1. Capacity building in financial management systems at all levels of Governance, to ensure smooth flow of funds for programmes / projects, proper maintenance of accounts and timely furnishing i necessary information / documents for this purpose.

2. Strengthening of internal audit systems to ensure proper utilisation of funds for the purposes/outcome for which they have been provided, and checking that unit cost of delivery/outcome is as per benchmark developed for this purpose.

3. An institutionalised method of external audit and assessment of the delivery and impact of programmes.

4. Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation and expenditure management (resource utilization) are the essential components of a public financial management system.

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5. Effective expenditure management calls for expenditure planning, allocation of resources according to policy priorities and good financial operational management and control.

6. Good financial operational management focuses on minimizing cost per unit of output, achieving outcome for which these outputs are intended and enhancing the value for money spent.

Weaknesses in the Budgetary Process

(i) Poor planning;

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(ii) No links between policy making, planning and budgeting;

(iii) Poor expenditure control;

(iv) Inadequate funding of operations and maintenance;

(v) Little relationship between budget as formulated and budget as executed;

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(vi) Inadequate accounting systems;

(vii) Unreliability in the flow of budgeted funds to agencies and to lower levels of government;

(viii) Poor management of external aid;

(ix) Poor cash management;

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(x) Inadequate reporting of financial performance; and

(xi) Poorly motivated staff.”

Uses of monetary policy

Monetary policy cannot change long-term trend growth.

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There is no long-term tradeoff between growth and inflation. (High inflation can only hurt growth). What monetary policy – at its best – can deliver is low and stable inflation, and thereby reduces the volatility of the business cycle.

When inflationary pressures build up: raise the short-term interest rate (the policy rate) which raises real rates across the economy which squeezes consumption and investment. The pain is not concentrated at a few points, as is the case with government interventions in commodity markets.

Core Principles of Financial Management are described below:

(i) Reforms in Financial Management System are part of overall governance reforms: Governance reforms to bring about improved transparency, greater account­ability, streamlining the structure of the Government, elimination of corruption, and fiscal and environment sustainability have to be backed by reforms in the financial management system in order to deliver the desired results.

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At the same time, it needs to be understood that reforms in the management system are not an end in itself but a means to achieving good governance.

(ii) Sound financial management is the responsibility of all government depart­ments/agencies: Maintaining financial prudence, discipline and accountability, while strengthening Financial Management Systems and Public Finance Management – concepts and core principles at the same time, ensuring prompt and efficient utilization of resources towards achieving organizational goals is the responsibility of all government agencies/organizations and not only of the Finance wing/Finance Ministry.

(iii) Medium-term plan/budget frameworks and aligning plan budgets and accounts: Medium-term plan/ budget frameworks attempt to bridge the gap between the short-term time horizon of annual budgets with the medium-term objectives of the schemes and programmes of government.

Even when there are medium term frameworks like five-year development plans, there is need for aligning the annual budgets explicitly with the plans and with the accounting mechanisms so that there is a clear ‘line of sight’ between the medium term developmental plan and the annual budget exercise.

(iv) Prudent Economic Assumptions: The economic assumptions that underline the budget have to be prudent and accurate in order to ensure that the budgetary estimates do not go haywire. The tendency to be overly optimistic has to be avoided.

(v) Top-down Budgeting Techniques : There is need to shift from the traditional bottom-up approach to budgeting to a top-down framework where the desired outcomes should point to the resources required which should be allocated thereafter at the macro level sector-wise. This in turn would lead to f on outputs and outcomes rather than on inputs and processes.

(vi) Transparency and Simplicity: The budget documents should be simple and easy to compared and be available in the public domain. Also the procedures involved in operating the budget release of funds should be simple. Suitable financial management information systems need to develop in order to ensure that all transactions are captured and ultimately made available public scrutiny.

(vii) Relaxing Central Input Controls: Government agencies need to be given greater opera” autonomy and flexibility by consolidating budget items and decentralization of administrative financial powers.

(viii) Focus on Results: Accountability in government needs to shift from compliance with rules procedures to achievement of results. This is all the more necessary with relaxed central input cont there should be emphasis on ‘value for money’.

(ix) Adopting Modern Financial Management Practices : Modern financial management tools accrual accounting, information technology, financial information systems etc. need to be used improve decision making and accountability. However, care needs to be exercised to ensure a congenial environment is created and adequate capacity is developed before adopting practices.

(x) Budgeting to be Realistic: unless the projections made in the budget are reasonably accurate, budgetary exercise loses credibility.

Conclusion:

Our financial system has served us reasonably well so far. It is capable of doing better. The concise Oxford Dictionary defines ‘reforms’ as making or becoming “better by removal abandonment of imperfections, faults or errors”.

This is what the Report of NIPFP has proposed correcting the imperfections, faults and efforts of the past in the hope that our financial manage system will enhance the progress of the economy and that credit would be, in Schumpeter’s memory phrase, “phenomenon of development”.

The way the economy is now linked to international economic pressures, it is also necessary the country takes steps to insulate itself and contain inflationary pressures. The old-fashioned virtues fiscal prudence and monetary restraint have thus not lost their contemporary relevance.

It must appreciated that there is indeed no substitute for sound and internally consistent macro manage covering aspects such as fiscal, monetary and exchange rate policies and an adequate institutional a legal framework which help in the efficient intermediation and control.

The system is always capable improvement in productivity, efficiency and in the ultimate analysis of profitability, which again helps increase the inherent strength of institutions and delivery systems.

The process of reform in the so” sector that we are now engaged in, cannot succeed unless the financial system itself is strong efficient so that it can help to support higher investment levels and accentuate growth and help to a productive and competitive economy. Structural and financial reforms are thus mutually reinforced and sustain each other.

No reform can indeed be painless. We have to appreciate that the quest for competitive efficiency will take its toll of the weak and the inefficient.

These pains, however, are a necessary foundation for emergence of a strong and viable financial system which will conform to best international practices make its distinctive contribution to the furtherance of our national objectives of growth, equity and justice.

A sound financial management system with the correct practices of planning, budgeting a accounting shall provide the desired framework for a result-oriented delivery system in the government In a democratic and federal polity like ours, it is necessary for reforms to have broad consensus. Such consensus shall emerge.

The states which were initially somewhat hesitant about the reform program are now embracing it with enthusiasm. There has also been a broadening across the political spectrum for support of the reform effort. This augurs well for the future.