[Burning Issue] Fiscal Council in India: Certain solution in uncertain times

The impact of COVID-19 on the economy is devastating and the government is forced to opt to borrow for spending more in order to support vulnerable households and engineer economic recovery due to the after-effects of COVID-19 pandemic on the economy.

The BI highlights the need for bipartisan, independent Fiscal Council to report and analyse FRBM discrepancies and inaccurate fiscal projections.

COVID Times: Fiscal situation and its unpredictability

  • The fiscal deficit of the Centre in 2019-20 as estimated by the Controller General of Accounts (CGA) was 4.6%, 0.8 percentage point higher than the revised estimate.
  • For 2020-21, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues.
  • The consolidated deficit of the Union and States could be as high as 12% of GDP and the overall debt could go up to 85%.

What is the Fiscal Council?

  • A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances.
  • They aim to provide nonpartisan oversight of fiscal performance and/or advice and guidance — from either a positive or normative perspective — on key aspects of fiscal policy.
  • These institutions assist in calibrating sustainable fiscal policy by making an objective and scientific analysis.

Important tasks of these IFIs: 

  1. Independent analysis, review and monitoring and evaluating of government’s fiscal policies and programmes
  2. Developing or reviewing macroeconomic and/or budgetary projections
  3. Costing of budget and policy proposals and programmes
  4. Presenting policymakers with alternative policy options

Voices for a Fiscal Council

  • The 13th Finance Commission recommended that a committee be appointed by the Ministry of Finance which should eventually transform itself into a Fiscal Council.
  • The FC expected it to conduct an annual independent public review of FRBM compliance, including a review of the fiscal impact of policy decisions.
  • The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council.

Tap to read more about the FRBM Act:

Explained: Fiscal Responsibility and Budget Management (FRBM) Act

Why need a fiscal council?

(1) Burgeoning deficits

  • For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues.
  • The consolidated deficit of the Union and States could be as high as 12% of GDP and the overall debt could go up to 85%.
  • Thus, it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over.

(2) Transparency issues

  • Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets.
  • The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common.
  • The report of the CAG of India in 2018 has highlighted various advances done to keep the liabilities hidden.

(3) Fiscal discipline

  • Many economists have faulted the government’s fiscal stance, arguing that this is no time for restraint; the government should spend more to stimulate the economy by borrowing as may be necessary.
  • In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.
  • Also in 2018, the D.K. Srivastava committee on fiscal statistics established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council.

Fiscal Council can be a game-changer. How?

  • Watchdog of public finance: An unbiased fiscal scrutiny will help raise the level of debate and brings in greater transparency and accountability.
  • Highlights populist measures: Accurate costing of various policies and programmes can help to promote transparency over the political cycle to discourage populist shifts in fiscal policy and improve accountability.
  • Public awareness: Scientific estimates of the cost of programmes and assessment of forecasts could help in raising public awareness about their fiscal implications and make people understand the budget.
  • Rule of law maintenance: The Council will work as a conscience keeper in monitoring rule-based policies, and in raising awareness and the level of debate within and outside Parliament.

Challenges meddling between

1) Lack of Political Will

  • Back in 2003 when FRBM was enshrined into law, it was thought of as the magic cure for fiscal ills.
  • The FRBM enjoins the government to conform to pre-set fiscal targets, and in the event of failure to do so, to explain the reasons for deviation
  • The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance
  • However, there is a lack of in-depth discussion in Parliament on fiscal stance and the submission of the FPSS often passes off without even much notice.

2) Adding up more to the accountability of the Govt.

  • Fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget, and if the Ministry decides to differ from those estimates, it is required to explain why it has differed.
  • Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
  • If the estimates go wrong, the Finance Ministry will simply shift the blame to the fiscal council.

3) Fiscal Bias

  • Governments that are unsure of being re-elected may ignore the long-term consequences of fiscal deficits and use generous fiscal policy to increase their chances of re-election.
  • This may be possible because voters tend to see the short term benefits they can gain from a reduction in taxes and an increase in public spending but are not always fully aware of the possible long-term costs of this.
  • This may explain why unsustainable deficits are not systematically punished by voters

4) Duplication of Work

  • As of now, both the Central Statistics Office (CSO) and RBI give forecasts of growth and other macroeconomic variables, questions will be raised about the need for Fiscal Council’s projections
  • Another argument made in support of a fiscal council is that it will act as watchdog & prevent the government from gaming the fiscal rules through creative accounting.
  • However, there is already an institutional mechanism in form of CAG to do the job of auditing & fiscal watchdog of government spending.

Way forward

  • When the markets fail, governments have to intervene. Whenever governments seem obstructed, it is here that we need systems and institutions to ensure checks and balances.
  • In that respect, a Fiscal Council is an important institution needed to complement the rule-based fiscal policy.

Alternatives to the situation

  • We can expect the CAG to scrutinize the budget after it is presented to Parliament for its fiscal stance and the integrity of the numbers, and give out a public report.
  • The CAG’s office will provide the secretarial and logistic support to the committee from within its resources.

Global examples

  • The Office for Budget Responsibility (OBR) is a non-departmental public body funded by the UK Treasury, that the UK government established to provide independent economic forecasts and independent analysis of the public finances.
  • We can have a similar official watchdog at our behest!

Conclusion

  • Of course, a fiscal council is not a ‘silver bullet’; if there is no political will, the institution would be less effective, and if there is political will, there is no need for such an institution.
  • That is also true of the FRBM Act. While we cannot state that the FRBM Act has been an unqualified success, it has also not been an abject failure either.

 

 


References

https://www.thehindu.com/opinion/lead/india-does-need-a-fiscal-council/article32432565.ece

https://www.thehindu.com/opinion/lead/do-we-need-a-fiscal-council/article32046204.ece

https://en.wikipedia.org/wiki/Fiscal_council

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