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

Key phrases: Fiscal Council, Fiscal deficit, fiscal management, FRBM Act, 2003, FRBM Committee, Finance Commission, forecasts on macro-variables, debt targets, escape clause, government debt.

Why in News?

• The Centre’s fiscal deficit widened to a very high level of 9.3% of GDP in FY21 due to Covid-related additional spending and revenue crunch. The fiscal deficit for FY22 is estimated at 6.9% of GDP, and budgeted 6.4% in FY’23 a level much above the FRBM threshold. This has raised voices for creating an independent Fiscal Council.

Key Points:

• One of the key suggestions of the NK Singh-led Fiscal Responsibility and Budget Management (FRBM) Committee to set up an independent Fiscal Council consisting of experts to assess and advise on the government’s spending and fiscal policies.
  • FRBM panel had suggested the Council to be an autonomous body that would report to Parliament.
  • The Fifteenth Finance Commission (also headed by Singh), the Fourteenth Finance Commission and the Thirteenth Finance Commission had also recommended creation of such a body.
• However, in a written reply to the Parliament (in December, 2021), Ministry of Finance said that Institutions such as the Comptroller and Auditor General of India, the National Statistical Commission, Finance Commission, etc. perform some or all of the roles proposed by the FRBM Review Committee to the Fiscal Council. Hence, government had no plan to form such a panel.
• “In India, despite the recommendations of successive Finance Commissions and other bodies to go in this direction, progress has lagged. As a result, institutional gaps have persisted in the production, collation, coordination and publication of fiscal data, as well as in independently reviewing fiscal projections and the medium-term budgetary framework across levels of government,” the Fifteenth Finance Commission said in its report in October 2020.

Need:

• An independent Fiscal Council will provide independent forecasts on macro-variables such as GDP growth and tax buoyancy,
  • It will oversee compliance with debt targets and indicate a path of return.
  • The assessment will help GoI evaluate macroeconomic conditions better and articulate the reason for where the fiscal deficit should be, keeping investors and bond markets informed.
  • It will also bring in much needed transparency in the budget process.
• Successive finance commissions, and the FRBM Review Committee recommended the creation of a fiscal council, in line with global practice.
  • About 50 countries have fiscal councils.
• A January IMF research paper, 'Fiscal Rules and Fiscal Councils: Recent Trends and Performance During the Covid-19 Pandemic', lauds their role in providing oversight that includes monitoring the use of the so-called 'escape clauses' that validates any breach in fiscal deficit.
  • Almost all countries with deficit rules exceeded the limits, by an average of 4% of GDP in 2020. Debt deviations reached unprecedented levels.
  • But countries with a good track record on fiscal rules responded more aggressively during the crisis.
• India's fiscal rules, adopted from July 2004, targeted a fiscal deficit of 3% of GDP.
  • However, the Gross fiscal deficit touched 6% of GDP in 2008-09, after the stimulus packages during the global financial crisis. Growth contracted after the pandemic, and the revised fiscal deficit widened to 9.3% of GDP in 2020-21.
  • The government’s announced plan is to reduce the deficit to below 4.5% of GDP by FY26.
  • This despite the FRBM panel suggestion that the Centre should aim for a fiscal deficit of 3% of the GDP for three straight years starting from FY18 and gradually reduce it to 2.5% by FY23 and partner states in adhering to fiscal discipline.
• The FRBM panel had also suggested a ceiling for general government debt (both centre and states) of 60% of GDP by FY23. And within this overall limit, a ceiling of 40% should be adopted for the Centre, and 20% for the states.
  • While the centre’s debt-to-GDP ratio rose to 58.8% in FY21 (from 49.4% in FY17), states’ stood at 30.8%.
  • The FRBM report kept debt, along with fiscal deficit, at the centre of fiscal management principles, slightly moving away from the current practice of targeting only fiscal deficit.

Conclusion:

• Some analysts worry that an abrupt fiscal consolidation may stifle recovery. But GoI cannot totally overlook the FRBM targets.
• A fiscal council, comprising of professionals experienced in public finance, to keep tabs on public debt will help bring government finances to a better shape.

Source: Economic Times , Financial Express

Mains Question:

Q. A Fiscal Council would be a useful institutional addition to further sound economic management. Comment.