[Editorial Analysis] Do we need a fiscal council?

Mains Paper 3: Economy
Prelims level: Fiscal Responsibility and Budget Management
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

• The government needs to borrow and spend more now in order to support vulnerable households and engineer economic recovery.

• But that will mean a steep rise in debt which will jeopardise medium-term growth prospects, an issue prominently flagged by all the rating agencies in their recent evaluations.

• It is possibly the fear of market penalties that is holding the government back from opening the money spigots(tap).

Enforcing fiscal discipline:

• Many economists have faulted the government’s fiscal stance, arguing that this is no time for restraint; the government should spend more to stimulate the economy by borrowing as may be necessary.

• But at the same time come out with a credible plan for fiscal consolidation post-COVID-19 in order to retain market confidence.

• But will the market be persuaded by the government’s assurance of future good conduct?

• Not necessarily, say the commentators.

• The government can signal its virtue by establishing some new institutional mechanism for enforcing fiscal discipline, such as for example a fiscal council.

• The suggestion of a fiscal council actually predates the current crisis.

• It was first recommended by the Thirteenth Finance Commission and was subsequently endorsed by the Fourteenth Finance Commission and then by the FRBM (Fiscal Responsibility and Budget Management) Review Committee headed by N.K. Singh.

Present in 50 countries:

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

• Fiscal council will be 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.

• The expectation is that such an open scrutiny will keep the government on the straight and narrow path of fiscal virtue and hold it to account for any default.

• Do we really need a fiscal council? Sure, we do have a chronic problem of fiscal irresponsibility, but is a fiscal council the answer?

Need:

• Recall that back in 2003 when FRBM was enshrined into law, we thought of that as the magic cure for our 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.

• Yet, seldom have we heard an in-depth discussion in Parliament on the government’s fiscal stance; in fact the submission of the FPSS often passes off without even much notice.

• If the problem clearly is lack of demand for accountability, how will another instrumentality such as a fiscal council for supply of accountability be a solution?

• It can be argued that a fiscal council will in fact be a solution because it will give an independent and expert assessment of
the government’s fiscal stance, and thereby aid an informed debate in Parliament.

• A fair point, but do we need an elaborate permanent body with an extensive mandate for this task?

The council’s mandate:

• As per that, the fiscal council’s mandate will include, but not be restricted to, making multi-year fiscal projections,

o preparing fiscal sustainability analysis,

o providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules,

o recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement and taking steps to improve quality of fiscal data,

o producing an annual fiscal strategy report which will be released publicly.

Challenges:

• An institutional behemoth with such a wide job chart will likely add more to the noise than to the signal.

• For example, the 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.

• As of now, both the Central Statistics Office (CSO) and the Reserve Bank of India (RBI) give forecasts of growth and other macroeconomic variables, as do a host of public, private and international agencies.

• Why should there be a presumption that the fiscal council’s forecasts are any more credible or robust than others?

• Why not leave it to the Finance Ministry to do its homework and defend its numbers rather than forcing it to privilege the estimates of one specific agency?

• Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.

• If the estimates go awry, it will simply shift the blame to the fiscal council.

• Another argument made in support of a fiscal council is that in its role as a watchdog, it will prevent the government from gaming the fiscal rules through creative accounting.

• But there is already an institutional mechanism by way of the Comptroller and Auditor General (CAG) audit to check that.

• If that mechanism has lost its teeth, then fix that rather than create another costly bureaucratic structure.

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Prelims Questions:

Q.1) With reference to the India’s Balance of Payments during 2019-20, consider the following statements:

1. The Current Account Deficit (CAD) narrowed to 0.9 % of GDP in 2019-20 from 2.1 % in 2018-19.

2. Net invisible receipts were lower in 2019-20.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:

Q.1) In view of mounting debt due to pandemic, which further widening the fiscal deficit why it is believed that the fiscal council is the need of the hour? Highlights it mandate and various recommendations in this regard.

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