Monday, March 8, 2010

Fiscal policy institutions for India

Will the Government of India be able to succeed with its highly laudable medium-term fiscal deficit and public debt reduction plans outlined in the recent Union Budget?

An excellent op-ed by Niranjan Rajadhyaksha points to an IMF working paper by Xavier Debrun, David Hauner and Manmohan Kumar, and advocate the setting up of autonomous fiscal authorities, like the Congressional Budget Office (CBO) of the US, to either help the government design fiscal policy or provide independent analysis of the budget numbers and forecasts. He feels that such agencies, working alongside fiscal rules like the Fiscal Responsibility and Budget Management Act of 2003 (FRBM), can be useful in reining in fiscal prfligacy among governments.

Debrun, Hauner and Kumar identify two types of institutions - one that conducts fiscal policy like central bank does monetary policy; fiscal councils that make the budget more transparent and credible, by providing independent analysis of the budget numbers, assessing the consistency of budgetary policies with long-term objectives or advising governments on specific fiscal adjustment measures in the context of established fiscal rules.

Given the political difficulty of establishing an independent fiscal authority, Niranjan rightly says that a fiscal council that acts as a credible fiscal watch-dog looks the best bet for India. The CBO in the US analyses the federal budget, provides its own forecasts about how various economic variables will move in the years ahead and commissions several independent economic reports.

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