Establishing the State-level PFM Institutes in India

Fiscal risks could arise from unexpected sources. Consider the macro-economic and fiscal melt-down in India during the global economic and financial crisis of 2008. Proper implementation of policies, establishing an accountability framework and finding different ways to improve delivery of public services remain key concerns in India. In such a scenario, a sound PFM (Public financial management) system can be the best alternative, to improve the institutional efficiency and to design and implement appropriate policies to achieve the desired results.

Long overdue, establishing State-level PFM Institutes in India is compelling, thanks to the changing economic, fiscal, social and political environment. Though some might prefer the term Fiscal Policy Institute, PFM Institute sounds suitable as it brings in broader perspective of fiscal policy and public finances, emphasizing on management aspects, not a traditional focus for policymakers and bureaucracy.

Being a low-middle- income Federal country, with a population of around 1300 million, the role of states is quite significant in India. However, state level organizations for providing high quality, empirically-driven, and context-based policy inputs have never been given any priority though they account for more than half of the combined Union and state government expenditure as per RBI data. So it’s nothing but imperative for the states to increase the quality of their PFM. The mandate should be on state-level autonomous PFM Institutes capable enough to undertake policy relevant PFM research, capacity enhancement of officials, and related functions. Such an institute should emerge as a model for state-level Institutes of similar nature across the country (and globally), with an expansive network spreading across organizations of similar stature.   

Initially the states should respond in context specific manner to the PFM initiatives of the Union Government which include:

  • Restructuring of Centrally Sponsored Schemes (CCS) which involve states in implementation and in some cases funding
  • Anticipated introduction of GST (Goods and Services Tax) from July 1 2017 which will replace inherently distortion prone and regressive taxes on domestic goods and services
  • There is a possibility of moving from current April-March fiscal year to calendar year by the Union government, which the states would need to adjust
  • Setting up of one–stop e-marketplace to enable government departments to directly purchase common use items from suppliers and winding up of existing procurement department

The Urban Local Bodies (ULB) need continuous monitoring of the effectiveness of their financing and delivery of key services, such as health, solid and liquid waste management, community safety, street architecture and amenities, etc. The PFM Institute could work in tandem with the State Finance Corporation (SFC) to reduce the turn-around time and guarantee good decisions and implementation. Accounting changes like selective modified accrual accounting method, development of asset registry for the states and ULBs, and improvements in treasury management and procurement systems and processes could also be undertaken by the PFM Institute.

In India, Haryana only has a state level PFM focused Institute. SJHIFM (Swarna Jayanti Haryana Institute of Fiscal Management), announced in the Union Budget of 2016-17 is yet to be operational. It is expected to play a key role as a high-quality think-tank on PFM issues for the Haryana government.

In the current and prospective environment, States will obtain more resources but also increased responsibilities, with emphasis on transparency and accountability. This article has explained the rationale for setting up State level PFM Institutes, and their possible structure and tasks. Meeting India’s future growth and PFM challenges and meeting citizen expectations requires establishing such State-level Institutes, albeit to suit context and priorities of a given State.

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