Day 12 – Q 3.What is existing mechanism to address fiscal deficit? What are your views on the current trends of fiscal deficit? Examine the need for setting up a fiscal council to monitor fiscal deficit in India.

3. What is existing mechanism to address fiscal deficit? What are your views on the current trends of fiscal deficit? Examine the need for setting up a fiscal council to monitor fiscal deficit in India. 

राजकोषीय घाटे को दूर करने के लिए मौजूदा तंत्र क्या है? राजकोषीय घाटे के मौजूदा रुझानों पर आपके क्या विचार हैं? भारत में राजकोषीय घाटे की निगरानी के लिए राजकोषीय परिषद की स्थापना की आवश्यकता की जांच करें।

Introduction:

Fiscal deficit is an indication of total borrowings needed by the government. As per the OECD around 3% of GDP is a healthy fiscal deficit for any economy. Indian economy has been successful to keep its fiscal deficit under control. Yet, there are some concerns regarding the fiscal deficit targets that are being achieved.

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Background:

15th Finance Commission’s Chairman NK Singh has pitched for an institutional mechanism like a ‘Fiscal Council’ to enforce fiscal rules and keep a check on the Centre’s fiscal consolidation.

Mechanism to address fiscal deficit:

At present, the fiscal deficit targets are set as per recommendations of FRBM review committee under N K Singh. The fiscal deficit is finance through the following means:

• Market borrowings: G-sec and Treasury bills.
• Securities against small savings.
• State provident funds as well as internal debts and Public account receipts.
• The government may borrow from Reserve Bank of India against its own securities.
• External debt including external commercial borrowings.

Further, The fiscal policy statement, medium term fiscal strategy statements etc., in the budget gives information about the fiscal deficit of the government. The current trends show that reaching its peak in 2011-12, the fiscal deficit has reduced continuously in the consecutive years reaching the lowest of 3.4% GDP. However, the targets as set by FRBM act has been breached. Also the revised estimate is deviating from the budget estimates which is a cause of concern.

Need for setting up fiscal council:

• Poor Budgetary Forecasting: Budgets often overstate revenue projections (15 out of 20 years since fiscal 1998) and understate expenditures (12 out of 20 years since fiscal 1998).
• Limited Tax Buoyancy: Faster growth in nominal gross domestic product (GDP) usually leads to faster growth in tax collections. However, in India, tax buoyancy shows no stable pattern and hence, forecasting tax revenues is difficult.
• Creative Accounting: Moreover, fiscal deficits are also understated by the use of ‘creative accounting’ such as ‘rolling over’ a part of the overall subsidy bill & dues to the states to the next financial year; using PSEs like LIC to purchase divested stakes in the disinvestment process. Such “creative” accounting has led to a decline in the headline fiscal deficit number but failed to reduce India’s public debt to GDP ratio, adversely impacting India’s macroeconomic stability.
• Use of Extra Budgetary Resources (EBR): Over the years, the Govt’s reliance on EBRs- such as funds of state- owned enterprises like LIC, SBI etc – to fund Govt. programmes has increased, but it doesn’t appear in real time fiscal deficit numbers. E.g. 61.4% of all capital expenditure outlined in the 2018-19 Budget is to be financed through EBR, up from 54% in 2016-17.
• Absence of uniform fiscal consolidation rules for centre & states:
  • Various cesses and surcharges, in which States’ have no share, are becoming a disproportionate portion of overall divisible revenue. This is against the spirit of fiscal federalism and financial devolution process.
  • For State Govt., Art 293(3) provides a constitutional check over market borrowings while no such restriction is there for the centre.
  • States have constraints in managing their finances as the RBI controls their deficit and cannot float a bond on a state’s behalf without the Centre’s approval.
• Non-adherence to Fiscal Responsibility and Budget Management (FRBM) Act targets: Since 2003 FRBM law came into effect, there have been four pauses in the deficit targets enshrined in it and many occasions where the targets have been flouted.
• Fiscal Populism: Political class has the tendency to make fiscal policy over-expansive, which increases burden on future government and thus, has detrimental long-run impacts e.g. loan waivers to farmers, tax waiver to MSMEs etc.
• Poor institutional infrastructure for monitoring: CAG has presented its audit report on Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 but the assessment is only post-facto.

Advantages of Fiscal council:

• IFC’s evaluation of budget announcements & forecasts would indicate how realistic government projections are. This would be a check on competitive populism in Indian polity and would increase financial accountability of the government to the Parliament.
• An institutional mechanism for sound fiscal practices will bring in transparency, instill confidence among domestic & foreign investors and improve policy outcomes.
• It will promote the culture of proper disclosures and good accounting practices within the Govt.
• Most fiscal councils across the world are able to discipline lawmakers through ‘comply or explain’ obligations— requiring governments to at least explain the divergence from the fiscal council’s views.
• International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
• An institutionalized fiscal council would enhance cooperation with Finance Commission and GST Council.

Conclusion

According to International Monetary Fund (IMF), IFCs are now an indispensable part in the design of fiscal frameworks aimed at guiding fiscal policymakers’ discretion. Even as NK Singh committee noted and recommended, an independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.