Budget 2019: How to gauge India’s fiscal health? Here comes a modern fiscal performance index

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Updated: June 7, 2019 10:57:34 AM

Budget 2019: The Confederation of Indian Industry (CII) has launched a new index comprising multiple indicators to evaluate India’s fiscal performance and budget, in order to make up for the shortcomings of ‘Fiscal Deficit’, which it says is a single-criterion measure, and doesn’t capture the complete picture.

CII launches new index to assess centre and state budgets

Budget 2019: The Confederation of Indian Industry (CII) has launched a new index comprising multiple indicators to evaluate India’s fiscal performance and budget, in order to make up for the shortcomings of ‘Fiscal Deficit’, which it says is a single-criterion measure, and doesn’t capture the complete picture. “Fiscal Performance Index” or FPI is CII’s newly-launched index, which will examine states and centre budgets, it said in a statement. “Fiscal Deficit to GDP” ratio is not enough to measure the quality of budget, CII added.

On the expenditure side, the index will consider government spend on social sector, education and infrastructure, which are considered more beneficial as compared with other expenditures, in order to review the economic growth. Similarly, as tax revenues are sustainable sources of revenue for the government in comparison to one-time income sources, the index will consider the former as more beneficial.

“In view of the results obtained from our analysis, we recommend that the Fiscal Responsibility and Budget Management (FRBM) Act which sets targets for the governments to reduce fiscal deficits should not solely focus on one component. Instead, a holistic performance of all entities viewed from all angles of expenditure quality, revenue receipts quality, and fiscal prudence should be taken into consideration,” Vikram Kirloskar, President, CII said.

Using this index, the CII has analysed the budgets from 2004-2005 to 2016-17 for both the centre and states. The study found that fiscal consolidation was highest in 2007-08 while 2009-10 emerged as the worst year. After showing recovery in 2010-11, FPI deteriorated from 2011-12 onwards till 2014-15 despite the improvement in fiscal deficit index. This was mainly due to poor performance of the tax revenue and expenditure quality indices.

The index began improving from 2015-16 and reached a high in 2016-17, before dipping again in 2017-18. The dip in 2017-18 was on account of a sharp moderation in capital expenditure despite recording an improvement in the fiscal deficit index.

At the State level, the CII study showed that the states which are presumed to be good in fiscal health, based on fiscal deficit to GDP ratio, and fall in the high-income category such as Maharashtra, Gujarat, Haryana, etc. are not necessarily doing well on the composite fiscal performance index front. This clearly is indicative of the fact that the one single parameter such as the fiscal deficit to GDP ratio in judging the overall quality of budgets of the state governments is not enough.

On the contrary, the low-income states such as Madhya Pradesh, Andhra Pradesh, Uttar Pradesh and Bihar, which have shown consistent good performance on the FPI over the years mainly due to good performance in “Expenditure Quality Indices” (Revenue and Capital), have performed below average on the Fiscal Deficit Index.

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