7 PM Editorial |Need For a Fiscal Council In India|25th August 2020

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Need For a Fiscal Council In India

Introduction:

Fiscal position of India is expected to worsen severely due to reduced tax revenue and increased need for expenditure in tackling COVID 19 pandemic.

Expected trends are:

  • Fiscal deficit above 7% for the centre as against budgeted 3.5%.
  • General government(Union and states) fiscal deficit at 12% and public debt at 85% of GDP

While in the short term, an expansionary fiscal policy is needed, in the medium to long term, fiscal consolidation is must. A fiscal council can aid this consolidation and ensure accountability of government.

Lack of transparency and accountability in existing budgeting:

Following budgetary practices in India show lack of effective accountability:

  • Lack of realistic forecasts:
    • Fiscal deficit of 2019-20 as per CAG is 4.6% compared to revised estimate of 3.8%.
    • Unrealistic targets of tax revenue and capital receipts
  • Repeated postponements of FRBM(Fiscal Responsibility and Budget Management) Act targets
  • Delays in bill payments
  • Extra budgetary financingnot shown in deficit calculations. Examples are:
    • FCI borrowing from NSSF(National Small Savings Fund) for food subsidy
    • Railways financing by borrowing from IRFC(Indian Railway Finance Corporation)
    • Irrigation financing by borrowing from LTIF(Long term Irrigation Fund) in NABARD
    • Special banking arrangement for fertilizer subsidy
    • Issuing short term bonds
  • Questionable disinvestment practicesto achieve targets
    • LIC buying IDBI bank
    • PFC(Power Finance Corporation) buying REC(Rural electrification Corporation)

To address these issues, a fiscal council is recommended by the 13th FC(Finance Commission), 14th FC and N.K.Singh panel of FRBM review. 14th FC suggested such a council should report to parliament and must be autonomous.

Fiscal council – Functions:

Fiscal council must be an independent fiscal institution(IFI) promoting stable and sustainable public finance. It must be composed of non elected professionals to ensure bipartisan support.

It performs functions of:

  • Unbiased reporting to parliamentpromoting accountability and transparency
  • Costing of budget, policies and programmes. This discourages populist measures and raises awareness of people about their viability
  • Developing macroeconomic and budgetary projections
  • Raising public awareness on budgetary constraints.
  • Monitoring rules based policiesand this improves the quality of legislative checks on executives. Extra budgetary financing and such practices will be discouraged due to this.
  • Presenting alternative policy options

Hence it improves the fiscal management as a whole by improving transparency and accountability.

Principles for successful fiscal councils:

Autonomy, transparency, impartiality and accountability are needed for an effective fiscal council. OECD evolved following principles for achieving this:

  • Local ownership
  • Independence and non partisanship
  • Mandate
  • Resources
  • Relationship with legislature
  • Access to information
  • Transparency
  • Communication and
  • External evaluation
Global successes:

36 countries had IFIs in 2014 as per IMF(International Monetary Fund).  Further, countries with IFIs saw following benefits as per IMF studies:

  • Stronger budgetary balances
  • More accurate budgetary and macroeconomic forecasts
  • Better public awareness and informed debates on fiscal policy

Belgium, Chile and UK in particular benefited significantly

  • In Belgium, adoption of macroeconomic forecasts by the Federal Planning Bureau is legally mandated. It reduced bias in forecasts
  • Chile has 2 independent bodies on Trend GDP and Reference Copper price to improve budget forecasts
  • UK’s Office of Budget Responsibility improved fiscal responsibility
Conclusion:

Fiscal council institutionalizes checks and balances on government budgetary practices. While it is not a silver bullet, it will improve transparency and accountability.

Source: The Hindu

Mains question:
  1. What is a fiscal council? Critically discuss the need for such a council in India? [15 marks, 250 words]
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