Time opportune to create a Fiscal Council to profligacy of political class

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Updated: April 2, 2019 7:07:26 AM

Considering the poor record of fiscal consolidation and the tendency of political parties to make unviable promises, the time is opportune for creating the Fiscal Council.

One shudders to think of the fiscal outcome if NYAY becomes an additional fiscal liability.

One of the major issues faced in democratic countries is the electoral budget cycle. The issue is of much more concern in developing countries where the single most important task of every political party is to win elections. Their myopic view encourages them to promise various subsidies and transfers to bestow short-term gains to different sections of the electorate on the eve of the elections. The electorate fall prey to this as the lack of transparency and fiscal illusion obscures the true budget constraints and understandings of the long-term implications of deficits.

Election season is the time when the flavour is about fighting poverty. It is during this season that most political parties think about the poor and initiate various schemes and show their concern to garner votes. In fact, in other times, we do not here much about the poor. Also, hardly any political party comes out with schemes to build skills and generate productive employment so that the poor are adequately endowed with human capital. In a country where the children in the age group of 0-14 years constitute 37% of the population, there is hardly any expression of the concern about their future. Often one is left wondering what they would do if absolute poverty is eliminated. Long live poverty!

The Nyuntam Aay Yojana, or NYAY, is the minimum income scheme announced by the Congress Party. It proposes to give `72,000 per year to 20% of the poorest, or 5 crore, families. This is expected to cost `3.6 lakh crore to the exchequer. The proposal is to counter the PM-KISAN scheme that aims to provide farm support and was announced by the current government in the interim budget. It seeks to provide `6,000 per year to 12 crore farmers with less than 2 hectares of landholdings and the total cost is estimated at `75,000 crore in 2019-20.

There is nothing wrong in assuring a minimum basic income, particularly in a country where there is no social security. In fact, assuring a minimum basic income is more desirable than having many subsidies and transfer schemes. Therefore, any proposal to substitute the multitude of subsidies and transfers with the minimum income support plan is welcome as it does not distort relative prices. The important question, however, is which of the prevailing subsidies are going to be subsumed in the new scheme? At present, there are explicit subsidies on food, fertiliser and petroleum products budgeted at `2.96 lakh core for 2019-20 and, in addition, there are many transfers such as MGNREGA (`60,000 crore), housing subsidy (`25,853 crore), interest subsidy for short-term credit to farmers (`18,000 crore) and a crop insurance scheme (`14,000 crore). If the proposed scheme is additional and not a substitute to the above schemes, it will be a fiscal disaster. One shudders to think of the fiscal outcome if NYAY becomes an additional fiscal liability.

Equally important is the problem of targeting in the wake of the poor information system. Many who should really qualify will be left out and many who will be given are not necessarily those who deserve to be supported. Big data analysis can help only if there is accurate and basic information. Like many other schemes where targeting has been poor, this will be another costly ill-targeted programme. But who cares?

There are two additional issues which must be noted. The first is that the introduction of the scheme is likely to reduce the numbers of the employed, particularly women. There will be resistance to earn and cross `12,000, the threshold of being considered the poorest. More importantly, people would prefer to undertake unorganised sector employment unless the wage differentials are very high. Secondly, what about the people earning in the next 20% category? They will find themselves to be having less take-home income than those who earn less than `12,000.
The fiscal cost of this proposal will be horrendous. Unless other sources of revenue are found, this would cost an additional 1.8% of GDP to the fiscal deficit and the entire consolidation path will go astray. If the experience is any guide, raising additional resources to meet the new commitment may not be easy. There is hardly any scope for reducing spending on social sector or physical infrastructure. This implies that the process of fiscal consolidation is at serious risk. We have had similar experiences in the 2008-09 budget when three important decisions (farm loan waivers, extension of rural employment guarantees from 200 districts to the entire country and implementation of the sixth pay commission recommendations) created a serious fiscal problem. Strangely, empowering the future generation (the children in the age group of 0-14) is not in the agenda of any political party. Instead, schemes like NYAY will only subject them to the burden of servicing and repaying loans.

When the markets fail, we seek government intervention. What do we do when the political parties fail the people? It is here that the importance of institutions of checks and balances becomes relevant. A growing number of countries have been appointing independent fiscal institutions (IFI) or fiscal councils to enhance their effectiveness in calibrating fiscal policies. These are called by various names such as the Congressional Budget Office in the United States, Parliamentary Budget Office in Australia and Canada, Office for Budget Responsibility in the United Kingdom, Public Finance Council in Portugal, Fiscal Advisory Council in Ireland and Fiscal Councils in most other countries. This is a part of the rule-based fiscal policy in these countries.

The objective of all these fiscal councils is to (i) assist the Parliament in monitoring and evaluating the fiscal adjustment process and (ii) impart greater transparency by objectively estimating the costs of various policies and programmes and enhancing accountability to the Parliament. In addition, these institutions could be mandated to undertake objective and independent evaluations of budget forecasts to impart greater realism to budget formulation. An independent bipartisan institution can assist the Parliament and its committees by helping the parliamentarians understand complex issues and providing them information to facilitate informed debate on fiscal matters.

There was a recommendation to have a Fiscal Council by the 13th Finance Commission and the same was again made by the FRBM Review Committee. The only problem was that they recommended that the finance ministry should appoint such a Council and the latter should be sending reports to the finance ministry. On the other hand, the Fourteenth Finance Commission recommended that the FRBM Act should be amended so as to enable the Parliament to appoint the Fiscal Council that then should be sending reports to the Parliament. Considering our poor record of the fiscal consolidation process and the tendency of political parties to make unviable promises that bind future generations in indebtedness, the time is opportune for creating the Council in order to ensure additional checks and balances.

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