Fiscal design of India needs update

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 Fiscal design of India needs update

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1.  What Covid did: In 2020, the Covid-19 crisis exposed public finance to new risks, and showed the inability of sub-national governments to absorb the fiscal costs. These risks well exceed those experienced in the 2008 global financial crisis.
2. Right design, right response: A lesson from history is that accountability and efficiency in public financial management become more critical during crises. Without improving the adaptability and responsiveness of fiscal management, the costs to the economy from misdirected resources and inefficient resource use will compound the effects of the covid crisis.
3. Three pillars: The challenges being faced highlight the need for greater clarity in the three pillars of the fiscal architecture: (a) public financial management processes; (b) the nature of the fiscal rules; and (c) the establishment of fiscal institutions to widen accountability over the fiscal rules. Many countries don’t have the fiscal architecture fully in place, but a growing number are quickly putting in place new and innovative ones,
4. PFM systems: Public financial management (PFM) refers to the set of laws, rules, systems and processes used to mobilize revenue, and allocate and account for the use of public funds. It is well-recognized that a strong PFM system is an essential part of the institutional framework for effective public service delivery. Most advanced and large emerging market countries have, in the past decade, established legal frameworks for public financial management that set out the budget, reporting, accounting, and audit processes. So New Zealand sets a high standard for transparency and the lucidity of its budget documents. Within middle-income countries, South Africa’s budget documentation is highly transparent and accessible, with extensive debt reporting, and clear and concise fiscal risks reports.
5. Fiscal rules: With respect to strengthening budget institutions and management practices, and their accountability, many advanced countries have set fiscal rules (including at sub-national levels) to retain the confidence and trust of financial markets. From international experience, well-designed and well-implemented fiscal rules have helped contain the ‘deficit bias’, strengthen market credibility of the commitment to fiscal sustainability, and allow countercyclical fiscal management. The challenge to achieve these outcomes is at least three-fold: to ensure that they are well-designed, that the public financial management systems and institutions allow them to be well monitored and implemented, and deviations from the fiscal rules allow the return to the rules in a time-bound manner.
6. Fiscal Institutions: Fiscal rules and fiscal councils have developed as complements. Good councils will learn how to better interpret the fiscal rules and to suggest improvements. Well-designed rules will make the task of councils easier to perform and less controversial than poorly designed or weak rules. Thus, effective rules and functioning councils are expected to reinforce each other. Independent fiscal institutions are now a common component of fiscal frameworks in most advanced economies, and the overall number of countries with such fiscal councils has more than tripled over the past decade.
7. What effective institutions have: A variety of institutional models exist for the manner and location in which fiscal councils are set up and reside. Effective fiscal councils should have (a) legal and operational independence, (b) strong media presence, and (c) the chair and board members with non-partisan affiliations.
8. Summary: As the crisis will continue to cast a long shadow over the public finances of many countries, the need to restore fiscal credibility encourages further reforms of fiscal frameworks. It is crucial to ensure the full transparency, good governance, and costing of all fiscal measures, especially given their size, exceptional nature, and speed of deployment. It is India’s moment now to benchmark its fiscal architecture to its peers, learn from the experiences of other federal countries, and adopt some of the best practices.

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