India Needs a Fiscal Council : Daily Current Affairs

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Key Phrases: Fiscal transparency, Accountability, Public debt, Gross Domestic product, Fiscal Council, Fiscal institution, Tax buoyancy, macroeconomic, Fiscal Responsibility and Budget Management (FRBM) Review Committee, Medium-term fiscal framework.

Why in News?

  • Fiscal transparency and accountability must be ensured to create room for market confidence in a high public debt regime.

Context:

  • Globally public debt, i.e. the total borrowing incurred by a government, is mounting. The International Monetary Fund (IMF) Global Financial Stability Report, published in April 2022 revealed that in the emerging market economies, the average ratio of public debt to GDP (gross domestic product) rose to a record 67% last year.
  • Public debt to GDP surged in advanced economies too, from 103% in 2019 to 123% in 2020, before declining to 115% of GDP in 2022. India registered a significant increase in this ratio, from 75.1% in 2019 to 90.1% in 2020. However, it is expected to decline to 85.3% by 2025, as per the recent IMF Fiscal Monitor.

Fiscal Council

  • A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances. Robert Hageman defines a fiscal council as, “…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”. These institutions assist in calibrating sustainable fiscal policy by making an objective and scientific analysis.

Why there is a need of a Fiscal Council?

  • The pandemic has made forecasts of growth and fiscal variables challenging. So, it is the right time to create a fiscal council that will provide independent forecasts on macro-variables such as GDP growth and tax buoyancy, oversee compliance with debt targets and indicate a path of return.
  • The fiscal council will help GoI evaluate macroeconomic conditions better and articulate the reason for where the fiscal deficit should be, keeping investors and bond markets informed.
  • Successive finance commissions, and the Fiscal Responsibility and Budget Management (FRBM) Review Committee recommended the creation of a fiscal council, in line with global practice. It will also bring transparency in the budget process.
  • It needed as an alternative institutional mechanism to enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.

N.K Singh Committee

  • N.K Singh Committee also known as Fiscal Responsibility and Budget Management Act, 2003(FRBM), Review Committee has recommended the Fiscal Council.
  • The committee proposed to create an autonomous fiscal council with a Chairman and two members appointed by the Central Government. To maintain the autonomy and independence of the fiscal council it proposed a non-renewable four-year term for Chairman and members.
    • The role of the Fiscal Council would include:
    • Preparing multi-year fiscal forecasts.
    • Recommending changes to the fiscal strategy.
    • Improving the quality of fiscal data.
    • Advising the government if conditions exist to deviate from the fiscal target.
    • Advising the government to take corrective action for non-compliance with the Bill.

Benefits of 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

Why India does not need a fiscal council?

  • It is said that nearly 40 countries have fiscal councils. So it means that a lot many countries do not have them. The US Congressional Budget Agency is more like our Parliamentary Committee on Finance Ministry. And, we in India have a solid base in the Economic Affairs Department to advise the Finance Minister, which other countries may not have. Merely replicating institutions of other countries has landed India with the Ombudsman, which has proved to be a complete failure.
  • There is what is called the Occam’s Razor, the principle of which is that a theory based on fewer assumptions is better than one having more. This also is true of organisations dealing with economic affairs. Fewer economists, the better. For they never agree. Each has a different opinion. Even in the FRBM Committee, there has been a lot of dissent.
  • There is no need for adding one more of the same breed. This will only overburden the system. More autonomous institutions we create, the more headache it is for the Finance Minister to take a decision. The government must be complimented for not implementing it.

Conclusion:

  • When the markets fail, governments have to intervene. What do we do when the governments fail? It is here that we need systems and institutions to ensure checks and balances. In that respect, a Fiscal Council is an important institution needed to complement the rule-based fiscal policy. Of course, it is not a ‘silver bullet’; if there is no political will, the institution would be less effective, and if there is political will, there is no need for such an institution.
  • That is also true of the FRBM Act. While we cannot state that the FRBM Act has been an unqualified success, it has also not been an abject failure either. The counterfactual will show that things would have been much worse without it, and it has helped to raise the awareness of government, legislators and the public at large. Similarly, the Fiscal Council will help in improving comprehensiveness, transparency and accountability.
  • Constituting a Fiscal Council in India is therefore crucial at this juncture to analyse the fiscal risks and to formulate post-pandemic fiscal strategies to ensure fiscal credibility in times of geopolitical uncertainties.

Source: The Hindu

Mains Question:

Q. “Fiscal transparency and accountability can be ensured by creating a fiscal council in India” Illustrate.