THE CONTEXT: The impact of COVID-19 on the economy is devastating and the government is forced to opt to borrow for spending more in order to support vulnerable households and engineer economic recovery. In this article, we’ll discuss Former RBI Governor D. Subbarao’s opinion on whether Fiscal Council is needed in India or not.
CURRENT SCENARIO:
- COVID 19 pandemic has resulted in weakening of fiscal situation of centre and states. Tax revenues have reduced due to subdued economic activities. Whereas, expenditure has risen due to spending on healthcare, social security and economic revival, to tackle the fallout of the pandemic.
- As a result, the fiscal deficit of the centre is estimated to double from budgeted 3.5% of GDP to around 7% as per the IMF. This steep rise in fiscal deficit will impact medium term growth prospects due to interest burden.
- In addition, ratings agencies consider fiscal deficit as a parameter in ratings which impact capital flows into the country. These concerns impose restrictions on expansionary fiscal policy strategy to tackle pandemic.
- In such a situation, many economists have pointed out that fiscal deficit limits should not constrain spending to stimulate the economy. They suggest expansionary fiscal policy during pandemic combined with fiscal consolidation plan post pandemic will help retain market confidence. Yet such a strategy may still lead to ratings downgrade and resultant capital outflows.
- To increase the confidence in fiscal consolidation, a fiscal council which enforces fiscal discipline is suggested. This can signal intent to maintain discipline in medium to long term which can reassure markets and credit agencies.
WHAT IS A FISCAL COUNCIL?
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.
Recommendations for Fiscal council in India:
- 13th and 14th Finance commission advocated the establishment of independent fiscal agencies to review the government’s adherence to fiscal rules and to provide independent assessments of budget proposals.
- In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.
- In 2018, the D.K. Srivastava committee on fiscal statistics established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government to provide harmonized fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.
Current global scenario:
- According to the International Monetary Fund (IMF), about 50 countries around the world have established fiscal councils with varying degrees of success.
- Fiscal Council in these countries is a permanent agency with a mandate to independently assess the government’s fiscal plans.
- It also gives projections against parameters of macroeconomic sustainability and put out its findings in the public domain.
India’s need for a fiscal council:
- There is a need for coordination between the finance commission as well as the GST Council.
- There is a lack of demand for accountability, and instruments such as a fiscal council may help address this issue.
- It needs an alternative institutional mechanism like the Fiscal Council to enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.
- The economic slowdown due to the COVID-19 has made it the dire need of the hour to have a fiscal council for a healthy, future foreseeing economic revival.
- A fiscal council will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.
- To fix these problems of overestimates and underestimates in budgets is to institute an independent and statutory watchdog to oversee the state of public finances and to come up with its own assessments, if not its own projections, of government revenues and expenditures. (Explained below)
- An International Monetary Fund (IMF) working paper published in 2018 showed that the presence of an independent fiscal council tends to boost accuracy of fiscal projections even as it helps countries stick to fiscal rules better.
Issue of overestimates and underestimates in budgets
- One standout feature in much of the discussion around the Union budget every year—both before and after the budget—has been the concern with the credibility of the budget numbers.
- Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth.
- An analysis of the projected, revised, and actual budget figures since 1991 by EPW Research Foundation showed that deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets .
- Usually, these estimates undergo sharp revisions in the next budget (when revised estimates are presented) and the deviation from budget estimates persists in the actual (and final) figures.
- While interim budgets are a special case of budgetary mismanagement, the finance ministry’s overall record in forecasting projections has been consistently poor under successive finance ministers.
- The over-ambitious revenue targets combined with the lack of transparency in tax administration lead overzealous taxmen to exceed their brief in a quest to fulfil unrealistic targets.
- Unsurprisingly, a 2017 CAG report found that the tax department had resorted to ‘irregular’ and ‘unwarranted’ methods to meet targets.
Council’s mandate:
As per that, the fiscal council’s mandate will include, but not be restricted to,
- making multi-year fiscal projections
- Preparing fiscal sustainability analysis.
- Providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules.
- Recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement and taking steps to improve the quality of fiscal data.
- Producing an annual fiscal strategy report which will be released publicly.
Composition and How should they function? (Recommendations by 14th FC)
The 14th Finance Commission recommended that an independent Fiscal Council should be established through an amendment to the FRBM Act, by inserting a new Section mandating the establishment of an independent Fiscal Council to undertake ex ante assessment of budget proposals and to ensure their consistency with fiscal policy and Rules.
1. The council is supposed to be appointed by, and report to, Parliament and should have its own budget.
2. The functions of the council include ex ante evaluation of the fiscal implications of the budget proposals which includes evaluation of how real the forecasts are and their consistency with the fiscal rules and estimating the cost of various proposals made in the budget.
3. The ex post evaluation and monitoring of the budget was left to the CAG.
Arguments in favour:
- An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
- In its role as a watchdog, it will prevent the government from gaming the fiscal rules through creative accounting.
- The committee should have the limited mandate of scrutinising the budget after it is presented to Parliament for its fiscal stance and the integrity of the numbers and give out a public report.
- The committee will be wound up after submitting its report leaving no scope for any mission creep.
- India needs better macroeconomic management and it cannot be left entirely to monetary policy, as regular monetary policy statements themselves testify, with their articulation of how contingent their decisions are on what the government does.
- A fiscal council could do the same for fiscal policy, what MPC doing it for Monetary Policy with regular meetings that produce assessments.
- Further, the working of a fiscal council would help harmonise fiscal policy with monetary policy.
- International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
- Although most fiscal councils don’t have the powers to stall the budgetary process, but they are able to discipline lawmakers through ‘comply or explain’ obligations—which entail governments to at least explain why they diverge from the fiscal council’s views.
- Also, it is supposed to report to the parliament regarding the practicability of government forecasts in the budget. This will make executive more responsible in budget preparation.
- Fiscal Council would also boost confidence of global credit rating agencies about government’s fiscal commitment.
CHALLENGES TO FISCAL COUNCIL OR ARGUMENTS AGAINST
Lack of Political will leading to Chronic fiscal irresponsibility
- Back in 2003 when FRBM was enshrined into law, it was thought of as the magic cure for fiscal ills.
- The FRBM enjoins the government to conform to pre-set fiscal targets, and in the event of failure to do so, to explain the reasons for deviation
- The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance
- However, there is lack of in-depth discussion in Parliament on fiscal stance and the submission of the FPSS often passes off without even much notice.
Its working may create confusion
- Fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget, and if the Ministry decides to differ from those estimates, it is required to explain why it has differed.
- Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
- If the estimates go wrong, Finance Ministry will simply shift the blame to the fiscal council.
Duplication of Work
- As of now, both the Central Statistics Office (CSO) and RBI give forecasts of growth and other macroeconomic variables, questions will be raised about need for Fiscal Council’s projections
- Another argument made in support of a fiscal council is that it will act as watchdog & prevent the government from gaming the fiscal rules through creative accounting.
- However, there is already an institutional mechanism in form of CAG to do the job of auditing & fiscal watchdog of government spending.
WAY FORWARD: Starting with small steps
- A week before the scheduled budget presentation, let the CAG, a constitutional authority, appoint a three-member committee for a five-week duration with a limited mandate of scrutinising the budget after it is presented to Parliament
- The committee will scrutinise government’s fiscal stance and the integrity of the numbers, and give out a public report
- The CAG’s office will provide the secretarial and logistic support to the committee from within its resources.
- The Finance Ministry, the RBI, the CSO and the Niti Aayog will each depute an officer to serve in the secretariat.
- The committee will be wound up after submitting its report
CONCLUSION: Given the growing demand for accurate and transparent fiscal statistics, the incoming government would do well to establish such a council, so that budget numbers meet with less scepticism than they do today.
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