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INDEPENDENT FISCAL COUNCIL (Issues in fiscal management (Limited Tax…
INDEPENDENT FISCAL COUNCIL
Issues in fiscal management
Poor Budgetary Forecasting
Limited Tax Buoyancy
in India, tax buoyancy shows no stable pattern
Creative Accounting
fiscal deficits are understated
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
Absence of uniform fiscal consolidation rules for centre & states
Non-adherence to Fiscal Responsibility and Budget Management (FRBM) Act targets
Fiscal Populism
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
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
Why fiscal discipline is important?
To improve investment
Increasing credit availability to private sector
Control inflation
Intergenerational parity
future generations will have to pay increased taxes to settle the government debt
Constitutional Requirement
Article 292 of the Constitution envisages fiscal responsibility in the form of legislation that obliges the government to have a ceiling on debt
Functions of Independent Fiscal Council
Prepare multi-year fiscal forecasts for the central and state governments
Define a sustainable level of public debt
Provide an independent assessment of the central government’s borrowing & fiscal performance
Government must also consult the council before flouting fiscal deficit targets
Advantages of an Independent 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
transparency, instill confidence among domestic & foreign investors
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
helps build public opinion favourable to fiscal discipline
An institutionalized fiscal council would enhance cooperation with Finance Commission and GST Council