NCAER paper recommends states to create independent fiscal councils
Feb 12, 2025
Several bodies in the past had recommended a fiscal council for the central government
States should create their own independent fiscal councils, with academics, financial market participants, and other experts as their members, in order to strengthen their institutional capacity, a research paper released by National Council of Applied Economic Research (NCAER) has recommended.
The paper, titled “The state of the states: Federal finance in India”, authored by NCAER Director General Poonam Gupta and Visiting Distinguished Professor Barry Eichengreen, said reports of the fiscal council would assess the realism of state government forecasts of revenues and expenditures, and offer forecasts of their own. “They would provide independent analyses of the scope for realisation of contingent liabilities,” the paper added.
Citing the European Union (EU) as an example, the authors said it has a comparable arrangement in place. “Under the most recent reform of its fiscal rules, the European Commission acts as a kind of quasi-fiscal council at the level of the Union, receiving and assessing the forecasts of member states, and offering forecasts of its own, while each member is required to create its own fiscal council at the state level to similarly assess the budgetary outlook,” it said.
Several bodies in the past had recommended a Fiscal Council for the central government. The Thirteenth Finance Commission suggested that the proposed Fiscal Council should be an autonomous body, reporting to the Ministry of Finance, which should further report to Parliament on the matters dealt with by the Council. The Fourteenth Finance Commission too noted that globally, several countries had constituted fiscal councils, which help in monitoring and evaluating fiscal policies and management. These also create transparency by providing costing estimates of various programmes, and increase accountability of the government. The N K Singh committee on FRBM (Fiscal Responsibility and Budget Management) review had also recommended the constitution of a Fiscal Council for the central government. However, the Centre has rejected all such proposals, holding that it could impinge on the powers of the finance ministry.
The NCAER paper also recommended that officials should conduct a forensic analysis, identifying the specific revenue shortfalls or expenditure overruns, resulting in excessive budget deficits and debt increases in the fiscally worst performing states. “Understanding what went wrong in the past is a first step in preventing and remedying problems that may arise in the future,” the authors said.
State debts in India vary from nearly 50 per cent of state gross domestic product (SGDP) in Punjab to less than 20 per cent in Odisha, Maharashtra, and Gujarat. In the last ten years, larger states have added more than 10 percentage points to their respective debt-to-SGDP ratios. Debt ratios have risen in all but four states over the last decade.
The authors of the paper said that the Reserve Bank of India (RBI) should review its policies of intervening in the markets to cap spreads on the bonds of heavily indebted states. “Limiting such intervention would strengthen market discipline. To be sure, there may be reluctance to move in this direction on the grounds that states should be treated equally, on borrowing costs just like other conditions, and for fear of contagion from the bonds of poorly performing states to the bonds of others that are innocent bystanders. But without market discipline, there can be no fiscal discipline,” the authors argued.
The paper recommended that the role of the Finance Commission should be reconsidered. “Finance Commissions have never considered overall fiscal prudence while recommending allocations. The horizontal devolution of taxes among states, awarded every five years, does not provide incentives for fiscal rectitude. Perversely, Finance Commissions are mandated to allocate more resources to states with larger revenue deficits, a mechanism which ironically subsidises errant states,” the paper said.
[The Business Standard]
