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INDIA DOES NEED A FISCAL COUNCIL

Focus: GS-III Indian Economy

Introduction

  • The fiscal situation in India has been under severe stress even before COVID-19 and the novel coronavirus pandemic has only worsened it.
  • While the prevailing exceptional circumstance warrants loosening of purse strings, it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over.

Details

  • 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 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%.

Need for transparency

  • The report of the Comptroller and Auditor General (CAG) of India in 2018 on the compliance of the Fiscal Responsibility and Budget Management (FRBM) Act for 2016-17, highlights various obfuscations done to keep the liabilities hidden.
  • In order to make the Budgets comprehensive, transparent and accountable, the 13th Finance Commission recommended that a committee be appointed by the Ministry of Finance which should eventually transform itself into a Fiscal Council to conduct an annual independent public review of FRBM compliance, including a review of the fiscal impact of policy decisions on the FRBM roadmap.
  • The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council.
  • The 14th Finance Commission recommended the establishment of an independent Fiscal Council which should be appointed by and reporting to Parliament by inserting a new section in the FRBM Act – as a Council created by the Finance Ministry and reporting to it can hardly be expected to be independent.

The mandate

A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances.

  1. An unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
  2. 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.
  3. 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.
  4. 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.

Diverse role, more acceptance

  • According to the International Monetary Fund (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.

important tasks of these IFIs include:

  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 policy makers with alternative policy options.

Conclusion

  • When the markets fail, governments have to intervene. What do we do when the governments fail? 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.
  • While we cannot state that the FRBM Act has been an unqualified success, it has also not been an abject failure either. The counterfactual will show that things would have been much worse without it, and it has helped to raise the awareness of government, legislators and the public at large.
  • Similarly, the Fiscal Council will help in improving comprehensiveness, transparency and accountability.

-Source: The Hindu

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October 2022
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