Time for India to Set Up a Fiscal Council

GoI is expected to chart a fiscal glide path in Tuesday's budget announcement. The pandemic makes forecasts of growth and fiscal variables challenging. So, it is the right time to create a fiscal council that will provide independent forecasts on macro-variables such as GDP growth and tax buoyancy, oversee compliance with debt targets and indicate a path of return. The assessment will help GoI evaluate macroeconomic conditions better and articulate the reason for where the fiscal deficit should be, keeping investors and bond markets informed. Successive finance commissions, and the Fiscal Responsibility and Budget Management (FRBM) Review Committee recommended the creation of a fiscal council, in line with global practice. It will also bring transparency in the budget process.

About 50 countries have fiscal councils. A January IMF research paper, 'Fiscal Rules and Fiscal Councils: Recent Trends and Performance During the Covid-19 Pandemic', lauds their role in providing oversight that includes monitoring the use of the so-called 'escape clauses' that validates any breach in fiscal deficit. Almost all countries with deficit rules exceeded the limits, by an average of 4% of GDP in 2020. Debt deviations reached unprecedented levels. But countries with a good track record on fiscal rules responded more aggressively during the crisis.

India's fiscal rules, adopted from July 2004, targeted a fiscal deficit of 3% of GDP. Gross fiscal deficit touched 6% of GDP in 2008-09, after the stimulus packages during the global financial crisis. Growth contracted after the pandemic, and the revised fiscal deficit widened to 9.8% of GDP in 2020-21. The economy is forecast to grow by 9.2% in 2021-22, and the budgeted fiscal deficit is lower at 6.8% of GDP. Some analysts worry that an abrupt fiscal consolidation may stifle recovery. But GoI cannot totally overlook the FRBM targets. A fiscal council, comprising of professionals experienced in public finance, to keep tabs on public debt will help bring government finances to a better shape.