Fiscal Council

26th August – Fiscal Council

Fiscal Council

The fiscal situation in India has been under severe stress even before COVID-19 and the novel coronavirus pandemic has only worsened it.

Key statistics –

  • 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%.

Need for transparency –

  • Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets. The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common.
  • In order to make the Budgets comprehensive, transparent and accountable, the 13th Finance Commission recommended that a committee be appointed by the Ministry of Finance which should eventually transform itself into a Fiscal Council to “…, conduct an annual independent public review of FRBM compliance, including a review of the fiscal impact of policy decisions on the FRBM roadmap” (Paragraph 9.65).
  • The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council.
  • The 14th Finance Commission recommended the establishment of an independent Fiscal Council which should be appointed by and reporting to Parliament by inserting a new section in the FRBM Act.
  • Former Deputy Governor of the Reserve Bank of India, Viral Acharya, in his recent book, Quest for Restoring Financial Stability in India, also makes out a case for a bipartisan, independent Fiscal Council.

The mandate – 

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

Need of the 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.

Principles of Fiscal Council –

The OECD (2013) has documented the important principles needed for successful fiscal councils under nine broad heads and these are: local ownership; independence and non-partisanship; mandate; resources; relationship with legislature; access to information; transparency; communication and external evaluation. These principles are important, ensure autonomy, being unbiased, transparency, and effective and accountable Councils.

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.

SourceThe Hindu

QUESTION – What is a ‘fiscal council’? Discuss its mandate and significance. Does India need one?

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