Context: Amid the coronavirus pandemic, the government needs to spend more in order to revive the Indian Economy post COVID-19. In order to ensure fiscal discipline, the government can establish an institution called ‘Fiscal Council’.
About Fiscal Council
- According to International Monetary Fund (IMF), about 50 countries around the world have established Fiscal Council with varying degree of success.
- It is a permanent agency with a mandate to independently assess the government’s fiscal plans and projections against parameters of macroeconomic sustainability.
Functions of Fiscal Council
- It provides an open scrutiny of government’s fiscal measures which keeps the government on the straight and narrow path of fiscal virtue and hold it to account for any default.
- As per Fiscal Responsibility and Budget Management (FRBM), the council’s mandate will include, but not restricted to, making multi-year fiscal projections, preparing fiscal sustainability analysis and recommending suitable changes to fiscal strategy to ensure consistency.
- The fiscal councils are able to discipline lawmakers through ‘comply or explain’ obligations i.e. which entail governments to at least explain why they diverge from the fiscal council’s views.
Why India require a Fiscal Council?
- The chronic problem of fiscal irresponsibility in India can be solved by establishing a Fiscal Council because it will give an independent and expert assessment of government’s fiscal stance and aid an informed debate in the Parliament.
- The wide chart of functions accorded to the council will add more to the noise than to the signal as it will give macroeconomic forecasts which will be used by Ministry of Finance for making the budget.
- It will play the role of a watchdog as it will prevent the government from gaming the fiscal rules through creative accounting.
- The countries with independent fiscal councils tend to produce relatively more accurate budget forecasts and stick better to fiscal rules.
- Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth.
- The presence of an independent fiscal council tends to boost accuracy of fiscal projections even as it helps countries stick to fiscal rules better.
Challenges to Fiscal Council in India
- If forcing Finance Ministry to use the numbers given by Fiscal Council, it will dilute the accountability of the council and if the estimates go awry, the Ministry will shift the blame to the fiscal council.
- There is already an institutional mechanism which acts as a watchdog i.e. the Comptroller and Auditor General (CAG), who audit to check the government from gaming the fiscal rules.
Committees recommending establishment of Fiscal Council
- In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.
- In 2018, the D.K. Srivastava committee on fiscal statistics established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government to provide harmonized fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.
- These recommendations follow similar recommendations from the 13th and 14th finance commissions, which also advocated the establishment of independent fiscal agencies to review the government’s adherence to fiscal rules, and to provide independent assessments of budget proposals.