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Need For a Fiscal Council In India
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
- Relationship with legislature
- Access to information
- Communication and
- External evaluation
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
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
- What is a fiscal council? Critically discuss the need for such a council in India? [15 marks, 250 words]