By Amol Agrawal
Prime minister Narendra Modi’s comment over political parties resorting to promising freebies, such as free power and free transportation services, to get elected led to heated discussion. While the strategy of doling out freebies is politically attractive, it raises several questions on economic grounds. RBI’s Annual State Finances Report 2021-22 noted that the state governments have managed to keep the gross fiscal deficit (GFD) less than the target of 3% for most of the last 15 years. There are three financial years in the last 15 years when the deficit exceeded the target—in FY10, due to the global financial crisis, and in FY16 and FY17, due to the power reforms. However, the fiscal scenario changed sharply during the 2020 pandemic as GFD touched 4.7% in FY21 and was expected to be 3.7% in FY22. The GFD has increased on account of declining growth in states taxes and lesser devolution of resources from the central government. On analysing the GFD of individual states, most states have overshot the target of 3%.
Most state governments do not have the fiscal bandwidth to distribute basic public goods, much less freebies. However, the political scenarios have evolved in such ways that they are pushing political parties to promise freebies. The heated discussions have also brought the Supreme Court and the Election Commission of India to the podium as well. The EC even released a model code of conduct to political parties on promises made in election manifestos.
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One institution that could have added insight is missing from the ongoing discussions as we do not have this—a fiscal council. Economists have written on the need for a fiscal council for a long time now, but the suggestion has been ignored by successive governments. A fiscal council is an agency created by the government to assess the sustainability of government finances, macroeconomic stability, and other official objectives. Such an agency periodically reviews the various government policies and publishes the assessment in the public domain for further discussion. As per the International Monetary Fund, 49 countries have fiscal councils as of 2021. Another statistic is that 105 countries have fiscal rules that are frameworks adopted by the governments to keep a check on their fiscal positions. This shows that while 100+ countries have adopted fiscal rules, only half of them have appointed fiscal councils to watch whether there is adherence to these rules. The pandemic tested both fiscal councils and fiscal rules as taxes declined and governments were forced into high expenditure, leading to significant deviation of the deficits and debt levels from the targets. Experiences also show that it is difficult to reverse the deviation, leading to multiple problems.
How does India compare on this front? Even India has a fiscal rule, in the form of the Fiscal Responsibility and Budget Management Act (FRBM Act), but there is no fiscal council. As a result, the government has found it much easier to first abandon the FRBM during the 2008 crisis and then not readopt it for a long time after the crisis was over. The FRBM was finally readopted in 2018, but in a much weaker avatar compared to the original. The fiscal council may not have prevented abandonment and weaker readoption of fiscal rule, but as a watchdog, it would have constantly pressurised the government to stick to the fiscal rules.
How does the fiscal council come into the freebies discussion? If there were a fiscal council, it could have studied the impact of freebies on different state budgets. Such an analysis would have added insights to the debates that are happening sans any fiscal arithmetic. There is one problem, however, when it comes to instituting a fiscal council in India. India already has a constitutional body in the form of the Finance Commission, whose role is to give recommendations on the distribution of tax revenues between the Union and the states, and amongst the states themselves. Ideally, the Finance Commission is perfectly placed to play the role of a fiscal council, given its expertise. However, it is a temporary body, reconstituted every five years. The Finance Commissions have suggested the creation of a permanent secretariat to keep analysing public finances of the Union and states and assist future commissions. But this has been ignored as the Union government fears it will keep a check on its fiscal action and only lead to more transfer of resources to the states. Having a new fiscal council outside of the Finance Commission will be like having a Monetary Policy Committee outside the central bank. It is high time that the government creates a fiscal council within the Finance Commission. The new body can then deliberate on the complex topic of the impact of freebies on public finance, as well as many other areas.
The author is Assistant professor, economics, Ahmedabad University
