7 PM Editorial |Need For a Fiscal Council In India|25th August 2020

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Need For a Fiscal Council In India

Introduction:

Fiscal position of India is expected to worsen severely due to reduced tax revenue and increased need for expenditure in tackling COVID 19 pandemic.

Expected trends are:

• Fiscal deficit above 7% for the centre as against budgeted 3.5%.
• General government(Union and states) fiscal deficit at 12% and public debt at 85% of GDP

While in the short term, an expansionary fiscal policy is needed, in the medium to long term, fiscal consolidation is must. A fiscal council can aid this consolidation and ensure accountability of government.

Lack of transparency and accountability in existing budgeting:

Following budgetary practices in India show lack of effective accountability:

• Lack of realistic forecasts:
  • Fiscal deficit of 2019-20 as per CAG is 4.6% compared to revised estimate of 3.8%.
  • Unrealistic targets of tax revenue and capital receipts
• Repeated postponements of FRBM(Fiscal Responsibility and Budget Management) Act targets
• Delays in bill payments
• Extra budgetary financingnot shown in deficit calculations. Examples are:
  • FCI borrowing from NSSF(National Small Savings Fund) for food subsidy
  • Railways financing by borrowing from IRFC(Indian Railway Finance Corporation)
  • Irrigation financing by borrowing from LTIF(Long term Irrigation Fund) in NABARD
  • Special banking arrangement for fertilizer subsidy
  • Issuing short term bonds
• Questionable disinvestment practicesto achieve targets
  • LIC buying IDBI bank
  • PFC(Power Finance Corporation) buying REC(Rural electrification Corporation)

To address these issues, a fiscal council is recommended by the 13th FC(Finance Commission), 14th FC and N.K.Singh panel of FRBM review. 14th FC suggested such a council should report to parliament and must be autonomous.

Fiscal council – Functions:

Fiscal council must be an independent fiscal institution(IFI) promoting stable and sustainable public finance. It must be composed of non elected professionals to ensure bipartisan support.

It performs functions of:

• Unbiased reporting to parliamentpromoting accountability and transparency
• Costing of budget, policies and programmes. This discourages populist measures and raises awareness of people about their viability
• Developing macroeconomic and budgetary projections
• Raising public awareness on budgetary constraints.
• Monitoring rules based policiesand this improves the quality of legislative checks on executives. Extra budgetary financing and such practices will be discouraged due to this.
• Presenting alternative policy options

Hence it improves the fiscal management as a whole by improving transparency and accountability.

Principles for successful fiscal councils:

Autonomy, transparency, impartiality and accountability are needed for an effective fiscal council. OECD evolved following principles for achieving this:

• Local ownership
• Independence and non partisanship
• Mandate
• Resources
• Relationship with legislature
• Access to information
• Transparency
• Communication and
• External evaluation

Global successes:

36 countries had IFIs in 2014 as per IMF(International Monetary Fund).  Further, countries with IFIs saw following benefits as per IMF studies:

• Stronger budgetary balances
• More accurate budgetary and macroeconomic forecasts
• Better public awareness and informed debates on fiscal policy

Belgium, Chile and UK in particular benefited significantly

• In Belgium, adoption of macroeconomic forecasts by the Federal Planning Bureau is legally mandated. It reduced bias in forecasts
• Chile has 2 independent bodies on Trend GDP and Reference Copper price to improve budget forecasts
• UK’s Office of Budget Responsibility improved fiscal responsibility

Conclusion:

Fiscal council institutionalizes checks and balances on government budgetary practices. While it is not a silver bullet, it will improve transparency and accountability.

Source: The Hindu

Mains question:

1. What is a fiscal council? Critically discuss the need for such a council in India? [15 marks, 250 words]