SPR Foundation in an earlier report had highlighted how it was near impossible to get a consolidated view of a state’s finances. A new Comptroller & Auditor General (CAG) report shows how municipal corporations, in addition to the state public sector undertakings (PSUs) we reported on, are an equally critical missing link in the overall accounting picture.

The problems are two-fold. First, states do not provide one consolidated balance sheet which gives a clear view on income, expenditure and more importantly losses and debt. Second, the accounting is archaic; 7 out of 22 municipal bodies in Maharashtra, for instance, don’t even follow double entry accounting standards despite diktats from the centre to that effect. And Maharashtra’s case only further highlights a fundamental accounting gap in Indian state finances.

Where’s The Data?

Incidentally, it’s not SPR expressing its helplessness at the lack of consolidated balance sheets. The CAG is in the same boat too. In a reference to Maharashtra’s municipal bodies, it says, quite matter-of- factly in its 2009-10 report, that the “consolidated position of receipts and expenditure of Urban Local Bodies (ULBs) are not maintained at the State level.” Moreover, the CAG too has to 'ask’ for this information which it evidently does not get. “This information although called for (February 2010) from the State Government is yet to be received in June 2011.”

The CAG then says the information regarding the finances of various ‘Local Self Government Institutions’ for 2008-09 and 2009-10 was not published in the Economic Survey of Maharashtra 2009-10 and 2010-11 as was done in the previous years. This is because the ULBs did not furnish the information to the Directorate of Economics and Statistics, Government of Maharashtra. So, essentially, the CAG is saying that it’s an island, within an island, within an island that is the Republic of India.

Single Or Double?

Now, let’s look at the conundrum of double entry accounting. It could be argued that as long as the numbers are true and fair, it really does not matter what the form of accounting is. But the Government itself begs to differ. The Ministry of Urban Development’s National Municipal Accounting Training Manual dated November 2007 itself says the 'cash-based single entry’ system does not give a proper picture of the financial health of a municipal corporation.

More specifically and we reproduce verbatim:

The accounts of the ULB have traditionally been maintained on cash based single entry system of accounting. Here are some major implications of this method:

  1. Full picture of Assets & Liabilities are readily “not available” in one statement.
  2. Inadequate managerial attention, for example, on speedier collection of receivables due to lack of information or delayed information. Similarly, on movement of payables/liabilities
  3. Inadequate cash management (several in operative bank accounts)
  4. Expenses not matched with revenues of the period making determination of surplus/deficit for the period a difficult task.
  5. Certain capital expenditures treated as revenue items. For example, roads, bridges and drainage.
  6. Did not present a “proper” picture of the financial health of the Urban Local Body.
  7. Inadequate information on “to what extent, the assets of the ULB have been used up”

The Controller General of Accounts’ (Department of Expenditure, Ministry of Finance) Central Government Rules of 1990 says something similar: “The accounts of Government are based, in the main, on the single entry system and the double entry system will be applied only in regard to the maintenance of a set of technical accounts called the Journal, Ledger and Trial Balance Sheet.

But it also points out that “The main purpose of the Journal and Ledger is to bring out by a scientific method, the balances of accounts in regard to which Government acts as a banker, or remitter or borrower or lender. Though such balances are worked out in the regular Government accounts, their accuracy can be guaranteed only by a periodical verification with balances brought out in the double entry system.”

Double Entry Deadline

Moreover, the Government set a deadline for conversion to double-entry accounting standards but some municipal corporations have not complied. To put things in context, the Maharashtra Government adopted the National Municipal Accounts Manual for implementation from 2005-06. Despite that, 7 Municipal Corporations including Ahmednagar, Akola, Aurangabad, Amravati, Bhiwandi-Nizampur, Dhule and Jalgaon have not implemented the double entry accounting system.

Moreover, “finalisation of accounts and audit of annual accounts by Municipal Chief Auditor is in arrear for the period ranging from 2001-02 to 2009-10 and no reports were submitted to the Standing Committee.” This means a decade has passed and the accounts are not adding up.

5-Year Data

Let’s look at the actual numbers for Maharashtra’s 22 municipal corporations.


If you didn’t know already, Mumbai’s Municipal Corporation or MCGM has the biggest share of revenue and expenditure in Maharashtra. For 2009-10, its revenue was Rs 19,035 crore while expenditure was Rs 18,973 crore.

Now, here’s a breakup of the numbers for the municipal corporations who are still not following the double-entry accounting. This is for 2009-10, last available. The receipt figures have been rising on an average between 10 and 20% every year in recent years so its thousands of crores totally not properly reconciled or accounted for.


(2009-10) (Rs Crore)

Note: Bhiwandi-Nizampur has a higher gap in receipts/expenditure as compared to previous years where the gap is minimal

At this stage, perhaps you were wondering when the system of municipalities came into existence. It might help (or not) to know that the Municipal Corporation introduced in Madras (Chennai) in 1688, which was followed by Municipal Corporations in Bombay (Mumbai) and Calcutta (Kolkata) by 1762. The current form and structure of municipal bodies is based on Lord Ripon's Resolution on local self-government adopted in 1882. And by the Government of India’s own admission, since then, the structure of municipal bodies has essentially remained the same, even though the urban areas multiplied.

The Other Riddle

Now, let’s go back to the first component of a state’s finances that we highlighted; Maharashtra’s 85 state PSUs. Here’s a quick recap. Their combined revenue was Rs 40,873 crore (approximately $9 billion) and they represented just under 5% of the state’s GDP. Some 199,000 people worked in these enterprises which turned in a cumulative loss of Rs 1,360 crore ($302 million). Accumulated losses were pegged at Rs 8,539 crore ($1.9 bn). Interestingly, of these 85 State PSUs, 23 are classified as non-working and 3 have been under liquidation for between 17 and 24 years!

This report does not look at the issues or problems within the balance sheets because that’s a different subject. We have restricted ourselves to a short overview on the structure of accounting itself, both at the state level and within the municipal corporations. In the case of the Maharashtra state government’s 85 PSUs and their accumulated losses of Rs 8,539 crore ($1.9 bn), arguably you could at least spot the problem better. In this case you can’t even do that.