Why In­dia needs an in­de­pen­dent fis­cal coun­cil

Mint ST - - PLAIN FACTS - Pramit Bhat­tacharya [email protected] NEW DELHI

Coun­tries with in­de­pen­dent fis­cal coun­cils tend to pro­duce rel­a­tively more ac­cu­rate bud­get fore­casts and stick bet­ter to fis­cal rules, re­search sug­gests

One stand­out fea­ture in much of the dis­cus­sion around the Union bud­get this year—both be­fore and af­ter the bud­get—has been the con­cern with the cred­i­bil­ity of the bud­get num­bers.

Rev­enue pro­jec­tions for the cur­rent fis­cal year, in par­tic­u­lar, ap­pear to be un­duly op­ti­mistic. But what this also means is that the bud­get es­ti­mates for the next fis­cal year, fis­cal 2020, are likely to see sharp re­vi­sions in the next bud­get, since those pro­jec­tions tend to rely largely on cur­rent year es­ti­mates. If that hap­pens, this will be more or less in line with past trends.

His­tor­i­cally, in­terim bud­gets in In­dia have con­sis­tently over­es­ti­mated rev­enue growth and un­der­es­ti­mated ex­pen­di­ture growth. An anal­y­sis of the pro­jected, re­vised, and ac­tual bud­get fig­ures since 1991 by Deepa Vaidya and K. Kan­gasaba­p­a­thy of the EPW Re­search Foun­da­tion showed that de­vi­a­tions from bud­get es­ti­mates tend to be ex­traor­di­nar­ily high for bud­get es­ti­mates pre­sented in in­terim bud­gets (bit.ly/2yce­hzh). With the ex­cep­tion of the 2014 in­terim bud­get pre­sented by P. Chi­dambaram, these es­ti­mates un­dergo sharp re­vi­sions in the next bud­get (when re­vised es­ti­mates are pre­sented) and the de­vi­a­tion from bud­get es­ti­mates per­sists in the ac­tual (and fi­nal) fig­ures. (chart 1).

While in­terim bud­gets are a spe­cial case of bud­getary mis­man­age­ment, the fi­nance min­istry’s over­all record in fore­cast­ing pro­jec­tions has been con­sis­tently poor un­der suc­ces­sive fi­nance min­is­ters. As these pages have high­lighted ear­lier, the fi­nance min­istry tends to over­state rev­enue pro­jec­tions and un­der­state ex­pen­di­tures (bit.ly/2vtivzb).

The over-am­bi­tious rev­enue tar­gets com­bined with the lack of trans­parency in tax ad­min­is­tra­tion lead overzeal­ous tax­men to ex­ceed their brief in a quest to ful­fil un­re­al­is­tic tar­gets.

Un­sur­pris­ingly, a 2017 CAG re­port found that the tax depart­ment had re­sorted to ‘ir­reg­u­lar’ and ‘un­war­ranted’ meth­ods to meet tar­gets (bit.ly/2rxyqsr).

What makes mat­ters worse is the use of ‘cre­ative ac­count­ing’ and the use of off-bud­get en­tries to man­age the gov­ern­ment’s books, as an ear­lier Plain Facts col­umn had pointed out (bit.ly/2t0ulvn).

If oil bonds were the in­stru­ment of choice to dress up fis­cal deficit num­bers ear­lier, now the pre­ferred mode of fi­nanc­ing the deficit is the use of pub­lic sec­tor en­ter­prises to boost stake sales by the gov­ern­ment. The coun­try’s big­gest in­surer, Life In­sur­ance Corp. of In­dia (LIC) has been the big­gest life­line for the coun­try’s di­vest­ment pro­gramme in re­cent years, data from Prime Data­base shows. (chart 2)

Mean­while, the hoary tradi-

MINT GRAPHITI tion of de­fer­ring pay­ments —such as to the Food Cor­po­ra­tion of In­dia (Fci)—con­tin­ues de­spite a rap on the knuck­les from the CAG (bit.ly/2bp­w­pkn).

One way to fix these prob­lems is to in­sti­tute an inde- pen­dent and statu­tory watch­dog to over­see the state of pub­lic fi­nances and to come up with its own as­sess­ments, if not its own pro­jec­tions, of gov­ern­ment rev­enues and ex­pen­di­tures. An In­ter­na­tional Mon­e­tary Fund (IMF) work­ing pa­per by the econ­o­mists Roel Beetsma, Xavier De­brun, Xiang­ming Fang, Young Kim, Vic­tor Lledó, Samba Mbaye, and Xiaox­iao Zhang pub­lished last year showed that the pres­ence of an in­de­pen­dent fis­cal coun­cil tends to boost ac­cu­racy of fis­cal pro­jec­tions even as it helps coun­tries stick to fis­cal rules bet­ter (bit.ly/2tb­wjri).

Al­though such coun­cils were few in num­ber even 10 years ago and largely con­cen­trated in the West, they have been grow­ing in num­ber in re­cent years, spread­ing all across the world (chart 3A and 3B). While most fis­cal coun­cils pub­lish their own fore­casts, they are not al­ways bind­ing on the trea­sury, and only a small mi­nor­ity have the pow­ers to stall the bud­getary process. How­ever, de­spite lack­ing such pow­ers, most fis­cal coun­cils are able to dis­ci­pline law­mak­ers through ‘com­ply or ex­plain’ obli­ga­tions—which en­tail gov­ern­ments to at least ex­plain why they di­verge from the fis­cal coun­cil’s views.

In In­dia, two ex­pert com­mit­tees have ad­vo­cated the in­sti­tu­tion of such a coun­cil in re­cent years. 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.

Given the grow­ing de­mand for ac­cu­rate and trans­par­ent fis­cal statis­tics, the in­com­ing gov­ern­ment would do well to es­tab­lish such a coun­cil, so that bud­get num­bers meet with less scep­ti­cism than they do to­day.

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