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Independent Fiscal Council

Independent Fiscal Council

UPSC CSE Mains Syllabus: GS-3- Government Budgeting.

Independent Fiscal Council

Fiscal situation in India:

  • The fiscal situation in India has been under severe stress even before COVID-19 and the novel coronavirus pandemic has only worsened it.
  • The fiscal deficit of the Centre in 2019-20 as estimated by the Controller General of Accounts (CGA) was 4.6%, 0.8 percentage point higher than the revised estimate.
  • 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 due to a sharp decline in revenues.
  • The consolidated deficit of the Union and States could be as high as 12% of GDP and the overall debt could go up to 85%. When off Budget liabilities are considered, the situation looks even more alarming.

While the prevailing exceptional circumstance warrants loosening of purse strings, it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over.

The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common. The report of the Comptroller and Auditor General (CAG) of India in 2018 on the compliance of the Fiscal Responsibility and Budget Management (FRBM) Act for 2016-17, highlights these.

Some examples:

Special banking arrangements for covering arrears of fertilizer subsidy, issuing short-term bonds, unsecured loans and borrowing from the National Small Savings Fund (NSSF) 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 National Bank for Agriculture and Rural Development (NABARD), and financing of railway projects through borrowings from the Indian Railway Finance Corporation (IRFC) are just some examples. We are familiar also with the cases of the Life Insurance of Corporation of India buying out the Industrial Development Bank of India and the Power Finance Corporation buying out the Rural Electrification Corporation (REC) and remitting the money to the government as disinvestment proceeds.

A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances.

Benefits of having a fiscal council:

  • First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
  • Second, costing of various policies and programmes can help to promote transparency over the political cycle to discourage populist shifts in fiscal policy and improve accountability.
  • Third, 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.
  • Finally, 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.

According to the International Monetary Fund (IMF), about 50 countries around the world have established fiscal councils with varying degrees of success. 

Abstracting from country-level differences, a fiscal council, at its core, is a permanent agency with a mandate to independently assess the government’s fiscal plans and projections against parameters of macroeconomic sustainability, and put out its findings in the public domain.  

Arguments for: 

  • The expectation is that such an open scrutiny will keep the government on the straight and narrow path of fiscalvirtue and hold it to account for any default. 
  • It will give an independent and expert assessment of the government’s fiscalstance, and thereby aid an informed debate in Parliament. 
  • While most fiscalcouncils publish their own forecasts, they are not always binding on the treasury, and only a small minority have the powers to stall the budgetary process.  
  • However, despite lacking such powers, most fiscalcouncils 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. 
  • Given the growing demand for accurate and transparent fiscalstatistics, the incoming government would do well to establish such a council. 

Concerns: 

  • The FRBM enjoins the government to conform to pre-set fiscaltargets, 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 ‘FiscalPolicy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal  
  • Yet, seldom have we heard an in-depth discussion in Parliament on the government’s fiscalstance; in fact the submission of the FPSS often passes off without even much notice.  
  • If the problem clearly is lack of demand for accountability, a question arisesthat how will another instrumentality such as a fiscal council for supply of accountability be a solution 
  • Moreover, both the Central Statistics Office (CSO) and the Reserve Bank of India (RBI) give forecasts of growth and other macroeconomic variables. Hence, there is no need for additional organisation.
  • Besides, forcing the Finance Ministry to use the council’s estimates will dilute its accountability. If the estimates go awry, the blame may fall on the fiscalcouncil
  • There is already an institutional mechanism by way of the Comptroller and Auditor General (CAG) audit to check the any accounting issues. 

FRBM Review Committee: 

  • FRBM Review Committee has recommended a framework for the fiscal
  • As per that, the fiscalcouncil’s mandate will include, but not be restricted to, making, 
  • multi-year fiscalprojections 
  • preparing fiscalsustainability analysis 
  • providing an independent assessment of the Central government’s fiscalperformance and compliance with fiscal rules 
  • recommending suitable changes to fiscalstrategy to ensure consistency of the annual financial statement  
  • taking steps to improve quality of fiscaldata 
  • producing an annual fiscalstrategy report which will be released publicly. 

A suggestive framework

  • 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 budgetafter it is presented to Parliament for its 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 Aayogwill each depute an officer to serve in the secretariat.  
  • The committee will be wound up after submitting its report leaving no scope for any mission creep.

SOURCE:”The Hindu”


POSSIBLE UPSC MAINS QUESTION:

Considering the current fiscal situation of India there is a strong case for a fiscal council. Analyse.