Public Finance: Meaning,

UNIT 2 FINANCIAL ADMINISTRATION: Types, Distinction Between

NATURE, SCOPE, IMPORTANCE Public And Private Finance

AND PRINCIPLES*
Structure

2.0 Objectives

2.1 Introduction

2.2 Nature of Financial Administration

2.3 Financial Administration: Scope

2.4 Financial Administration: Importance

2.5 Principles of Financial Administration

2.6 Conclusion

2.7 Glossary

2.8 References

2.9 Answers to Check Your Progress Exercises

2.0 OBJECTIVES
After going through this unit, you should be able to:

 Explain the nature of financial administration;

 Examine its scope;

 Discuss its importance; and

 Describe the principles of financial administration.

2.1 INTRODUCTION
Financial administration deals with the study of public funds. All government activities
are carried out with money that is collected through taxes from its citizens and profits
from public sector organisations. Hence, the study of financial administration deals
with the finance and taxation including the departments and agencies at the union
and the state level dealing with budgeting, tax collection, administrative systems,
disbursement systems, accounting, debt and borrowings, administration, and audit.
This unit orients the learners with the nature, scope, importance, and principles of
financial administration.

2.2 NATURE OF FINANCIAL ADMINISTRATION

Let us first discuss the meaning of financial administration. Given below are some
of the definitions put forth by various scholars:

*
Contributed by Dr. Anupama Puri Mahajan, Former Post-Doctoral Research Fellow (Public
Administration), Himachal Pradesh University, Shimla.
27
Introduction to Public Kautilya: All State activities depend first on the treasury. Therefore, a King shall
Finance and Administration devote his best intention to it. A system with a depleted treasury eats into the very
vitality of citizens and the country.

L. D. White: Fiscal management includes those operations designed to make funds

available to officials and to ensure their lawful and efficient use.

Jaze Gaston: Financial administration is that part of government organisation which

deals with the collection, preservation, and distribution of public funds, with the
coordination of public revenue and expenditure, with the management of credit
operations on behalf of the State and with the general control of the financial affairs
of public household.

M.S. Kendrick: Financial administration covers all the aspects of managing the
economy and balancing the payments for socioeconomic development in the country,
the preparation of budget, method of administering the various revenue resources
the custody of the public funds, procedures in expending money, keeping the financial
records and the like. These functions are important to the effective conduct of
operation of public finance.

Dimock: Financial administration consists of a series of steps whereby funds are

made available through certain official procedures ascertaining their legal and efficient
use. The main ingredients are budgeting, auditing and purchase and supply.

To conclude, from all the above-mentioned definitions, financial administration is

the study of financial systems, procedures, and processes of a country.

Regarding the nature of financial administration, there has always been a debate
over whether the discipline is a science or an art. It has been agreed upon that it is a
social science at best. Given below are the arguments in favour and against financial
administration being a science or an art to determine its true nature:

Arguments in favour of Financial Administration being a Science: Financial

administration is a subject bordering on science and art. Given below are the bases
why scholars consider it as a science:

1. System: Every science is considered as such only if it is systematic and analyses

the relationship between cause and effects. The subject of financial administration
carries out the activities in a manner that characterises accuracy and facts. It
determines the relationship between revenue and expenditure of the government.

2. Definiteness: Public finance studies the definite knowledge with facts and does
not claim to know and study all about human knowledge.

3. Principles: It studies and formulates best practices to be followed in financial

administration, thereby, establishing them as the principles of the discipline.

4. Scientific Methods: Financial administration uses scientific methods to study

all the four aspects of public finance which are public revenue, public expenditure,
public debt, and financial administration.

5. Empirical: Financial administration bases its studies and analyses the concepts,
principles, processes, and procedures on empirical analysis.

It can be concluded here that financial administration is a science as it uses all the
28
methods of science based on facts. As science, it can be positive and normative Financial Administration:
which means it can be ‘what is’ or ‘what ought to be’. It sees the processes and Nature, Scope, Importance
and Principles
procedures as they are.

Arguments in favour of Financial Administration as Art: Keynes stated that art

is the application of knowledge for achieving definite objectives. Given below are
the arguments put forth in favour of financial administration being an art:

1. Application of Knowledge: Financial administration applies the knowledge of

all the types of public finance to determine mechanisms of policies regarding
employment, economic equality, controlling inflation, etc. The budgeting process
and formulating taxation policies are an art in itself.

2. Acquired: The study of financial administration can be acquired as an art through

training. The example of scientific management approach is best suited to describe
this perspective. The training of managers make them better executives.

3. Human Perspective: Financial administration strives to work on the facts and

figures to meet the developmental needs of the society. Hence, this branch of
public finance is an art which considers human beings as their end, clients whose
needs are to be met and satisfied due to their efforts.

4. Subjective: Besides using facts to formulate budgets and accounts, financial

administration activities are carried out by officials who have their own opinions
and perspectives to deal with an issue. So, it is subjective as an art is.

After considering both the views of financial administration being an art or a science,
it can be concluded that it is both. It uses scientific facts and methods while being
subjective and applying the knowledge. It is more popularly called as a science of
administration having a body of knowledge which is applied to human beings living
in a society. There is need for a lot of research on developing methods and principles
to strengthen the discipline.

2.3 FINANCIAL ADMINISTRATION: SCOPE

Kautilya many centuries ago stated that the entire nation can be managed by financial
administration. This is true in the present day too, the governments in the modern
democracies are facing an astounding increase in their activities, which can be carried
out only with finance. Sound administration is required to do this task with economy,
efficiency, and effectiveness. The range of activities has widened with the age of
information and technology that has brought the world together. The global market
has become an integral component to be managed by governments as e- commerce
also has expanded in size. Finance is the lifeblood of every government action and
financial administration has a wide scope. Given below are the areas which come
under its purview:

1. Public Sector Organisations (PSUs): The PSUs are managed with the
government funds and do business to make a profit so that it can be used for the
welfare of the citizens. Financial administration ensures that the PSUs are run
smoothly without any inefficiencies.

2. Public Revenue: Financial administration makes the procedures and processes

to collect revenue through tax and non-tax channels. Revenue is most important
29
Introduction to Public to achieve economic development and growth, for example in the present context,
Finance and Administration the attainment of Sustainable Development Goals, 2030. India ranks very low
on all the indices of development and needs to increase its revenue to meet the
demands.

3. Public Expenditure: The governments have the responsibility to spend on

accomplishing the developmental goals with the accumulated public revenue.
To do so, it has to ensure that the budgeting process is carried out according to
the mandated procedures by the legislature. No amount of money can be spent
without the legal allocation or be left unspent without a justifiable cause.

4. Legislative Control: The public expenditure is subjected to legislative controls

with its Parliamentary Committees. In India, there are three major Committees
– Public Accounts Committee, Estimates Committee, and the Committee on
Public Sector Undertakings – which exercise control over the justified use of
public funds and ensures that no misappropriations take place. We shall be
discussing about these committees in detail in subsequent units of the Course.

5. Resource Mobilisation: Financial administration takes care that resources

required for developmental funds are mobilised through proper management of
the PSUs and revenue collection. The environment must be made conducive to
increase the opportunities of business to reap more benefits and subsequently
more revenue. The additional revenue can be used for better facilities and social
and physical infrastructure.

6. Accounting and Auditing: Financial administration deals in accounting of the

items on which the public funds were spent to ensure that the appropriated funds
were utilised on the purpose specified for. After the procedure of accounting is
complete, the Comptroller and Auditor General of India conducts the audit of
the accounts to ascertain that there have been no misappropriations.

7. Ease of Doing Business: The governments today have the responsibility of

increasing the ease of doing business in the market economy so that the nation’s
economic growth increases in the global market. E-commerce growth requires
the fiscal and monetary policies to accommodate new methods of business.
Financial administration has the responsibility to build up an environment without
any constraints that hinder economic growth.

Check Your Progress 1

Note: i) Use the space given below for your answers.

ii) Check your answers with those given at the end of the unit.

1) Discuss the nature of financial administration.

............................................................................................................................
............................................................................................................................
............................................................................................................................

2) Elaborate on the scope of financial administration

............................................................................................................................
............................................................................................................................
............................................................................................................................

30
 Financial Administration:
2.4 FINANCIAL ADMINISTRATION: Nature, Scope, Importance
IMPORTANCE and Principles

Financial administration, in general terms, deals with the collection of public revenue
and spending on public administration. The financial activities of the government
are managed by financial administrative structure to ensure economic growth and
inclusive development. As has been established by public administration scholars, it
is the lifeblood of any economy; it impacts the health of the economy and the
development. A good financial administration is important in many ways to strengthen
the country’s socioeconomic condition. Given below are the justifications to indicate
the importance of financial administration:

1. Economic Activity: The financial sector in a nation is the most important sector
in an economy. Financial administration takes care that the finances in a country
are generated in sufficient proportions to promote and sustain the economy.

2. Adjustment of Public Expenditure to National Income: With the growth in

the activities of a government, there is a need to adjust the ratio of public
expenditure to the national income which is done by financial administration.

3. Administration of the Government Machinery: The government needs funds

to deliver good governance which also requires sound administration of finances.
Funds are needed to pay salaries of the personnel, run the offices of the
government departments and agencies and their programmes and projects.

4. Operating Systems: The operating systems must work efficiently to get work
done with economy. Every decision in an agency has financial repercussions
which calls for wise financial administration.

5. National Objectives: Every government has defined objectives to be achieved

in alignment with its policies. Such objectives can be accomplished only if they
are backed by funds with increased plan outlays. Hence, financial administration
facilitates the achievement of the targets of the government.

6. Socio-economic Elevation: As more national objectives are achieved,

developmental work helps in elevating the socioeconomic status of the people.
They will be able to have a better standard of living.

7. Reduction of Wastage: Financial administration uses various tools of materials

management to reduce wastage of funds and resources.

8. Resource Generation: Sound administration of government finances leads to

generation of internal and external resources.

9. Public Debt and Public Borrowing: Financial administration deals with public
debt and borrowing methodically so that it remains within means and do not
destabilise the economy. The mismanagement of debt and borrowing leads to
an unstable market giving rise to inflation and weak political economy.

10. Fiscal Policy: Financial administration resorts to fiscal policy to reduce regional
disparities in income by generating more employment, controlling prices,
promoting foreign direct investment, and balancing the payments.

31
Introduction to Public Hence, the domain of financial administration is extremely important to handle the
Finance and Administration rise in public debt and deficit due to increase in government’s developmental work.
It aids in diversification of the banking system, for example microfinance credit for
Self Help Groups to enable the marginalised sectors integrate the mainstream
economy.

2.5 PRINCIPLES OF FINANCIAL

ADMINISTRATION
It has been established that financial administration is an art as well as science. It
formulates policies to promote economic growth and inclusive development according
to the country-specific socio-economic and political situations. Financial
administration deals with problems in implementation of the policies through plans,
programmes, projects, and activities. However, they can be achieved only if it is
based on sound principles. They guide the general administration of the government
and other departments and agencies. Given below are the important principles of
financial administration on which it formulates its procedures and processes:

1. Unity of Organisation: The efficiency of government agencies in the execution

of the policies can be improved through a unified budgeting process. This also
involves the principle of coordination so that there is no duplication of work
and wastage of physical, financial and human resources. The principle of
centralisation also works with the unity of organisation. The more centralised is
the agency, according to P.J.J. Pinto, the more it is efficient. However, decision-
making must be decentralised so that localised problems can be considered to
achieve optimum productivity and utility.

2. Legislative Control: The Parliamentary Committees exercise legislative control

over the formulation and execution of the plans through the Appropriation Act,
the Finance Act, monetary policy and other fiscal policies and measures. The
audit by Comptroller and Auditor General serves as a tool to monitor the financial
activities.

3. Political Direction: Financial administration is a branch of public administration

and has to align itself to the political economy of a nation. The population in
developing countries lives in abject poverty without basic necessities for which
the government formulates policies and plans to ensure inclusive development.
Financial administration must facilitate the national objectives to cater to the
socioeconomic problems of the people.

4. The Principle of Correspondence: The principle of correspondence means

that there must be equivalence between the objectives and functions of financial
administration. The executives and the officials who have the ultimate
responsibility of carrying out the activities of financial administration must be
given proper training. In an age of information and technology, the personnel
must be imparted training to enable them to use the latest technologies. The
digitisation of the government departments and agencies necessitates the officials
to be not only conversant but also to be experts to achieve the objectives in the
shortest time possible.

5. Primacy of Public Interest, Public Choice and Public Policy: The economic
32
 problems need to be studied with the public choice theory with the help of modern Financial Administration:
economic mechanisms. The public choice theory focuses on the attitudes and Nature, Scope, Importance
and Principles
behaviour of politicians and government officials and claims that they work for
self-interest. Their social interaction with citizens and their functioning as
government officials and elected representatives is analysed by public choice
theorists. This theory is premised in the positive analysis (what is) but is often
used for normative purposes (what ought to be) to determine a problem. It can
highlight the behavioural problems of the people in power and who hold authority
and public interest be inculcated in them. Public policy must include the base of
public interest as a prime factor with focus on public choice in their formulation.

6. Stability and Balance: Human Resource Development is essential for financial

administration to achieve stability and balance. Capacity building is a subsequent
need to implement the plans and programmes of the government. Building stable
and balanced personnel resource results in effectiveness, efficiency, and economy.

7. Awareness and Accountability: Contrary to the belief that the government has
the power and authority, it is the electorate in a democracy that has the real
power. There must be awareness amongst the citizens of the electoral procedures
and their fundamental rights to hold the elected representatives accountable. An
aware and alert citizen will be able to make the right choice by exercising his/
her voting rights and capable to evaluate the government and administration’s
performance. It enables the voters comprehend and evaluate the government’s
performance, to choose the candidates.

8. Flexibility: Financial administration must be flexible so that plans, and projects

can be modified to suit the ever-changing socio-economic needs of the people.

Check Your Progress 2

Note: i) Use the space given below for your answers.

ii) Check your answers with those given at the end of the Uunit.

1) Discuss the importance of financial administration in a modern democracy.

............................................................................................................................
............................................................................................................................
............................................................................................................................

2) What are the principles of financial administration?

............................................................................................................................
............................................................................................................................
............................................................................................................................

2.6 CONCLUSION
Financial administration is the lifeblood of an economy. India, since its independence
in 1947 from the British Rule, has been striving hard to have a stable economy as it
was lagging on several fronts. Gradually a stable financial administrative system
evolved. It is only in recent times that financial administration has gained so much
importance to make India the fastest growing market economy. It has the capacity to
provide good governance. The collection of resources, whose quantity is not unlimited,

33
Introduction to Public and proper utilisation of those limited resources. The economic progress as well as
Finance and Administration backwardness both depend, to a large extent, upon effective financial administration.

2.7 GLOSSARY
Micro-finance Credit: It is a low amount credit bearing interests given to micro
entrepreneurs who are into income generating activities, who do not have access to
traditional banking services.

National Income: It is the sum total of the value of all the goods and services
manufactured by the residents of the country during a financial year. It is the net
result of all economic activities of a country during one year.

Political Economy: It refers to the interrelationship between politics and economy.

Public Choice Theory: Public choice theory focuses on people’s decision-making

process within the political realm. The politicians and bureaucrats are said to be
motivated by their self-interests in decision making. This has been propounded by
Niskanen, Buchanan and others.

2.9 REFERENCES
Cox, R., Vetter, D.E. & Stout, R.G. (1996).Financial Administration and Control.
New Jersey, USA: Wiley Publishers.

Gupta, R.K. & Saini, P.K. (2008). Financial Administration in India: Changing
Contours and Emerging Challenges. New Delhi, India: Deep and Deep Publications.

Mahajan S. K. & Mahajan, A. (2014). Financial Administration in India. New Delhi,

India: PHI India.

Panda, S. (1989). Financial Administration and Personnel Management in Public

Enterprises: A Study of Orissa. New Delhi, India: Mittal Publications.

Reed, B. J. & Swain, J.W. (1997). Public Finance Administration. New Delhi, India:
Sage Publications.

Shaw, A. (2007). Budgeting and Budgetary Institutions. Washington, D.C., USA:

The World Bank.

Singh, R.S. (1988). Union Budgets and Financial Administration. New Delhi, India:
Deep and Deep Publications.

2.9 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1

1) Your answer should include the following points:

Arguments in favour of Financial Administration being a Science:

 System
 Definiteness
 Principles
34
 Scientific Methods Financial Administration:
Nature, Scope, Importance
 Empirical and Principles
Arguments in favour of Financial Administration as an Art:
 Application of Knowledge
 Acquired
 Human Perspective
 Subjective
2) Your answer should include the following points:
 Public sector organisations
 Public revenue
 Public expenditure
 Legislative control
 Resource mobilisation
 Accounting and auditing
 Ease of doing business
Check Your Progress 2
1) Your answer should include the following points:
 Economic activity
 Adjustment of Public Expenditure to National Income
 Administration of the Government Machinery
 Operating Systems
 National Objectives
 Socio-economic Elevation
 Reduction of Wastage
 Resource Generation
 Public Debt and Public Borrowing
 Fiscal Policy
2) Your answer should include the following points:
 Unity of Organisation
 Legislative Control
 Political Direction
 The Principle of Correspondence
 Primacy of Public Interest, Public Choice and Public Policy
 Stability and Balance
 Awareness and Accountability
 Flexibility
35