Fiscal Council: Parliamentary Budgetary Office

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There is a major institutional gap in India's Fiscal System. This gap has been recognized and identified by a number of committees such as recent Finance Commissions and the FRBM Review Committee. International experience also points to the importance of such an institution. In order to overcome this gap, in many countries, a ‘Fiscal Council’ has been set up.

Accordingly, the Chairman of the 15th Finance Commission, NK Singh has recently recommended setting up institutional mechanisms like a ‘Fiscal Council’ to keep a check on Centre’s fiscal consolidation.

In this regard, let us understand as to what Fiscal Council is and how the setting up of the Fiscal Council can improve the credibility of fiscal policy in India.

What is the Fiscal Council?

A fiscal council is an independent and non-partisan agency that is set up to publicly assesses the government’s fiscal performance against its stated objectives.

Fiscal Councils can serve both ex-ante and ex-post functions. Some of the functions that can be performed by Fiscal Council include:

  • Producing independent forecasts related to GDP growth, tax buoyancy, inflation rate
  • Review the government’s forecasts and assumptions related to tax collections, Fiscal Deficit, GDP Growth etc (an ex-ante function)
  • Monitoring governments’ fiscal performance including adherence to fiscal rules (an ex-post function)

International Experience with Fiscal Council

  • In recent years, an increasing number of advanced and some emerging economies are using independent fiscal council in order to enhance the credibility of their fiscal rules.
  • International experience suggests that fiscal councils can improve fiscal outcomes and accuracy-related to government forecasts related to fiscal parameters.
  • For example, the United Kingdom created an Office of Budget Responsibility (OBR) in 2010 and granted it statutory status in 2011 to provide independent analysis of the country’s public finances.
  • On similar lines, Congressional Budget Office (CBO) in USA supports the budget-making process by providing independent analyses of budgetary and economic issues.

Fiscal Council in India

  • Keeping in view best international practices, the FRBM Review committee headed by N.K Singh and D.K. Srivastava Committee on Fiscal Statistics has proposed to set up an independent Fiscal Council in India.
  • The N.K Singh Review committee recommended that Fiscal Council should be an autonomous body, under the aegis of the Ministry of Finance (Department of Economic Affairs).
  • It is proposed that it should comprise a Chairperson and two Members to be appointed by the Central Government. The persons to be appointed ought to have significant experience in public finance, economics or public affairs.

Need for Fiscal Council in India

  • The General Budget of the Government is based upon the forecasts related to Revenue Collection and Expenditure of the Government for the upcoming financial year. Normally, it is found that the Government usually comes out with ambitious targets related to fiscal parameters such as Tax collection, reduction in Fiscal Deficit etc.
  • However, the government fails to meet these ambitious targets wherein there is a wide margin between the budget forecasts and actual targets met by the Government. Hence, it is required to ensure that the Government sets realistic fiscal targets.
  • Further, in recent years, the Government has resorted to Off-Budget financing in order to reduce its expenditure and to contain Fiscal Deficit. The CAG has raised concerns with respect to off-budget financing since it understates the Government's Fiscal deficit and reduces the accountability of the Government to the Parliament.

What should be the role of Fiscal council in India?

  • Fiscal Data Coordinator: As a fiscal data coordinator, the Fiscal Council will have the responsibility of compiling and collating centre, state, and local government fiscal data and provide individual and consolidated fiscal accounts of the governments in India on a timely basis and make such data accessible to governments and public.
  • Fiscal Data Analyst: It should utilize the compiled fiscal data to provide valuable insights into the underlying fiscal trends and highlight their policy significance.
  • Fiscal Consolidation Path Monitor: The central, as well as state governments, follow their respective fiscal consolidation paths according to targets set under their FRBM Acts. The Fiscal Council should monitor the compliance of these targets by the Central and State Governments. It should highlight deviations in the targets by publishing quarterly and annual reports.
  • Fiscal Policy Advisor: Fiscal Council should provide guidance to the central and state governments on appropriate fiscal policy interventions aimed at improving growth and macro-stabilization outcomes.

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