Finance Commission – Issues related to devolution of resources

India needs a Fiscal Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Idea of fiscal council

Mains level : Paper 2- Fiscal Council

The newscard highlights the need of bipartisan, independent Fiscal Council to report and analyse FRBM discrepancies by the Government.

Try this question for mains:
Q.Fiscal Council is an important institution needed to complement the rule-based fiscal policy. Discuss.

What is a 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.

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.

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.

Fiscal Council can be a game changer. How?

  • First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
  • Secondly, 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.
  • Third, 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 nature of budgetary constraint.
  • Finally, 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.

Issues meddling between

  • The problem is that a Council created by the Finance Ministry and reporting to it can hardly be expected to be independent.

Diverse role to play ahead

  • According to the IMF, there were 36 countries with IFIs in 2014 and more have been established since.
  • While most of the IFIs are in advanced countries, emerging economies too have also shown growing interest in them.
  • Although their common agenda has been to function as watchdogs, there is considerable diversity in their structure and functions.
  • Over the years, monitoring compliance with fiscal rules and costing policies and programmes have become major tasks of these councils.

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.

Conclusion

  • Of course, it 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.
Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments