FRBM panel proposes for 'autonomous' fiscal council under North Block

40 countries now have one of these bodies, tripling in number after the 2008 global crisis

The committee report on the Fiscal Responsibility and Budget Management (FRBM) law’s recommendation for a new fiscal council to monitor implementation comes after studying the examples of 40 other countries, advanced and emerging.

The panel, whose report was made public on Wednesday, has proposed the Council as an autonomous body but under the finance ministry.

It asks that the Council be tasked with monitoring the government’s fiscal announcements for any year, providing its own forecasts and analysis for these, and to advise the ministry on when to trigger the escape clause provision.

“It is proposed that it should comprise a chairperson and two members, to be appointed by the central government. The persons to be appointed ought to have significant experience in public finance, economics or public affairs,” the panel said.

“To ensure they function independently, such persons should not be in the current service of the government, should have a non-renewable term of four years and non-diminishing salaries while in office, and their appointment should be capable of termination only on limited grounds.”

The proposal is part of its draft Debt Management and Fiscal Responsibility law, meant to replace the existing FRBM Act.

“We foresee the Council will serve both an ex ante role – providing independent forecasts on key macro variables like real and nominal gross domestic product (GDP) growth, tax buoyancy, commodity prices – as well as an ex post monitoring role, and also serve as the institution to advise on triggering the escape clause and also specify a path of return,” the report says.

The escape clauses are to provide flexibility for the Centre to deviate from the prescribed deficit stabilisation schedule by 0.5% for any year, under strictly defined circumstances. The clauses are proposed for over-riding considerations of national security like acts of war, calamities of national proportion and collapse of agriculture. Also for “far-reaching structural reforms in the economy with unanticipated fiscal implications” and if a sharp decline occurs in real output growth of at least three percentage points below the average for four preceding quarters.

In recent years, the panel has said, an increasing number of countries are using independent bodies to further enhance the credibility of their fiscal rules. “In particular, a fiscal council can be thought of as independent, non-partisan agency – set up either through a statutory or executive mandate – to publicly assess the government’s fiscal performance, against its stated objectives.”

The report says the number of countries having such fiscal councils jumped after the 2008 global financial crisis. From then till 2015, such councils almost tripled, to about 40. “Furthermore, 10 emerging markets had established fiscal councils by 2014, versus just about two a decade before.”

The panel states a number of different models exist for such bodies. Germany, Ireland, Portugal and Hungary have stand-alone institutions, set up as part of fiscal responsibilities. The United States’ Congressional (its legislature) Budget Office, and fiscal councils in South Korea, Mexico, Australia, Canada, Italy and South Africa are set up under the legislative branch, with wide-ranging powers.

There are also councils that come under the executive branch, as in Belgium, Japan, Netherlands and Britain, while some are paired with other financial institutions, as in France and Finland.

The panel is headed by N K Singh, a former revenue and expenditure secretary to the Union government, and also a former Member of Parliament. The other members include former finance secretary Sumit Bose, Reserve Bank of India (RBI) Governor Urjit Patel, Chief Economic Advisor Arvind Subramanian and Rathin Roy, head of the National Institute of Public Finance and Policy. 

It has recommended has recommended a fiscal deficit target of 2.5% of GDP, a revenue deficit of 0.8% and a combined Centre-states debt ceiling of 60% for financial year 2022-23, end point of its six-year, medium-term, fiscal road map.