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No use instituting a Fiscal Council if the political system won't listen to it

The finance ministry last month ruled out the setting up of a Fiscal Council (REUTERS)Premium
The finance ministry last month ruled out the setting up of a Fiscal Council (REUTERS)

  • In theory, it would be a good idea to implement the recommendation of the 15th Finance Commission and set up a Fiscal Council. In practice, it would be as good as the readiness of the political leadership to work within an institutional framework, respecting institutional mandates and boundaries

In a written reply in Parliament, the finance ministry last month ruled out the setting up of a Fiscal Council. In theory, it would be a good idea to implement the recommendation of the 15th Finance Commission and set up a Fiscal Council. In practice, it would be as good as the readiness of the political leadership to work within an institutional framework, respecting institutional mandates and boundaries. In a political system dominated by a single person, the way President Trump dominated the US administration or Prime Minister Narendra Modi dominates the Indian system, if the leader deigns not to notice an institution, whether the Fiscal Council or the Inter-State Council, it matters little whether it exists and toils away, delivering learned reports that preach wisdom to the silverfish with they share shelf-space, or does not.

India has a Fiscal Responsibility and Budget Management (FRBM) Act, and every Budget contains a document that describes the degree of compliance that year’s fiscal performance has had with the prudential benchmarks laid down, and the reasons for deviance, if any. But this is an annual statement and projection. There is no secretariat, so to speak, to study the fiscal implications of any new scheme or vision the political leadership might suddenly unveil, to specify ways to finance it or mitigate some negative fallout. That kind of institutional working would have averted follies such as abrupt demonetisation of high-value currency notes that destroyed the value of something like 1% of GDP, according to the government’s own Economic Survey.

America’s Congressional Budget Office is widely respected as a non-partisan body that brings out the fiscal implications of official policy. India needs a similar body to vet the feasibility or otherwise of new policies. Take the hypothetical example of the National Security Council suggesting a revamped defence personnel policy, to improve the teeth-to-tail ratio of defence spending. A sizeable chunk of India’s defence outlay goes towards funding defence pensions. Suppose the service term of most soldiers who are not officers, non-commissioned officers, were to be limited to say, seven years, during which serving personnel learn a great many skills and values that would prepare them to become valuable members of the civilian workforce once they leave the service, in their twenties, and defence pensions also become contributory, on par with pensions of civil servants who joined service on or after January 1, 2004. The scheme would drastically reduce future pension payouts for soldiers and ensure that soldiers on active duty are in the prime of their physical fitness.

Who can study the long-run fiscal implications of such a scheme, estimate how much additional funds could be made available to the procurement of military hardware, from the saving on pensions? Right now, the government would simply outsource the work to a consulting firm, which would dump it on its latest recruits with an impossible deadline and no realistic quality checks.

Take another scenario. For reasons beyond the control of the government, fiscal targets are going to be missed. Now, if there were a non-partisan expert body that enjoyed public credibility, it could attest to the valid compulsions behind missed targets, outline measures to minimise the pain of compensatory measures, such as additional, temporary tax increases, and provide the government with a legitimate space for manoeuvre without forsaking political credibility.

At the same time, a council could warn against needless fiscal slippage, disciplining the government’s profligate instincts, say, just ahead of a crucial state election.

All these beneficial possibilities hinge on the institutional independence of a proposed Fiscal Council, the autonomy of its professionals from political affiliations, and the readiness of the political leadership to respect the body’s independence and expert advice.

If these conditions can be met, a Fiscal Council would be a useful institutional addition to further sound economic management. If these conditions cannot be met, a Fiscal Council would just mean more jobs for the boys.

 

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