Why India needs an independent fiscal council
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.