{"id":195281,"date":"2022-07-12T16:58:53","date_gmt":"2022-07-12T11:28:53","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=195281"},"modified":"2022-07-12T16:58:53","modified_gmt":"2022-07-12T11:28:53","slug":"the-pandemic-flagged-need-for-a-new-fiscal-framework","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/the-pandemic-flagged-need-for-a-new-fiscal-framework\/","title":{"rendered":"The pandemic-flagged need for a new fiscal framework"},"content":{"rendered":"\n

Source:<\/strong> The post is based on an article \u201cThe pandemic-flagged need for a new fiscal framework\u201d published in the Live Mint on 12th<\/sup> July 2022.<\/p>\n

Syllabus: <\/strong>GS3 – Union Budgeting<\/p>\n

Relevance: <\/strong>Fiscal Framework<\/p>\n

News:<\/strong> In recent years, there has been suspension of fiscal rules across the globe due to the global financial crisis (GFC).<\/p>\n

What were the causes behind suspension of the fiscal rules? <\/strong><\/h5>\n

The costs of dealing with the pandemic has raised global government and private debt to record-high levels.<\/p>\n

The GFC crisis has been compounded by the Russia-Ukraine conflict<\/strong> in the year 2022.<\/p>\n

What are the traditional government approaches in the fiscal management domain?<\/strong><\/h5>\n

Fiscal architecture: <\/strong>It involves a fiscal strategy, supported by fiscal institutions such as an accountable and efficient public financial management system (PFM).<\/p>\n

Fiscal rules:<\/strong> There has been advocacy for well-designed and implemented numerical fiscal rules.<\/strong> These rules help strengthen the credibility of an administration\u2019s commitment<\/strong> to fiscal sustainability.<\/p>\n

What were the issues in the numerical fiscal rules approach?
\n<\/strong><\/h5>\n

India adopted numerical fiscal rules<\/strong> in 2003. However, there was pre-covid evidence that demonstrated that numerical fiscal rules<\/strong> did not prevent a large debt build-up over time. Therefore, the rigid numerical fiscal rules <\/strong>did more harm than good.<\/p>\n

Thus, it prompted modification<\/strong> of existing rules<\/strong> and revamping<\/strong> of escape clauses. Therefore, the Centre updated the Fiscal Responsibility and Budget Management (FRBM) Act in 2018<\/strong> and adopted multiple fiscal indicators<\/strong> as targets.<\/p>\n

What are the issues with India\u2019s new fiscal rule regime?<\/strong><\/h5>\n

The fiscal rules have been effectively circumvented by off-budget fiscal operations<\/strong>, inconsistent budget classification<\/strong> and accounting standards<\/strong>. In addition, there have been improper use of public accounts<\/strong> for budgetary purposes in India.<\/p>\n

Definitions of key targets, such as \u2018fiscal deficit\u2019<\/strong> or \u2018public debt\u2019,<\/strong> vary across state governments and the Centre.<\/p>\n

Though the PFM system was strengthened. But it has been able to meet only a fraction of best practice standards<\/strong>. It cannot check misclassification<\/strong> of accounts for compliance.<\/p>\n

Way forward
\n<\/strong><\/h5>\n

India needs to develop a system which mandates fiscal sustainability <\/strong>through institutional framework<\/strong>. The institutions should also be allowed to take judgement in the times of crisis.<\/p>\n

For example, fiscal responsibility principles should not be time-bound, but must allow the government to manage shocks. This can be done through three key steps:<\/strong><\/p>\n

(1) Instead of adopting numerical fiscal rules<\/strong>, the government should adopt the principles of fiscal responsibility<\/strong>. Such a model has been adopted by New Zealand, Australia and the UK.<\/p>\n

(2) Various stands, criteria, procedures and methods should be established. This should be devised in a manner that ensures that standards are being met.<\/p>\n

(3) There must be institutions to do surveillance and to determine ex-post compliance<\/strong> with the fiscal responsibility principle.<\/p>\n

In a post-pandemic framework, overall, India needs to improve the quality and efficiency of public spending<\/strong> and financial managem<\/strong>ent across all levels of government.<\/p>\n

(A) The New Zealand Model \u2013Principles-Based Fiscal Strategy<\/strong><\/p>\n

(1) NZ has enacted \u2018the fiscal strategy act\u2019<\/strong>, which requires adherence to the standards and principles of responsible fiscal management. For example, a medium-to-long-term fiscal sustainability report <\/strong>etc.<\/p>\n

(2) The government publishes an annual fiscal strategy <\/strong>explaining how its annual fiscal plan is consistent with the standards set out in the law etc.<\/p>\n

(3) It ensures transparent public reporting<\/strong> at regular frequency. Further, a periodic public review of the government\u2019s fiscal plans is done by the Parliament and independent fiscal institutions.<\/p>\n

(B) In doing this, India should move toward a new principles-based fiscal strategy<\/strong>, rather than returning to a fiscal framework<\/strong> based on rigid numerical fiscal targets<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cThe pandemic-flagged need for a new fiscal framework\u201d published in the Live Mint on 12th July 2022. Syllabus: GS3 – Union Budgeting Relevance: Fiscal Framework News: In recent years, there has been suspension of fiscal rules across the globe due to the global financial crisis (GFC). What… Continue reading The pandemic-flagged need for a new fiscal framework<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10501],"class_list":["post-195281","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-live-mint","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1701657902},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/195281","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=195281"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/195281\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=195281"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=195281"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=195281"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}