india - punjab state

Local Bodies

A. Local Bodies

  1. Like other parts of the country, in Punjab there are two types of local bodies: Urban Local Bodies (ULB), which are mainly municipalities, and Rural Local Bodies (RLB), which are primarily villages. The 73rd and 74th constitutional amendments (1994) converted local bodies into institutions of local self-governance through ensuring transfer of powers, regular elections, and financial resources.
  2. States such as Punjab are currently in the process of providing major support for self governance in local bodies. The challenge is to ensure that adequate capacity exists for this increased responsibility. Currently ULBs and RLBs in Punjab have very different accounting and accountability arrangements.

B. Urban Local Bodies

  1. Punjab has 134 ULBs which are classified as per the provisions of the Punjab Municipal Corporation Act, 1976 as amended in 1994. As per this act, cities with a population of more than 300,000 and a municipal income of more than Rs. 2 crores are classified as “Corporations”. Smaller towns are classified as Councils and Panchayats. Based upon this criteria, Punjab has four Municipal Corporations, 26 Municipal Councils (Class I), 42 Municipal Councils (Class II), 30 Municipal Councils (Class III), and 32 Nagar Panchayats which are large villages.
  2. The income of ULBs has been expanding rapidly. In 2000-01, total receipts were Rs. 820 crores, almost double that of 1997-98. Almost all of this money is raised by the ULBs themselves with the bulk of it being on account of octroi (56%), property tax (8%), water and sewerage charges (7%), liquor sales (9%), and other non-tax revenue (10%). State and Central transfers to ULBs amount to only 8% of their income. On the expenditure side, approximately 67% of income is spent on provision of services, 10% on tax collection, 5% on general administration, and 15% on miscellaneous expenses. Debt servicing is a negligible component of their income stream.
  3. There are detailed legal provisions governing accounting and auditing arrangements in ULBs. The Municipal Account Code, 1930 (Punjab) provides that the budget of ULBs is to be prepared by 28th of February every year. The budgets are to be approved by GoP and the Finance Sub Committee of the house of elected representatives, and no payment can be made unless it is covered by a budgetary provision. The code also provides a detailed list of records and registers to be maintained by the ULBs, but there are no penalties for non-compliance. In August 2003, GoP prescribed that the accounts of ULBs should be maintained on an accrual basis. However this has not yet been incorporated into the legislation. Section 418 provides that by April 1 of the subsequent year an annual report needs to be produced and placed in the house. Audit is the responsibility of the Local Fund Auditor.
  4. At the request of GoP, as part of this financial management assessment a detailed study of accounting and auditing practices was undertaken in two municipalities – Municipal Council of Ludhiana (MCL) and Municipal Council of Mansa (MCM).[1] MCL was selected because it is the largest municipality in Punjab and it has an income of 25% of the total incomes of all ULBs in the state, while MCM is fiscally challenged.
  5. This review was undertaken over the period November 2003 to February 2004. In MCL, 61% of income is due to octroi and 17% on account of property tax. While on the revenue side forecasting has improved over the past two years with the variation (budget vs. actuals) reduced from 29% to 8%. On the expenditure side there are wide variations with actual spending on development expenditures being 70% below budgeted amounts (FY 2001 and FY 2002). MCL is relatively financially secure with Rs. 30 crores invested in a fixed deposit account.
  6. Accounting practices remain weak even though MCL was the pilot for accrual accounting in 1999. MCL is still following cash accounting which has major weaknesses. Controls exercised at the grassroots level are poor. MCL has not reconciled its bank accounts for several years. There are questions about the integrity of the data because data from the Billing and Collection unit (now computerized) does not tally with the figures produced by the accounting unit. There are no zonal accounts which makes it impossible to assess the performance of any particular zone. All receipts and expenses are entered into a central account. Audit objections and audit reports have not been responded to for years. The current management of MCL has decided to complete the transition to accrual accounting by FY 05.
  7. In MCM, like MCL, the main source of income is octroi (53%) and property tax (9%). Despite the annual income only being approximately Rs. 3.5 crores it has regularly overestimated receipts by as much as 40%. When octroi was abolished for five months in 2001-02, MCM diverted provident fund payments to meet operating expenses. Aggrieved employees have filed suits against MCM for a total value of Rs. 60 lakhs. The municipality is severely fiscally constrained and lacks the resources to provide adequate services to residents.
  8. As can be expected, accounting practices in MCM are worse than in MCL. Almost no budgetary controls are exercised at the voucher level. There are numerous instances of expenditures being incurred without prior budgetary allocations and no expenditures on heads where there were budgetary allocations. No monthly accounts are being prepared despite this being a requirement under paragraph III.6 of the Municipal Account Code, Punjab. Audit is being conducted with a backlog of three years and audit paras are invariably ignored. More than 1,000 paras are pending, more than half of them in excess of ten years. Presently there are no plans for shifting to accrual accounting despite GoP’s advice to do so.
  9. On next steps, GoP needs to ensure that minimum standards of cash accounting are being followed in municipalities before requiring them to shift to accrual accounting. It is important that steps are taken to ensure that proper cash accounting is implemented immediately. A few pilots need to successfully demonstrate the utility of accrual accounting in municipalities. GoP needs to fully support the MCL transition to accrual accounting and also select four other pilots, one in each classification category of ULBs. MCL may benefit from a twinning arrangement with a large municipality such as Bangalore or Tumkur that has made the transition to accrual accounting. In tandem, provided it is feasible under the regulatory framework, release of state support needs to be linked to improved compliance with audit objections.

C. Rural Local Bodies

  1. Punjab has a three-tier system of Rural Local Bodies. At the village level there are 12,369 Gram Panchayat, at the block level there are 137 Panchayat Samiti, and at the district level there are 17 Zila Parishads. These are collectively known as Panchayati Raj Institutions (PRIs).
  2. Accurate income or expenditure estimates do not exist due to poor record keeping at the village level. However the Second Finance Commission has estimated that in FY00 the income of the 12,369 gram panchayats was Rs. 204 crores (or a fourth that of municipalities). Of this, only 41% was income from their own sources of revenue with the rest being from state or central grants (44% was on account of centrally sponsored or state plan schemes). The main items of expenditure were pavement of streets (36%), school buildings (19%), construction of drains (12%), and welfare activities (12%). Establishment costs accounted for only 3% of total costs.
  3. The constitutional amendment envisaged transfer of 38 functions to PRIs. Different states are at different stages along the spectrum of transfer of functions and financial powers. The lead has been taken by Kerala and Karnataka. Devolution is now a priority for GoP. The plan is to initially devolve powers in five areas: (i) Health, (ii) Education, (iii) Welfare of Scheduled Castes and Backward Communities, (iv) Social Security, and (v) Women and Child Development.
  4. This devolution is to be accompanied by increasing devolution of fiscal powers. GoP’s position is that it has: (i) provided the Panchayat Raj Act for imposing taxes for raising its financial resources, (ii) empowered panchayats to levy and collect taxes, duties, tolls and fees,
    (iii) provided Grants-in-aid to Panchayats from the Consolidated Fund of the State, (iv) provided for the constitution of “Funds” for crediting money received by or on behalf of Panchayats and also for the withdrawal of such money therefrom, and (v) empowered the RLBs to raise loans for specified purposes.

16.  Section 96 of the Punjab Panchayati Raj Act, 1994 and the rules there under prescribes the form and manner in which the income and expenditure accounts of gram panchayats are to be maintained. GoP’s Second State Finance Commission recognized the existing capacity constraints at the village level and commented that because Gram Panchayat/s do not have adequate accounting staff the maintenance of their accounts is poor. Not only is the maintenance of records poor, but the Commission was of the view that compliance with audit objections is very weak with “no action is taken about the disposal of audit objections at any stage.”[2]

  1. This is a common problem facing panchayats across the country. A Bank study recently confirmed that Panchayats face a huge challenge in navigating the intricacies of government accounting, and the various rules and exceptions for booking receipts and expenditures under various control, suspense, debt, deposit, and remittance accounts of Major Heads 8658, 8670, and 8782. [3]
  2. Accounting practices at PRIs were reviewed by visiting the district level Zila Parishad in Roopnagar District and five Gram Panchayats in Nawanshahr District in November 2003. The main findings from this review were that at: (i) the district level there was adequate maintenance of accounting records due to trained government staff having been provided, (ii) the village level there was poor record keeping and there were severe capacity constraints, and (iii) two of the villages visited traditional systems of accountability of public assets seemed to be working. Income from common land (Shamlat land) was effectively used for building and maintaining community assets (school, dispensary, paved streets, lighting, and drainage). GoP’s initiative to computerize land records is facilitating increased access to land records.

19.  Concurrent with the transfer of additional financial resources, several initiatives are underway to introduce more complex accounting formats and systems at the village level. One is the introduction of PRI accounting formats by C&AG, which are now in the process of being simplified.

Figure 4. Accounting Model for Gram Panchayats
  1. Second is the current initiative of GoP for requiring PRIs to implement an accrual accounting system. This has been designed by accounting professors from Vanderbilt University USA and the Business School, Chandigarh. The proposed accounting model is shown in Figure 4.
  2. Before implementing this model, GoP needs to assess whether capacity exists for implementing such a complex system in a weak capacity environment. In the near term, GoP needs to ensure that a simple cash-based system is implemented at the village level before it begins to introduce more complex systems.
  3. With 90,497 new PRI members elected last year (many of whom have various levels of literacy) GoP has embarked upon an ambitious capacity building program. Nine universities/Non-Governmental Organizations (NGOs) have been assigned separate districts for training as per the course module designed by GoP. The plan is for an initial course for two days covering 18 topics, one of which is “Preparation of budget, maintenance of accounts and auditing”. Although the initiative is excellent, the capacity challenge is such that far more training and time will be required before it will make a difference.
  4. Audit of PRIs is conducted by GoP’s Local Fund Audit (LFA). LFA has only 562 staff but is required to conduct audit of more than 17,000 entities—12,000 of which are PRIs. Inevitably there is a huge audit backlog. CAG is providing technical guidance and support for PRI audit in fifteen states.
  5. GoP announced last year that it was actively promoting social or community audit and Gram Sabhas (village community) would be activated to undertake social audits under legal provisions. This has worked effectively in Rajasthan where good practice examples exist of community organizations doing effective social audits.

D. Next Steps

  1. GoP is planning to move forward and introduce accrual accounting systems at the village level. This may be premature considering that most villages do not currently maintain adequate cash-based accounting records. Instead of more complex systems, there is need to introduce a far simpler cash-based system that can be implemented in the weak capacity environment.
  2. On audit, GoP needs to actively explore ways to make social audits more effective, as well as explore ways to involve the private sector in supporting this task in the future.

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[1] The findings summarized below are based upon the February 2004 study by Hemant Chaddha (WB Consultant) titled “Review of the workings of Municipal Corporations / Committees in Punjab”. It can be provided on request.

[2] Report of the Second Punjab Finance Commission (February 2002), Main report, pages 275 and 276.

[3] World Bank (May 23, 2003), “ India – Fiscal Decentralization to Rural Governments (Volume II)”, page 81, paragraph 220 and World Bank (January 7, 2004), “ India – Fiscal Decentralization to Rural Governments”.