Editorial Notes

[Editorial Notes] Why India needs a Fiscal Council?

Fiscal Council will enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.
By IASToppers
August 25, 2020

Contents

  • Introduction
  • Fiscal Council
  • Functions of the Council
  • Recommendations for Fiscal Council
  • Need for an Independent Fiscal Council
  • Arguments against Fiscal Council
  • Arguments supporting Fiscal Council
  • Conclusion

Why India needs a Fiscal Council?

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Introduction:

The fiscal situation in India was under severe stress even before COVID-19 and the pandemic has worsened it. The fiscal deficit of the Centre in 2019-20 as estimated by Controller General of Accounts (CGA) was 4.6%. 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.

The exceptional circumstance demands ‘Fiscal Council’ to enforce fiscal rules and keep a check on Centre’s fiscal consolidation.

Fiscal Council:

  • According to International Monetary Fund (IMF) Fiscal councils are independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.
  • Fiscal Council is a permanent agency with a mandate to independently assess government’s fiscal plans.
  • The fiscal council’s mandate extends:
    • To prepare fiscal sustainability analysis.
    • Independent assessment of Central government’s fiscal performance and compliance with fiscal rules.
    • To recommend suitable changes to fiscal strategy to ensure consistency of annual financial statement and steps to improve fiscal data.
    • To produce an annual fiscal strategy report released at public domain.

Functions of the Council:

  • Independent analysis, review, monitoring and evaluating of government’s fiscal policies and programmes.
  • Developing or reviewing macroeconomic and/or budgetary projections.
  • Costing of budget and policy proposals and programmes; and presenting policy makers with alternative policy options.
  • Monitoring compliance with fiscal rules and costing policies and programmes.

Recommendations for Fiscal Council:

1. Article 293 (3):

  • Article 293 (3) provides a constitutional check over borrowings and state government liabilities.
  • But there are no such restrictions on the Centre.

2. 14th Finance Commission:

  • The FC recommended to establish an independent Fiscal Council through an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
  • This could be done by inserting a new Section mandating establishment of an independent Fiscal Council to undertake ex ante assessment (look at future events based on possible prediction) of budget proposals, to ensure their consistency with fiscal policy and Rules.
  • The FC is to be appointed by, and report to the Parliament and have its own budget.
  • The FC should include ex ante evaluation of the fiscal implications of the budget proposals i.e. evaluation of how real the forecasts are; their consistency with the fiscal rules and estimating the cost of various budgetary proposals.
  • The ex post evaluation and monitoring of the budget should be taken by CAG.

3. N.K. Singh committee, 2017:

  • Fiscal Responsibility and Budget Management Review Committee in its 2017 report had proposed creation of an autonomous Fiscal Council with representatives from both states and Centre.

3. D.K. Srivastava committee, 2018:

  • The committee established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government.
  • It would provide harmonized fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.

Need for an Independent Fiscal Council:

  • Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth.
  • The deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets.
  • There are over-ambitious revenue targets in budgets combined with the lack of transparency in tax administration.
  • Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets.
  • Tax department had resorted to ‘irregular’ and ‘unwarranted’ methods to meet targets.
  • Need for coordination between the finance commission as well as the GST Council.
  • Need to inculcate financial discipline and cut the borrowings of Central government.
  • So, there is a need to institute an independent and statutory watchdog to oversee the state of public finances.
  • As a watchdog, FC can prevent the government from creative accounting or clever financial engineering.

Arguments against Fiscal Council:

  • A body with such wide responsibilities is more likely to add more chaos than substance.
  • The exercise should be left to the Finance Ministry to defend its numbers rather than forcing it to privilege the estimates of one specific agency.
  • Forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
  • If the estimates go wrong, the ministry can simply shift the blame to the fiscal council

Arguments supporting Fiscal Council:

  • An unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
  • Costing of various policies and programmes can help to promote transparency over the political cycle to discourage shifts in fiscal policy.
  • 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.
  • 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.

Conclusion:

  • When the markets fail, governments have to intervene. What do we do when the governments fail? In that case we need systems and institutions to ensure checks and balances.
  • The institutional mechanism like Fiscal Council will enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.
  • It is not a silver bullet and needs a strong political will to help in improving comprehensiveness, transparency and accountability in government’s fiscal stance.
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