It will improve policy management
The Union government this week informed Parliament there was no plan to set up a fiscal council as recommended by the Fifteenth Finance Commission and the Fiscal Responsibility and Budget Management (FRBM) review panel, among others. The government argued that existing institutions, such as the Comptroller and Auditor General of India, the Finance Commission, and the National Statistical Commission were performing some or all the functions proposed for such a council. The government would be well advised to review its position and closely look at the arguments made by successive Finance Commissions and the FRBM review panel. Given the state of India’s public finances, in fact, the need for an independent fiscal council today is more than ever before.
India’s public debt-to-gross domestic product (GDP) ratio is estimated to have increased to about 90 per cent, while the general government budget deficit is likely to remain elevated in the foreseeable future. The Union government is expected to miss its fiscal deficit target in the current year, and has budgeted to bring it down to 6.4 per cent of GDP in 2022-23. The government is also committed to reducing the fiscal deficit to 4.5 per cent by 2025-26. However, it has not presented a glide path. It is also not clear how the targeted level of 4.5 per cent was arrived at. To be fair, the deterioration in the fiscal position was unavoidable and, to its credit, the government remained fairly conservative in its approach during the pandemic. However, it is still necessary to have a credible medium-term fiscal plan, particularly given the level of public debt. It would inspire market confidence and lower longer-term borrowing costs for the government.
This is where the need for an independent fiscal council becomes critical and, globally, the idea has gained greater acceptance over the years. As the Fifteenth Finance Commission noted, the number of countries with an independent fiscal council has tripled since 2005. Experience shows that it leads to better fiscal outcomes. In this context, it is worth noting that the council needs to be independent with a clear operating legal framework. The National Democratic Alliance government in its last term did well to reform India’s monetary policy by introducing the flexible inflation-targeting framework and instituting the Monetary Policy Committee. Instituting an independent fiscal council, though it would not have decision-making powers, will strengthen India’s macroeconomic standing. The council, as suggested by the Fifteenth Finance Commission, can make medium-term macroeconomic forecasts; evaluate performance against targets across all levels of government; make longer-term fiscal sustainability assessments; and assess the measure of the government and its fiscal implication. It would also provide greater analytical support to the Finance Commissions and other bodies.
At the current stage of India’s development, the government needs to do more in a number of areas. It not only needs resources to fulfil its obligations, but also spend prudently at all levels. For instance, it is hard to gauge what proportion of general government spending goes on account of welfare measures and subsidies. Both the Union and state governments have introduced cash transfers at various levels, but are there ways by which such welfare measures can be consolidated to make the reach more effective? The council can address some of these questions and enable better decision making. At a broader level, it will improve policy management, increase market confidence, and enhance the government’s ability to manage risks.