Enforcing fiscal discipline

A council with only advisory powers will be ineffective

One of the key recommendations of the N K Singh-led committee to review the working of the Fiscal Responsibility and Budget Management Act, 2003, (FRBM) is the formation of a fiscal council. This recommendation goes to the heart of the matter as to why India needed a review of the FRBM Act in the first place. The fact is, notwithstanding the onerous demand that a law passed by Parliament places on a government, at the end of the day, fiscal policy, and possible profligacy, is too intricately linked to the political economy of democratic decision-making. For instance, the recent farm loan waiver in Uttar Pradesh disregards the fact that the state government’s finances are in a shambles. For that matter, the Centre’s adherence to the FRBM Act in the past has waned as domestic political compulsions, in the form of loan waivers and an indiscriminate expansion of the rural employment guarantee scheme, dominated. As such, when formulating fiscal rules for governments, a key concern is to have an institutional framework that will not only assist and advise the government on policy but also alert it about impending dangers and possibly provide resistance to breaching fiscal rectitude. Although the office of a fiscal council has been often discussed in the past, it was never instituted. To the extent that such a council will increase awareness about the pitfalls and provide an alternate expert view on policy, it is a welcome recommendation.

If instituted, India will not be the first country to have a fiscal council. According to a cross-country study in 2014, more than 80 countries, including several emerging economies, had adopted fiscal rules in some form or the other; of these, more than 35 countries had constituted autonomous fiscal councils. But whether or not a fiscal council will achieve its goal will depend on two broad factors. One, how independent it is of the government. Two, whether its recommendation is binding on the government. Again, there is no standard format for such councils the world over. For instance, in the United Kingdom, the Office of Budget Responsibility (OBR) was created in 2010 as an independent body and has statutory status. However, the OBR is primarily responsible to the chancellor of the exchequer for its activities. In the US, the Congressional Budget Office has been around for much longer, since 1975, and, as the name suggests, is directly responsible to the legislature, instead of the executive. Another variation is the Irish Fiscal Advisory Council, a stand-alone statutory body that functions independently.

According to the preliminary formation suggested by the FRBM review committee, the fiscal council will serve both an ex-ante role — providing forecasts on key variables such as real and nominal GDP growth and tax buoyancy — as well as an ex-post monitoring role. The council is also expected to “advise” on triggering the escape clause from the path of debt management and also specify a path of return. It will be an autonomous body under the finance ministry. But nowhere in this formulation is there any mention of the fiscal council’s advice being binding on the government, and there is no reason for the government of the day to heed the advice of the council. In this regard, the council envisaged will be far weaker than the monetary policy committee of the Reserve Bank of India, which has since last year taken over the role of determining the country’s monetary policy.