Accrual Dreams, Cash Reality: India’s Municipal Reform Stalls
Greater Chennai Corporation listed Municipal Bonds on NSE.(Image NSE India)
Two decades after NMAM, weak enforcement, state resistance, and capacity gaps keep urban local bodies stuck between cash books and accrual systems
By P. SESH KUMAR
New Delhi, May 6, 22026 — Two decades after the National Municipal Accounts Manual (NMAM) promised to drag Indian cities out of cash‑book opacity and into accrual‑based transparency, a large share of urban local bodies (ULBs) still live in a twilight world of partial reform, parallel ledgers and fragile spreadsheets. The Comptroller and Auditor General of India (CAG) and its Government Accounting Standards Advisory Board (GASAB) have done the hard intellectual lifting-designing formats, manuals and road maps-but their tools have been persuasion, guidance and audit‑shaming, not hard coercive power over state governments and municipalities.
The result is a patchwork: a few states and big cities showcase slick accrual financial statements, while many others still struggle to produce even timely cash‑basis accounts, let alone a credible opening balance sheet. NMAM 2.0, and the expert deliberations one would participate in, will matter only if the next phase of reform ties standards to money, politics and capacity-through enforceable grant conditions, mandatory standards for local‑body audits, and state‑level ownership of a municipal finance cadre.
Setting the Stage: From NMAM 2004 to NMAM 2.0
The story begins with a judicial nudge that should have been a shove. In a public‑interest litigation on Delhi’s civic mess, the Supreme Court inter alia, directed that municipal bodies move from cash to mercantile (accrual) accounting and asked the Union government to develop guidelines capturing the full cost of municipal services. The Ministry of Finance responded with guidelines on local‑body grants in 2001, under which the CAG prescribed budget and account formats, accounting policies and costing norms for utilities.
On the back of a CAG Task Force, the Ministry of Urban Development (now MoHUA) crafted the National Municipal Accounts Manual in 2004 as a generic framework to be adapted by states into their own municipal accounts and budget manuals. NMAM pushed ULBs toward double‑entry, accrual‑based accounting, laid out a standard chart of accounts and offered model financial statements-balance sheet, income‑and‑expenditure account and cash‑flow statement.
The vision, endorsed by Finance Commissions and administrative reform committees, was “bubble‑up” reform: local bodies would transition to accrual first, and their experience would eventually pull state and central governments toward modern public sector financial reporting.
The Great Municipal Stagnation: A Story of Two Decades of “Coming Soon”
It is a tale of administrative inertia that would make a bureaucrat blush. Two decades ago, the Supreme Court of India-a body rarely mistaken for a financial consultancy-had to step in and effectively order the executive to do its day job. The Supreme Court’s intervention in Almitra H. Patel v. Union of India became the judicial catalyst for urban governance reform; the detailed move toward accrual-based municipal accounting was subsequently developed through the National Municipal Accounts Manual and related reform instruments. It was a stunning indictment of the executive branch’s failure to treat municipal governance as a professional concern, necessitating a judicial “nudge” for a function that should have been standard operating procedure.
The response to this judicial fire-bell was, predictably, a slow-motion shuffle. Despite the urgency, it took until December 2004-more than three years after the Apex Court’s directive-for the National Municipal Accounts Manual (NMAM) to be finally released. This manual was meant to be the holy grail of urban fiscal transparency, providing the architecture for cities to move from opaque, cash-book entries to sophisticated, double-entry accrual statements. Yet, what followed was a masterclass in stalling.
Today, 22 years after the Court’s indirect intervention, the dream of a nationwide transition to accrual accounting remains largely a fantasy. While a handful of flagship cities and donor-funded projects have shown off slick, modernized accounts, the vast majority of India’s 4,500+ ULBs are still stumbling through the dark with cash-basis ledgers, unable to produce credible balance sheets or even basic fiscal transparency.
The real villain in this two-decade-long soap opera, however, is the quiet, systematic resistance from state governments. Because local governance falls squarely under the State List of the Constitution, the Union government and bodies like the Comptroller and Auditor General (CAG) are reduced to playing the role of professional advisors, lacking the constitutional “bulldozer” to force compliance. State governments, often fearing that transparent accounting will expose the uncomfortable realities of their urban finances-unfunded liabilities, massive arrears in property taxes, and systemic inefficiency-have perfected the art of the “compliant delay”. They adopt the manuals, issue the orders, and hold the ribbon-cutting workshops, only to let the reforms wither the moment the central government’s gaze shifts elsewhere.
We are thus left with a system that is perennially “under reform.” The result is a bizarre fiscal twilight: we have the tools, the technology, and the manuals, yet we lack the political will to make them mandatory. Without linking these accounting standards to the hard, cold reality of central grants-making cash contingent on credible, audited accrual statements-we are likely to spend another twenty years holding workshops on the “next” version of a manual that is destined to collect dust.
It is here that the 28 April 2026 workshop of experts on ‘Strategic Approach to NMAM 2.0’ sits squarely in this lineage. The gathering at the CAG’s office, co‑hosted with GASAB and Janaagraha, was not merely another technical conclave; it was an attempt to rescue and update an ageing manual by hard‑wiring issues like ULB typology, GST treatment, digital integration, municipal bonds and ESG into the very architecture of municipal accounting. The CAG’s own press note frankly acknowledged that the current accounting system is “largely modelled” on NMAM 2004 but that implementation is “patchy”, hence the push for a revised NMAM 2.0.
A Reform That Never Quite Arrived
On paper, the trajectory looked impressive. States such as Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu and West Bengal issued government orders adopting accrual‑based, double‑entry systems for all ULBs, usually anchored in state‑specific manuals built on NMAM. The Fourteenth Finance Commission noted that NMAM had long been finalised and urged that large municipal bodies and panchayats become early adopters of accrual accounting, with the promise that this would strengthen transparency and accountability.
Yet the empirical record is stubborn. A National Institute of Urban Affairs (NIUA) study bluntly observed that, despite a long implementation period, “only [a] handful of local bodies have attained complete conversion” to accrual‑based double‑entry accounting.
A 2023 NITI Aayog–ICAI report on the transition to accrual accounting in ULBs finds that more than half of India’s ULBs still operate on cash basis, even as AMRUT 2.0 formally requires double‑entry accounting as a reform condition. Earlier CAG and state audit reports tell the same tale in slow motion: Orissa’s municipal manual provided for accrual accounting but it remained unapplied; Bihar issued an accrual‑based manual while hundreds of audit paragraphs on municipal finances accumulated unresolved; and Goa’s ULBs, even in the mid‑2000s, had not adopted CAG‑prescribed formats.
International partners saw the gap early. An Asian Development Bank implementation guide on municipal accounting reforms stressed that the “foundation of good urban management” is a double‑entry accrual system, but openly acknowledged that India’s shift from cash‑based ledgers would be complex and politically sensitive. Two decades on, that understatement feels generous: reform has not failed outright, but it has certainly stalled and in some states even regressed after initial pilots.
The Anatomy of Resistance
Part of the problem lies inside the manual itself. A recent 2026 research paper argues that NMAM remains essentially procedural: it endorses accrual accounting but leaves serious gaps in recognition, measurement and disclosure, particularly on tricky issues like depreciation, provisions and revenue recognition. Accounting Standards for Local Bodies (ASLBs), issued by ICAI and modelled on IPSAS, were designed to plug exactly those gaps, yet NMAM and ASLBs have never been formally integrated, leaving ULBs to navigate a confusing dual universe of a rule‑based manual and principle‑based standards.
But even a perfect manual would be dead on arrival without local capacity. ICAI’s study on “Accounting System of the Urban Local Bodies – Issues & Challenges” lists a depressingly familiar menu of obstacles: shortage of trained finance staff, absence of comprehensive asset registers, incomplete identification of liabilities, weak IT systems, and high turnover of outsourced accountants and consultants.
NITI Aayog’s case studies echo this, documenting how many states struggled just to create credible opening balance sheets, digitise legacy records, or convince engineering departments to cooperate in valuing municipal assets. The result is partial conversion: income‑and‑expenditure accounts on accrual lines, but balance sheets still unreliable; or beautifully formatted financial statements that collapse under audit because underlying registers and ledgers are incomplete.
Layered over this is the political economy of discomfort. Accrual accounting shines an unforgiving light on unpaid property tax, under‑priced user charges, unfunded pension obligations and contingent liabilities that cash‑basis books happily ignore. NIUA’s work notes that very few ULBs maintain comprehensive registers of immovable property, even though statutes require them, which undermines both asset management and financial reporting. When reform threatens to expose arrears, misallocations and soft deals embedded in municipal finances, it is hardly surprising that some councils, parastatals and even state departments drag their feet.
In short, resistance has not been an open revolt against accrual accounting, but a quiet foot‑dragging, often dressed up as technical constraint. Where political and administrative leadership chose to own the reform-as in parts of Karnataka, Kerala and Tamil Nadu-accrual accounting has taken root. Where it became a donor‑driven project or a compliance box for central schemes, it withered once the consultants left.
The CAG and GASAB: Architects Without a Bulldozer
The CAG has been central to this story, but more as architect and conscience‑keeper than as enforcer. Acting on Finance Commission recommendations, CAG set up a Task Force in 2002 to design budget and accounting formats for ULBs, recommended adoption of accrual basis, and oversaw preparation of NMAM in collaboration with the central government. The CAG then went a step further by constituting GASAB in 2002 as a nodal advisory body for government accounting standards, with a mandate to move Indian public finance toward principle‑based standards and, ultimately, accrual accounting.
GASAB has since produced a “Road Map for Accrual Accounting”, drafted a few Indian Government Financial Reporting Standards (IGFRS) for central and state governments, and repeatedly emphasised that local bodies should be early adopters of accrual accounting to create pressure for wider reform. CAG speeches and booklets frankly acknowledge the long‑term nature of the transition, pointing to foundational tasks such as building asset and liability databases, creating asset registers and training staff as prerequisites for credible accrual statements. CAG has also compiled performance audits highlighting failures in implementing accrual reforms, thereby using the audit function to keep the issue alive in legislatures and public discourse.
What CAG and GASAB do not have is a legal bulldozer. Local bodies are creatures of state law, and the actual adoption of NMAM‑based manuals or ASLBs must be done through state government orders, rules and amendments to municipal legislation. The Andhra Pradesh municipal accounts manual, for instance, was issued not by CAG but by the state’s Municipal Administration and Urban Development Department, even though it explicitly builds on NMAM and Supreme Court directions. In Orissa, the state accepted an accrual‑based manual but ULBs did not implement it; the audit report could criticise and recommend, but neither CAG nor GASAB could compel compliance beyond that.
Finance Commissions and central schemes have occasionally given CAG sharper indirect tools. The Thirteenth and Fourteenth Finance Commissions recommended that publication of audited annual accounts, often prepared on accrual basis, be made a precondition for accessing certain grants, thereby raising the stakes for non‑compliant ULBs.
AMRUT 2.0 likewise lists double‑entry accounting as a reform requirement, with NITI Aayog and ICAI documenting how this has triggered a “sudden spurt” of activity in states keen not to forgo funds. But even here, CAG’s role is to advise, design templates and audit compliance-implementation ultimately rests with state governments and local bodies. In practical terms, therefore, the CAG’s authority over municipal accounting reforms remains largely persuasive and diagnostic, not coercive.
Why the Transition Has Been So Uneven
Behind the banner headline of “slow progress” lies a messy reality of uneven trajectories and partial successes. The NITI–ICAI report shows that some states managed to produce true and fair accrual financial statements for many ULBs, while others saw reforms stall after pilots or remain confined to large municipal corporations. Where reforms were driven as time‑bound projects-often linked to externally aided urban infrastructure loans-ULBs moved to new software and formats but failed to embed the underlying processes, leading to reversion to old practices once the project team was disbanded.
Technical design flaws have compounded these institutional weaknesses. NMAM’s focus on formats and procedures, without a fully articulated standard‑setting backbone, may have left ULBs without clear guidance on complex transactions such as revenue recognition for long‑term projects, treatment of grants, or impairment of assets. ASLBs, though more conceptually robust, were for many years non‑mandatory and not systematically embedded in state manuals, which meant auditors could not insist on their application. Even today, ICAI has mandated only two ASLBs (on cash flows and borrowing costs) for its members when auditing local bodies, leaving much of municipal financial reporting in a standards‑light grey zone.
Audit feedback has also struggled to bite. A Bihar audit report shows thousands of audit paragraphs on municipal finances pending settlement, involving huge unadjusted amounts and highlighting systemic weaknesses. NIUA and Finance Commission‑commissioned studies describe a chronic cycle: ULBs delay finalisation of accounts, statutory auditors face capacity constraints, audit arrears pile up, and pending observations become politically normalised rather than urgent red flags. In such an environment, the threat of a qualified opinion on accrual financial statements does not yet carry the reputational or financial sting that it would in a mature municipal credit market.
Auditing the Invisible State: Can CAG Expose Faceless Tax Power?
What NMAM 2.0 Is Trying to Fix
It is precisely this backdrop that makes NMAM 2.0 both necessary and risky. The CAG’s press note on the September 2025 workshop openly calls for diagnosing “systematic challenges” of ULBs and framing solutions that are “ambitious yet realistic”, acknowledging that the original manual’s implementation has been patchy and that India needs to mobilise trillions of rupees annually for urban infrastructure by 2036. The description of the workshop themes-ULB typology, accounting architecture, accrual standards, budgeting reforms, transparency, implementation strategy, municipal bonds and digital finance-captures the ambition to turn NMAM from a mere manual into a full‑blown fiscal and governance framework for cities.
Academic and professional commentary already sketches what a credible NMAM 2.0 might entail. The 2026 paper on aligning NMAM with ASLBs argues that the manual must shed its procedural skin and explicitly embed a full suite of local‑body accounting standards, harmonised with IPSAS and backed by strong disclosure requirements.
ICAI and Janaagraha have separately urged that ULBs be required to follow a uniform set of standards and financial‑statement formats-balance sheet, income‑and‑expenditure account, cash flow statement and notes-so that municipal finances become comparable across cities and over time. NITI’s report underscores the need to tie accrual accounting to digital public finance systems, asset management, and performance measurement rather than treating it as a stand‑alone accounting exercise.
In other words, NMAM 2.0 is being positioned, rightly, as the operating system for urban fiscal governance, not just a more polished user manual. But an operating system is only as good as the hardware it runs on and the incentives of the humans using it.
Authority, Persuasion and the CAG’s Real Levers
On the question one may raise most pointedly-does the CAG have any authority or power to ensure adoption of the accounting manual-the legal and practical answer is sobering. CAG can design formats, advise the Union and states, and issue model frameworks, but it cannot, by itself, command a municipal council in, say, a mid‑sized town to adopt NMAM 2.0 or ASLB‑compliant statements. That authority sits with state legislatures and governments, through municipal Acts, local fund audit laws and executive orders that prescribe accounting systems for ULBs.
What CAG does possess is a powerful, if indirect, three‑part toolkit. First, as auditor, it can expose weaknesses in municipal accounting and highlight demonstrable adverse implications of non‑implementation of accrual reforms in reports laid before state legislatures, thereby creating political pressure. Second, through GASAB and expert committees, it can shape the standards landscape and push for convergence between NMAM, IGFRS and ASLBs, nudging states and professional bodies toward a coherent regime. Third, by working with Finance Commissions, MoHUA and NITI Aayog, it can help design grant conditions and reform agendas-like those under AMRUT 2.0-that make credible accrual accounts and published audited statements a ticket to central funds.
To date, the CAG’s role has been overwhelmingly persuasive and supportive: building manuals, convening workshops, issuing guidance notes, training auditors, and producing compendia of performance audits that distil lessons on what has worked and what has not. That “hand‑holding” stance has been essential in a field where many ULBs are starting from below zero. But persuasion without teeth can at best produce islands of excellence in a sea of inertia. Unless Finance Commissions, MoHUA and states are willing to weaponise CAG’s frameworks through hard budget constraints and legal mandates, the CAG will remain an influential advisor, not an enforcer.
From SAI20 to AI Audits: Can CAG Deliver Ground-Level Results?
A Hard‑Nosed Roadmap for Real Change
If NMAM 2.0 is to be more than a commemorative edition of a manual few ULBs fully follow, the way forward has to be both political and technocratic. The first move is to fuse the currently fragmented normative architecture. NMAM 2.0 should explicitly incorporate ASLBs as its standard‑setting backbone, with a clear schedule of which standards apply from which date, and ICAI should in turn make a critical mass of ASLBs mandatory for audits of all but the smallest ULBs. This is not mere academic housekeeping; it is how one may ensure that the balance sheet of a tier‑II city in Maharashtra speaks the same financial language as that of a city in Odisha.
Second, money must talk louder. Future Finance Commission recommendations and MoHUA schemes should go beyond vague “reforms” and require, as a non‑negotiable entry condition, publication of audited accrual‑based financial statements-balance sheet, income‑and‑expenditure account, cash‑flow statement and notes-on ULB websites within a fixed time after year‑end. NITI’s own work shows that where access to central grants was at stake, states suddenly discovered the resolve to push ULBs toward accrual reporting. This leverage needs to be institutionalised and tightened, with clear consequences for persistent non‑compliance.
Third, reforms have to move from consultant‑driven projects to institutionalised municipal finance systems. The ADB guide and ICAI studies emphasise that sustainable accounting reform requires a dedicated cadre of municipal finance professionals, modern financial‑management information systems, and painstaking creation of asset and liability registers. States should invest in state‑level municipal finance cells that provide hand‑holding, shared services and continuous training, rather than relying on one‑off capacity‑building workshops that vanish with the project budget.
Fourth, accrual accounts must be visibly linked to benefits that politicians care about. Credit rating agencies and investors already treat robust accrual‑based statements as a prerequisite for municipal bonds and pooled finance structures. NMAM 2.0 should therefore be marketed not as a compliance burden but as the passport to cheaper long‑term capital, better ESG scores and the ability to tell a compelling story about a city’s fiscal health to citizens and markets alike. Janaagraha’s submissions to the Fourteenth Finance Commission explicitly make this link between uniform standards, better disclosure and improved accountability; that narrative needs to be amplified.
Finally, the CAG and GASAB can recalibrate their own stance. Without overstepping constitutional limits, they can adopt a more hard‑edged audit vocabulary: systematically grading states on the maturity of municipal accounting reforms; publishing comparative scorecards on accrual implementation; and flagging, in national‑level reports, those jurisdictions where NMAM‑based reforms have stagnated or regressed. Combined with stronger, time‑bound follow‑up on audit paragraphs and public dashboards of pending municipal audit observations, this could turn the soft power of audit into a more tangible pressure point on state governments.
In the end, the slow progress of municipal accounting reforms is not a failure of ideas; NMAM, ASLBs, GASAB’s road maps and the NITI–ICAI case studies together offer a well‑stocked intellectual toolkit. It is a failure of politics, incentives and execution. If NMAM 2.0 can become the rallying script for a coalition of reform‑minded municipal leaders, state finance departments, auditors, rating agencies and citizen groups-and if Finance Commissions and central ministries are willing to back that script with hard conditions and real money-the long‑promised shift from cash‑book opacity to accrual‑based clarity may finally move from conference rooms and LinkedIn posts into the everyday reality of India’s city halls.
(This is an opinion piece. Views expressed are the author’s own.)
Follow The Raisina Hills on WhatsApp, Instagram, YouTube, Facebook, and LinkedIn
About The Author
