1/7/2020 : The Hindu Editorial Notes or Summary

Topic- ‘IN THE NAME OF COOPERATIVE FEDERALISM’

QUESTION : Discuss about cooperative federalism and various roadblocks to cooperative federalism in India and How can it be strengthened ?

WHAT ?

• Centre – State Relations

 WHY IN NEWS ?

• The states are urging the Central Government to work in the spirit of cooperative federalism.
• The central government is being criticised owing to the gap between what the 14th Finance Commission (FC) promised to states and what they are receiving.

 CENTRE-STATE RELATIONS:

• Federalism refers to relations between the Centre and states of the Union of India.
• It has been a trend in Indian political history that so long as the central and state governments were ruled by the same political party, the cooperative framework worked very well.
• But when different political parties are in power in the centre and the states and more recently when coalition governments are in power, there are signs of stresses and tensions in intergovernmental relations between the Centre and the States.
• In the period ranging between 1980 and 1989, tussle for the rights of States was focused on ARTICLE-356. (Using pliant Governors, regional party governments were politically destabilised).
• Little was done to implement the report of the R.S. Sarkaria Commission on Centre-State relations.

DETAILS :

CENTRE-STATE TUSSLE

• The tussle for the rights of States has been focused on Article 356.
• Partial behaviour by the Governors, regional party governments were politically destabilised.
• Little was done to implement the report of Justice R.S. Sarkaria Commission on Centre-State relations.
• The new fault line in the Centre-State relation could be over the way report of 14th Finance Commission is being implemented.
• This began well before COVID-19, but the pandemic and its economic disruption have brought things to an edge

HURDLES FACED BY STATES :

• Delayed payments: The 14th FC recommended 42% share of taxes of the centre to states, up from earlier 32% but tax devolution has been quite low.
• The economic slowdown coupled with a shortfall in GST collections are primary reasons behind this.
• Cess Approach: The centre is resorting to cess route as the same is not to be shared with states, thereby decreasing the amount to be transferred from Central pool of taxes.
• More Burden of Social Development: As per a study by the Centre for Policy Research, there is a Rs. 6.84 lakh crore gap between what the 14 FC promised to States and what they have received.
• Still in 2014-2015 the states undertook programmes and projects spending 46% more than the Central Government; today the figure is 64%.
• Lack of Centre’s Support: The states are not receiving adequate financial support considering the nature and magnitude of liability.
• For instance in West Bengal the State government had spent Rs.1,200 crore in fighting COVID-19 while the Centre has given Rs. 400 crore under the National Health Mission and to the State Disaster Response Mitigation Fund, but specifically for the pandemic.
• Directives to Cut the Expenditure: The Ministry of Finance has instructed other ministries to cut expenditure due to which crucial programmes in the states has come to standstill
• FRBM Act provisions: As per provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, the Gross State Domestic Product (GSDP) can actually accommodate a fiscal deficit of 3%.
• This would be difficult to achieve amidst the pandemic.
• Further the “escape clause” that allows for a one-time relaxation of the fiscal deficit threshold upto 0.5% in a time of exigency has already been utilised by the Centre but it has proven woefully insufficient in addressing the current crisis.

NEED TO REVISIT FRBM PROVISIONS:

• Due to pandemic, the fiscal deficit for States, collectively, is inevitably going to breach the projection of 2.04%.
• As per provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, the GSDP can actually accommodate a fiscal deficit of 3%.
• The FRBM has an “escape clause” that allows for a one-time relaxation of the fiscal deficit threshold upto 0.5% in a time of exigency.
• The escape clause has been utilised by the Centre but it has proven woefully insufficient in addressing the current crisis.
• Fiscal policymakers and technocrats agree that the rigidity of the FRBM has to be revisited.
• It should allow for greater flexibility and consultation as to when and how the “escape clause” can be applied.
• The Centre has gone in for subjective interpretation, imposing conditions that are outside the scope of the FRBM.

WAY FORWARD:

• In such difficult times the Central and State governments must keep their political gains aside and work together in the spirit of cooperative federalism.
• It is a concept of federalism in which federal, state, and local governments interact cooperatively and collectively to solve common problems, rather than making policies separately.
• The rigidity of the FRBM has to be revisited.
• It should allow for greater flexibility.
• The Centre has gone in for subjective interpretation, imposing conditions that are outside the scope of the FRBM.
• Setting up sector-specific committees to facilitate prompt responses.

 

 

 

Topic – DO WE NEED A FISCAL COUNCIL?

QUESTION: Discuss why India should have a fiscal council and give important issues related to its formation.

WHAT ?

• Idea of Fiscal Council in India

 WHY IN NEWS?

• The government can signal its virtue by establishing some new institutional mechanism for enforcing fiscal discipline, for example, a fiscal council.
• Non Efficient working of current system of fiscal responsibility:

 FRBM act,2003

• The FRBM enjoins the government to conform to pre-set fiscal targets, and in the event of failure to do so, to explain the reasons for deviation.
• However, the system is not working efficiently according to the requirement.
• Fiscal Policy Strategy Statement’ (FPSS)
• The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance.
• Ultimately, the submission of the FPSS often passes off without even much notice.

 

IDEA OF CREATING A FISCAL COUNCIL :

• The suggestion of a fiscal council actually predates the current COVID-19 crisis.
• The idea was first recommended by the Thirteenth Finance Commission and was subsequently endorsed by the Fourteenth Finance Commission.
• It was also endorsed by the FRBM (Fiscal Responsibility and Budget Management) Review Committee headed by N.K. Singh.

 

MORE ABOUT FISCAL COUNCIL :

• It is a permanent agency with a mandate to independently assess the government’s fiscal plans and projections against parameters of macroeconomic sustainability.
• It also puts out its findings in the public domain.
• The expectation is that such an open scrutiny will keep the government on the straight and narrow path of fiscal virtue and hold it to account for any default.
• According to the International Monetary Fund (IMF), about 50 countries worldwide have established fiscal councils with varying degrees of success.
• The fiscal council is said to be a solution to fiscal inefficiency because it will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.

MANDATE OF THIS COUNCIL :

• As per the model suggested by the FRBM Review Committee the fiscal council’s mandate will include, but not be restricted to,
• Making multi year fiscal projections
• Preparing fiscal sustainability analysis
• Providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules
• Recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement and taking steps to improve the quality of fiscal data,
• Producing an annual fiscal strategy report which will be released publicly.

 

ARGUMENTS AGAINST FISCAL COUNCIL:

 1) Lack of demand for accountability

• The government is required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance.
• Yet, seldom have we heard an in-depth discussion in Parliament on the government’s fiscal stance.
• The problem clearly is the lack of demand for accountability.
• So, another instrumentality such as a fiscal council for the supply of accountability cannot be a solution.

 

2) Adding more to noise than signal

• The fiscal council will give macroeconomic forecasts for the budget, and if the Ministry decides to differ it is required to explain why it has differed.
• Both the Central Statistics Office (CSO) and the RBI give forecasts of growth and other macroeconomic variables, as do a host of public, private and international agencies.
• Why should there be a presumption that the fiscal council’s forecasts are any more credible or robust than others?
• It should be better to leave it to the Finance Ministry to defend its numbers rather than forcing it to privilege the estimates of one specific agency.
• Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
• If the estimates go awry, it will simply shift the blame to the fiscal council.

 

3) Issues with the role as watchdog

• Another argument made in support of a fiscal council is that in its role as a watchdog.
• It is said that it will prevent the government from gaming the fiscal rules through creative accounting.
• But there is already an institutional mechanism by way of the Comptroller and Auditor General (CAG) audit to check that.

 WAY FORWARD :

• The way forward could be to start small and scale it up if it proves to be a positive experience.
• let the CAG, appoint a three-member committee for a five-week duration.
• The committee should have the limited mandate of scrutinising the budget after it is presented to Parliament for its fiscal stance and the integrity of the numbers and give out a public report.
• The committee will be wound up after submitting its report leaving no scope for any mission creep.