Does India Need a Fiscal Council?

 

In a span of seven years, India, that was in the top three fastest growing economies in 2009, slipped to the top ten fastest growing economies in 2016-17 with a growth rate of 7.1%. According to Kaushik Basu, what is more puzzling is that subsequently, growth in economy in each successive year turned out to be worse than the previous year.

As a result, our fiscal position had come under severe strain well before Covid-19 pandemic: as estimated by the Controller General of Accounts, fiscal deficit in 2019-20 stood at 4.65 — 0.8% higher than the revised estimate. The pandemic has further worsened it in 2020-21: fiscal deficit was estimated at about 7% of GDP as against 3.5% of the Budget estimate, while the consolidated deficit of the Union and States put together could be as high as 12% of GDP. The debt burden may as well climb to 85%. And the need of the hour is further loosening of purse strings to effectively meet the challenges posed by the pandemic.

Over it, the report of the Comptroller and Auditor General of India reveals many obfuscations—borrowing from the National Small Saving Fund by the Food Corporation of India towards meeting food subsidy and its arrears, financing irrigation projects from the Long-Term Irrigation Fund (LTIF) created by the NABARD, and financing of railway projects through borrowings from the Indian Railway Finance Corporation (IRFC)—done to keep the liabilities hidden and present a lower deficit.

It is against this backdrop that the 14th Finance Commission recommended establishment of an independent Fiscal Council by Parliament to undertake ex ante assessment of budget proposals and to ensure their consistency with fiscal policy and rules. Even the former Deputy Governor of the RBI, Viral Acharya proposed a bipartisan, independent Fiscal Council to restore financial stability.

Fiscal councils are defined as independent, non-partisan agencies with an official mandate to assess fiscal policies, plans, rules, and performance (Debrun et al., 2013). According to Robert Hagemann (2011), Fiscal Council is “…a publicly funded entity staffed by non-elected professionals mandated to provide nonpartisan oversight of fiscal performance and/or advice and guidance—from either a positive or normative perspective—on key aspects of fiscal policy”.

Over the last decade a rapidly growing number of over 50 countries have introduced independent fiscal councils to encourage better fiscal policies. Of course, they cannot play an independent role in setting policy instruments but they can certainly influence policy outcomes through three channels: one, by ensuring transparency over the political cycle it improves democratic accountability, besides discouraging opportunistic shifts in fiscal policy; two, raises public awareness about the consequences of the adopted policy paths and thereby raise the reputational/electoral costs of unsound policies through independent analysis and forecasts; and three, it can also provide direct inputs to the budget process leading to closure of technical loopholes that aid governments in circumventing numerical fiscal rules.

A study carried out by IMF in 2013 on the functions and impact of fiscal councils found that the presence of fiscal councils led to: stronger primary balances; more accurate macroeconomic and budgetary forecasts; and a raise in public awareness that resulted in an animated debate over fiscal policies adopted by the nation. In short, their presence resulted in improved fiscal performance of the countries.

According to OECD (2013), their successful functioning however squarely rests on their: independence and non-partisanship, mandate, resources, relationship with legislature, access to information, transparency, communication and external evaluation.

Looking to the recent developments in the Indian financial system—widening fiscal deficits owing to the pandemic coupled with contraction in GDP growth, introduction of GST, no constitutional check like the one that limits States’ borrowings on centre’s borrowings, financial engineering undercutting the basic spirit of devolution process, etc.—one is tempted to conclude that it is time for India to have an independent institutional mechanism to enforce fiscal rules and keep an eye on centre’s fiscal consolidation.

Of course, there are also arguments that there being already a Chief Economic Advisor, Economic Affairs Dept., National Institute of Public Finance and Policy, Comptroller and Auditor General of India, etc., to aid Finance Minister, we need not create one more institute under the name, Fiscal Council.

Prof. Govinda Rao, a Public Economics expert, argues (2021) that when markets fail, we have government to intervene, but when governments fail, what do we have? According to him Fiscal Council, if established, can undertake macroeconomic and budgetary forecasts and also evaluate the realism of the budget forecasts, monitor the implementation of the budget to see compliance with the declared rules and targets and estimate the costs and liabilities of the various programs and policies announced by the government from time to time. And, that is what commends establishment of an independent Fiscal Council to impart checks and balances and ensure better fiscal policies.

May be to begin with, it may be appointed with a limited mandate of undertaking macroeconomic and fiscal forecasts, policy costing of new measures with significant fiscal implications and evaluating fiscal performance against targets.