India should account for what it owns and owes

Government accounting in India remains largely cash-based. Transactions are recorded when cash moves rather than when the underlying obligation arises

Every February, the most scrutinised number in Indian public finance is the fiscal deficit. It captures the gap between cash coming in and cash going out, but says far less about what governments own, owe, and what today’s decisions will cost tomorrow. Government accounting in India, at both the Union and state levels, remains largely cash-based. Transactions are recorded when cash moves rather than when the underlying obligation arises. That suited a State focused on controlling disbursement, but not so much one whose biggest fiscal risks sit outside cash flow: assets it must maintain, debt it has guaranteed, and pensions it has promised.

Cash accounting shows spending on new assets more clearly than what happens to those governments already own. A road, bridge, or hospital may deteriorate for years without generating an expense comparable to depreciation, while building a replacement produces visible capital expenditure. (Raju Shinde/HT Photo)

Cash accounting has two blind spots.

The first is obligations. Costs can be pushed into the future. Oil bonds are the clearest example. Between 2005 and 2009, the government issued securities worth roughly ₹1.4 lakh crore to oil marketing companies in place of cash subsidies for fuel sold below cost. The cost was incurred then, but because no cash moved, it was treated as fiscal-deficit neutral, despite incurring a liability. Only interest surfaced as expenditure; redemption was treated as debt repayment. Accrual accounting would instead have booked the expense when the government became liable and shown the decline in net worth. An obligation should become visible when incurred, not only when paid.

Pensions show the same problem over a longer horizon. A government returning to the old pension scheme stops making contributions, improving its immediate cash position while assuming a much larger future liability. RBI economists estimate that reverting could eventually cost four and a half times the NPS burden. Under accrual reporting, the pension cost attributable to each year of service would be charged to that year’s accounts.

The second blind spot is assets. Cash accounting shows spending on new assets more clearly than what happens to those governments already own. A road, bridge, or hospital may deteriorate for years without generating an expense comparable to depreciation, while building a replacement produces visible capital expenditure. The National Monetization Pipeline has pushed identification and valuation, but that is not the same as accounting for an asset. It also affects access to capital. A city entering the bond market must show investors what it owns, owes, and has committed. Two decades after the National Municipal Accounts Manual prescribed accrual accounting for urban local bodies, a 2023 NITI Aayog and ICAI study found more than half still on cash.

The Government Accounting Standards Advisory Board (GASAB) drafted accrual-basis standards, the Indian Government Financial Reporting Standards, but they remain recommendatory. Much of the architecture exists; the question is implementation. The municipal record warns against treating notification as reform. Where the switch was attempted, auditors found missing or outdated asset registers, nominal valuations, parallel manual books, accounts in arrears, and statements certified rather than audited. The constraint is capacity.

Accrual accounting requires judgment about when an obligation arises, what an asset is worth, and how its value is consumed, applied consistently and defensibly. Valuation and depreciation methods must be settled before they are mandated. Accounting capability within Union and state finance and accounts services must be built through recruitment and specialised training.

International practice removes one objection: Accrual reporting need not replace cash budgeting. By 2016, roughly three-quarters of OECD governments prepared year-end financial reports on an accrual basis, but only a little over a quarter set their budgets that way. Most continued to vote for cash appropriations while publishing accrual accounts.

India should follow that route in four steps. First, set the implementation architecture: notify the roadmap, valuation and depreciation methodologies, responsibilities, and required system changes. Second, build capability through recruitment, training, Public Finance Management System and state Integrated Financial Management Information System upgrades, and reconciliation of opening balances and asset registers. At the same time, consolidate liabilities, guarantees, arrears, pension obligations, and significant payables into a supplementary budget statement; much of this already sits in FRBM disclosures. Third, notify accrual standards in sequence, beginning with major asset classes, employee obligations, payables, and areas where reliable measurement is feasible. Apply them first to entities whose systems can support them. Fourth, publish a consolidated accrual-based statement alongside the Finance Accounts, initially as supplementary information and eventually under audit. Once systems and standards have matured, the accrual framework should ultimately be prescribed as part of the form of Union and state accounts under Article 150 of the Constitution.

Cash budgeting would remain. The fiscal deficit would remain. What changes is that the State must say whether its decisions added to or depleted public net worth.

Mitul Jhaveri is a public policy and GovTech professional. The views expressed are personal