resources,

monitoring execution, and making final evaluation before start-

Apprsorx 3

the next year-budgeting

197

also becomes aing the Process forcyclical process.

Cost accounlingTraditionally, firms relied on financial accounting, which

recorded transactions on a historical basis, to get informa-

tion 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 itpossible 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.

Management accouniingA more madern terminology for the accounting function

embracing financial accounting, cost accounting and budgeting

is management accounting defined as preparation and presenta-

tion of accounting information to enable the organisation or

firm (t) to plan ahead and (2) to ensure effictive control ofactivities during the execution of plan.

Perhrmance budgettngSince 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 variousitems of expenditure such . as raw-materials, wages, fuel,power, stores represent certain physical dimensions and thequantities of output from them depend on certain physicalparameters like utilisation of machines, process efficiencies,reduction of material waste, productivity of labour, the qualityof budgeting can be improved if the exercise is done in physi-cal terms alongside the financial analysis. Sucb an exercise. tobe manageable, must break up the production process intomeaningful 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 atwhich they would have to be produced to enable the firm tomake profits. The objectives must take into account the environ-mental conditions. Such a comprehensive budgeting system whichestablishes a clear nexus between objectives, physical dimensionsand financial outlays is what we call performance budgeting.

Appendix 4

Discounted Cash Flow Technique

If different investments yield different patterns of benefits over

different periods, in order to make a comparative evaluation

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 lakhthis year it is preferable to an investment which gives a returnof rupees one lakh next year, or the year after.

The technique is compound interest calculation in reverse-

Ifa 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 ofmoney at the end oft years, we can know its present value P bythe formula.

-A (1+r)r

Thus. if A 1 . A2. 43 are the net benefits likely to accrue frornan investment A during the lst year, 2nd year,3rd year afterinvestment, their total present value can be worked out as

AI A2 A3NPv,; rr-,;l a ;F F-1r-,.1u

Similarly if B 1, 82, 83, 84, B5 are the net benefits likelyto accrue if five 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 practicesince tables giving present values corresponding to differentdiscount rates are readily availablel, just liki compoundinterest tables.. Suppose the interest rate is l0 per cent. Thevalues in differei'rt years are as below:

PresEntlime

1.00

o.910.830.750.68a.62

After Iyear

1.10

1.00

0.910.83r),75

0.68

After 2yearc

r.211.10

1.000.91

0.83

0.75

After 3yaers

1.33

1,.21

1.101.000.91

0.83

1.61

1.46

1 .21

1.101.00

(in lakh rupees)

After 4 After 5

leafs years

1.46

1.331.21

1.101.000.91

There is no magic in this table. The underlined figuresindicate the year in which money is earned/spent. For gettingits equivalent value in a future year we multiply by 1.1 success_ively. For getting its value in apastyear rve divideby l.lsuccessively. Thus, Rs. 1.00 lakh earned/spent this year isequivalent Rs. 1.61 lakh earned/spent after 5 years. Con-versely, Rs. 1.00 lakh earned/spent after 3 years is equival-€nt to only Rs. 0.75 lakh earnedispent this year.

To illustrate the application of the technique, the net presenfvalue at l0 per cent discount rate of a project which costsRs, 10,000 in the current year and yields Rs, 3,000 every yearfof the next five year is as below:

r Present value factors for certain selected djsccunt rates are given atdhe end of this note.

APPENDTX 4 20r

Cash inflow (Rs.l Present value lactor Present valueYear

o1

23

45

(10,000)2,7302,490r ,t 5n

2,0401,8601,310

(10,000)3,0003,0003,0003,0003 000

Net Present

N.B.: Amounts in brackets are costs or cash outflows.

The technique or the computation involved is tress importantthan the judgements made on the "life" of the various invest-

ments, that is, the respective periods during which they witlgive the benefits, and on the quantum of cost and benefitstreams flowing from them.

The rate'used for discounting in the private industrialsector for these calculations is usuirlly the rate at wbich thefirm is able to borrow funds from the market for the proposed

investments. Different discount rates can give different resultsdepending on whether an investment gives early benefits orlate benefits. The selection of investment may go wrong ifthe discount rate assumed is wrong. Further, it may be heipfulto know at whal. rate the investment will be justified' A varia-tiotr of this technique is, therefore, to calculate the internal rateof return (IRR) of each investment that is, to calculate theinterest rate which gives a zero net present value (NPV) foreach alternative. If the internal rate of return (IRR) thusarrived 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 onthebasisof two assumed discount rates, say 10 and 12 per cent. If 10

per cent gives a positive NPV and 12 per cent gives a negativeNPV, the IRR lies somewhere in between and can be arrivedat 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. Ifboth the discount rates give negative NPV, the IRR. is lowerthan 10 per cent and another lower rate, say 8 or 9 per cent,

is tried. Having arrived at two rates the lower one of whichgives a positive NPV and the higher a negative NPV, the exact

1.000.91

0.830.750.680.62

Value (NPV)

202 PERFoRMArqcr BuocEtNc pon Pr,cNNro DpvrloptanNr

IRR is arrived at by interpolation. For the project illustratedabove, the net present value at different interest rates work out(with reference to standard tables appended) as below :-

Discount rate

10%12%

14%1s%

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+ $: I 5 -1.0.21

-t{rl

Thus, the benefits in the next five years, ifdiscounted at a rateof 15.21 per cent, less the capital cost of the project wouldyield zero net present value. The investment is, therefore, justi-fied so long as the firm is in a position to borrow funds withan interest rate lowerthan 15.21 per cent.

As the reader may have concluded himself it is morestraightforward for the firm to indicale to all the lower forma-tions the rate at which it is able to borrow funds, so thatinvestment decisions can be taken at the appropriate levelsusing that as the discount rate, than ask the lower formationstoworkout the IRR in respect ofeach prepared investmentand subrrit for comparison with the borrowing rate keeping ita secret. (see Table 6.1

Where the quantum of benefits yielded over the years isuniforrn it will facilitate quick calculation if cumulative valuesof discount factors are ready at hand. (see Table 7)

NPZ (Rs.) ,

t,370830290-50

0e0)

203APPENDTX 4

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Appendix 5-

A New Classification of Govemment Transactiois

The broad sectors of the new classification are:

RECETPTS ExPEI\DtruRE

A, Tax Revenue A. General ServicesL

a. Taxes on Income and Expen- a. Organs of Statediture

b. Taxes on Property and capital b' Fiscal Services .

transactionsc. Taxes on Commodities and c. Interest Payments

Servicesd. Administrative Servicese. Pensions and miscellaneous

General Services

B. Non-tax Revenue 8.6 Sacial and Community Semices2

(including Dividends, InterestReceipts and charges for servicesrendered or supplies made).

C, Grants-in-aid. contributioni etc.6 C.6 Economic Senicesxa. General Economic Servicesb. Agriculture and Allied Servicesc. Industry and Mineralsd. Water and Power Developmente. Transport nnd Communicationsaf. Railwaysag. Posts and Telegraphs{D. Gr ant s -in-ai d cont ribut ion s et c.E

lservices wlfch are indispensable to the existence of organisedState.

2Services 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 EoR Pr,r.r.rNEo DBvnLopuENr

There is an exhaustive list of major heads under each

setcor/sub- sector. For example, "Agriculture and Allied Ser-vices" have the following. major heads:

Major Head Number

305

306307

308

309

3r0311

314

Major Head305 Agriculture

Minor HeadsDirection and AdministrationLand reformsConsolidation of holdings

Nomenclature

AgricultureMinor IrrigationSoil and Water Consetvation

Area Developm€ntFood and NutritionAnimal HusbandryDairy DevelopmentFisheriesForestCommunity Development.

It is necessary to mention that under the same function,there can be four different types of transactions, namely,revenue expenditure, capital investments iL departmentallymanaged, private or public undertakings, loans given to publicor private undertakings or to individuals, and, receipts ofdepartmental undertakings or charges for services rendered.

Correspondingly, in respect of each function there are fourseparate major heads. To facilitate accounting the four majorheads are given numbers according to a common code. Forexample, receipts on account of Dairy Development are

accounted for under Oil Dairy Development, revenue expendi-ture under '31 I Dairy Development', Capital investments rinder

'511 Capital outlay on Dairy Development', and loans under

'711 Loans for Dairy Development'. The corresponding num-bers differ by 200 because provision is made in the new classi-fication to accomnodate 200 functions.

Each major head is subdivided into a number of minor heads.

They are intended to indicate subfunctions or groups of pro-grammes serving the same objective within or outside the plan.

For example, major head 305 Agriculture has the followingminor heads:

ApprNorx 5

Muitiplication and distribution of seedsAgriculture farmsHigh yielding varieties programmesPlant protectionCommercial cropsSchemes for small and marginal farmers andagricultural labourExtension and farnters' trainingAgricultural educationAgricultural engineerirtgAssistance to Indian Council of AgriculturalResca rch

^ AgriculturalresearchAgricultural econolnics and statisticsStorage and rvarehousingHorticultureOther expenditure.

The actual programmes and schemes undertaken by differentGovernments and Departments are to be designaled by themas sub-heads under the respective minor heads. Thus, a sugar-cane development programme undertaken by the Governmentof Bihar will be classified in the accounts of that Governmeot as

a sub-head under the minor head "Commercial crops". If therebe more than one such programme more than one sub-headwill 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 furtheradvantages of facilitating the compilation of economic classi-fication.

Thus, the expenditure incurred on the travel of an extensionoffcer connected with sugarcane development will be classifiedin accounts as follows:

Sector+ *EconomicservicesiAgriculturalAlliedServicesMajor Head -305 AgricultureMinor Head -Commercial croPsSub-head -Sugarcanedevelopmentprogramme'Detailed head -Travel expenses

*not required to be meuioned on each bill.

207

208 Pnnnonu.llcr BuocrrrNc FoR PLANNED Dsvrropr\4pNr

The major heads and minor sub-heads correspond to func-tions and programmes respectively. So_far as activities are con-cerned no specific provision is made in the new accounting classi-fication for the reason that below the programme level thereought to be really a two way classification, oho to indicate thenature of expenditure to exercise detailed control over expendi-ture and the other to indicate the purpose of expenditureor the activities of the programme. (In the literature on per-formance budgeting, the latter is known as the activity classi-fication and the former as the ,,Objectwise" classificationmaking a distinction, for some unknown reason. betwecn"objective" indicating the purpose and ,.object" indicating thenature of expenditure). Both are presented together in perfor-mance budgets. As further progress is made in remodelling theaccounting systems and refinding the performanne budgets itmay be considered whether an intermediate tier between subhead (programme) and detailed head (object of expenditure) torepresent o'activities" should be introduced. This will bepossible whon each item of expenditure is capable ofbeingrelated to different activities and classified as such ab initio.

The attempt in the new classification is to bring together a1lexpenditure connected with a particular programme under asingle sub head. For example, the extension work done for thesugarcane programme or expenditure connected with fertilizbrsspecifically relatable to suagarcane programme is reflected in thesub head'sugarcane programme'under the minor head .,com-

mercial crops", not under the minor heads ..extension andfarmers' trainirrg" on "manures and fertilizers".

The fundamental principle of classification is that expendi-ture should be classified with reference to the purpose at thelowest possible tier of classification. For example, if there is aDirectorate for sugarcane programme the expenditure on thatDirectorate will form part ofthe sub head relating to sugarcaneprogramme. On the other hand, if there is a common Directo-rate for all commercial crop programmes (including sugarcaneprogramme) the expenditure is identifiable only with the minorhead "eommercial crops", not withany of the sub heads underit. In such a case, "Directorate of Commercial Crops" willitself b: a sub-head under the minor head .,Commercial Crop".Further, there may b.e a Dire ctorate of Agriculture looking

Apprxorx 5

after all agriculture programmes (including commercial cropwhich includes sugarcane programme). This office will not beclassificable under any specific minor head underthe majorhead '305 Agriculture'. It will be a separate minor head initself. Still, further, there are Secretariat Ofrces which lookafter 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 infor elaborate allocation of the expenditure involved. Forexample, each item of expenditure on the Secretariat of theMinistry of Agriculture will need to be allocated (at the timeof incurring itself) as between all the major heads dealt withby it. That portion ofthe expenditure allocated to the majorhead '305 Agriculture' will further need to be allocated asbetween the various minor heads under the major head .305

Agriculture'. Again, that portion of the expenditure allocatedto the minor head 'Commercial Crops' under the major head'305 Agriculture' will need to be allocated to various sub-headsunder the minor head including the sugarcane programme.Assuming that we will be able to resolve the methodologicalproblems involved and e mploy a computer to make such alloca-tion at the time of passing each salary or travelling allowancebill of the Ministry, we will find that the .,cost" involved inmaking the allocation is not commensurate with the ,,benefit"derived. Such allocation cao be attempted on ad hoc basiswhenever a detailed analysis or evaluation ofthe particularprogramme 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 theexpenditure 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'in respect of construction costs that too limited to functionalbuildings (like schools, hospitals as distinct from ofrces) in the

209

2t0 Prnromuxcr Buocnrrtc ron PreNNno DnvErorltsNr

,development sectors (Social and Community Services andEconornic Services) because building costs form a s'rbstantial'chunk of these development programmes. Here again, wheretthe expenditure connot be classified under the concerned minor,,head it will be allocated to a separate minor head under theconcerned major head.

ln respect of programmes with more than one objective, theprogramme is classified with reference to the main objective.What generally happens is that there is one main objective andthere are a number of subsidiary objectives. For example, anirrigation 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 theschool or hospital are entirely subsidiary. Hence, the entirecostof the irrigation project, which istaken as an integratedone, 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 classificationthe question to be asked is: Would the scholarship have beengiven ifthestudent did not belong to a Scheduled Caste? If theanswer is no, it will be classified under the minor head "Welfareof Scheduled Castes" under the major head'288 Social Securityand Welfare'. It will not be classifiable under the mihor head

"scholarships" under the major head '27'1 Education',. In away, this is applying the "with and without" principle,

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Stonier, W. Alfred and Hague, C. Douglas' A Text. Book ofEconomic Theory ' Lond,on: E.L.B.S' and Longman' 1972'

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Batty, J. Management Accountancy. London: E.L,B.S. andMacdonald & Evans, 1975.

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INDEX

Administrative Reforms Commis- kinds ofsron, 32, 124, 127 a.ctlvity, 121-2

on purposes of Performance functional, 122-4Budgeting,32 under the Indian Constitution,

Team on evolving common classi- 126-7fication for Plan and Budget, Commercjal accounting, principles124-7 of, 191-8

Agriculture, efficiency objectives in, Cost accounting. I9766-'70 Cost-benefit analysis, 40-1, 75-98

Anai,ysis, res cost-benent analysis advantages of, 79-80Antyodaya,69, 172, 174-5 objective cf, 76Appu, P.S., 69n of rev€nue programmes, 86-7Audit, role of , 162-5

Discounted Cash Flow technique.Budget 110-5, 199-204

consideration of, 131-3 Ducker, Peter, 37

de ftnition of, I-2features of, 2-5 Evaluation, 4l-2, 148-65Government budget 2-4,6-11,28 criteria of, 150-3

Constitutionalprovisions relat- definitiouof,42nine 10, 177-9 need for, 64

household budget 2-6, 9 of public enterprises, 157-62preparation of, 27n Expenditure, classification of, 22

Budgetingan instrument of planning, 21-3 Galbraith, J.K., 100efficiency in,23-4 candhi, M.K.,69relevance of techniques of

management in, 33-4 Hoover Ccmmission, Second, 28role of, 22

Bureaucracy, lack of commitment Inconre d istributi on, 24-6, 60 |to objectives,60 and basic needs of individual,

Burkehead, Jesse,27, 29 25-6equitable distribution, justifica-

Canada,29,31 tion of, 87-8Circular flow of financial resources, India

187-9 average yield-of land (1975), 14Classification, 40 balanced diet, rccommended for,

adoption of new accounting 48classjfication in India, 124-6, Constitutional pro'risions relating205-10 to Government budget, 177-9

and demands for grants, 127-31 food consumption in, 48-9

INorx 2r9

hew classification ofcovernment and role cf audit in, 162-5

transactions, 205-10 definition of, 27resources of, l3-5 distinquished from Programme

Internal Rate of Return (lRR), 113 Budgeting, 30ethos of, 145-7

Kothari Commission on Education, implementation of, 166-7

50 in Canada, 3lin United Kingdonl, 30-l

Linear programming, 35-6 in United States, 27-9nature of, 39-40

Management, and performance origin of, 27

budgeting, 33-4, 37-40 relation to public expenditureManagement accounting, 197 programmes, 166

Management by Objectives stages of, 40-3, 74

(M.B.O.), 36-7 see a/so classification, cost-benefitManagement lnformation System analysis, €valuation, objec-

(M.I.S.), 154-7 tives, organising and YACEManual .for Programme and Pcrfor- Planning

mance Budgetirtg,2g-30, I49 and budgeting, 12-26

McNamara. Robert S.. 2g as a management system, 16g-72

Minhas, B.S., 6? decentralisation of, need for, 58,136-40

National Income, and economic disadvantages of, I00growth, 15-7 objectives of, l2-3, 35, 81

National income aceounts, 15, Planning Commission, 21, 90, 100,

180-9 r05, 114, 120, 124Planning, Programming and Budget-

Objectives, 40-1,44-74 ins Svstems (PPBS),28-30, 98

and organizations, 58-60 assumptions of, 30-lconflict between, 46-51 basic objectives of, 31

efficiency objectives, 65-i0 Prpgrammc Analysis and Reviewin agricultural sector, 66-70 (PAR)' I 19

of individual programmes, 60-5 Programme Budgeting (PB), 28

of public enterprises, 70-4 Public adminislration and systemsspecification of, 44-6, 52-3, 58, approach' 3+6

64,74 Public enterprises

Organiring, 41, 13347 evaluation of' 157-62

delegation of financial powers, objectives of, 70'4l4l-4 Public expenditure, 18-21, 60

demarcation of roles. difficulties and income disparities, 89-90in, t33-5 complementarity with private

Output Budgeting, 30 expenditures, 6I-2justification of, 53-57

Performance budgeting, 197-8 objectives of, 59-6ia total management system,

38-40 Return on Investment (ROI), 81,advantages of,29,74,735 84, 113, 157, 161and linear programming, 36 Revenue programmes, analysis of,

220 Penronu.qNcp BuocsflNc ron PlAtqnro DrvrlopvrNt

86-7

United Kingdom, 29-30, 93, 719United Nations, 29-30, 149Uniied Nations Industrial Develop-

ment Corporation (UNIDO),103

United States, 27-9, 93, 98

University Grants Commission, 50-1

Value Added to Capital Empl oyed(vAcE), 82-7, 157, 160-1, 182

advantages of, 96-8and analysis of revenue pro-

grames, 86-7and assesssment of demand, 99-

101

and discounting costs and bene-fits, 110-5

and income distribution, 92-3and indirect benefits, 103-6and programme selection, 99

and shadow price for foreignexchange, 115-8

and unemployment, 93-4and valuation of benefits, 101-3

and valuation of capital employ-ed, 108-10

and valuation of costs, 107-8Value analysis/value engineering,

J /-6

Wages, as bencfit, 93-6World Bank, 28