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IASbaba’s Daily Current Affairs – 17th June 2017

ECONOMY

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Government Budgeting.

Need of Parliamentary Budget Office

Significance of budget:
The budget is an extremely important political expression affecting every citizen. Budgets can be seen as contracts between citizens and the state. The budget, as a socio-economic and political document, primarily involves a legitimate process of raising revenue and (an equitable) distribution of public resources amongst various sectors. The budget is the clearest expression of the direction of a government’s priorities and targets, reflecting its fiscal plans, and social and financial commitments. The budget is also a primary instrument through which the elected representatives can exercise influence on economic and social development policies of the country.

Importance of legislative participation in the budget process:

Effective legislative participation in the budget process establishes checks and balances that are crucial for transparent and accountable governance, and for ensuring efficient delivery of public services.

Ineffective parliamentary control over budget process:
Parliament is considered to be “the guardian of the public purse” and must play a greater role in budgetary governance. As a budget approving body, it oversees the following: presentation of the budget; scrutiny of the budget proposal and demands for grants of various ministries; debate; and consideration and approval of the budget. To carry out such functions effectively, the Parliament requires institutional, analytical and technical competence.

However, the budget research capacity is negligible in Parliament:

The quality and comprehensiveness of the budget scrutiny process, through the debate and the standing committees, is weak.
Due to the lack of analytical knowledge support, members of Parliament (MPs) are unable to properly scrutinise the demands for grants in the respective standing committees.
On occasion, MPs seek to reach out to external experts for credible analysis and inputs. Such practices help in adding depth to the committees’ work and their reports. While this results in better assessment of demands, it is an ad hoc way of bridging the gap in knowledge and analysis.

Consequently, Parliament appears unable to perform the aforementioned functions effectively, often resulting in the executive acting in accordance with its own preferences. Parliament’s failure to exert meaningful influence often results in arbitrary taxation policy, burgeoning fiscal deficit, and an inequitable allocation of public resources among various sectors.

The above example suggests that, in India, the effectiveness of parliamentary oversight in public finance is an unsettled concern. Establishing a Parliamentary Budget Office(PBO) is a fitting response to this concern.

What is PBO?
A PBO is an independent and impartial body linked directly to the Parliament. It provides high-quality technical, objective and non-partisan analysis of budgets and public finance to the Parliament and its committees.

Need of PBO:

An institutional mechanism, such as a parliamentary budget office (PBO), is necessary to provide continuous assistance to MPs and their committees.
An adequate and inclusive role of Parliament or the state legislatures in public finance management is not sufficiently dealt with in the political economy literature in India. There is a visible deficit, a “knowledge gap,” between Parliament and its members in India. Parliamentarians do not have access to detailed evidence that may allow them to pass judgment on budgetary decisions. A body that is independent of the executive is necessary in order to provide “independent costings, fiscal analysis and research to all MPs, especially non-government members.”
Many ordinary laws have been piggybacked as money bills and included within the Finance Act, 2017, while the Parliament remained entirely oblivious. The establishment of a PBO would eliminate such malpractice as MPs would have been alerted and appropriate action would follow.
A PBO is an instrument for addressing bias towards spending and deficits and, more significantly, for enhancing fiscal discipline and promoting accountability.
Further, it can generate quality public debate on budget policy and public finance, enabling parliamentarians to engage more meaningfully in the budget process.
A PBO could provide the essential substantive information and knowledge support services for parliamentarians and committees. Such timely, accurate, objective, responsive, and non-partisan information is vital for the productive working of the parliament and its members. An independent, non-partisan, transparent body can bridge the gap between executive decision-making and parliamentarian involvement.

Examples form across the world:
PBOs are being established across both presidential and parliamentary systems. Traditionally, independent budgetary units are more common in developed countries, but many developing countries are now establishing such entities, for example, Benin, Ghana, Kenya, South Africa, Morocco, the Philippines, Uganda, Nigeria, Liberia, Thailand, Afghanistan, and Vietnam. The other functioning PBOs are in countries such as the United States (US), Canada, Australia, Austria, South Korea, Italy, Mexico, etc.

Core Functions of PBOs:

Most PBOs have four core functions:

Independent and objective economic forecasts;
Baseline estimate survey;
Analyzing the executive’s budget proposal; and
Providing medium- to long-term analysis.

Conclusions:

The goal of the PBO is to render budgets more transparent and accountable. PBOs can help parliamentarians understand the complex nature of the budgeting process and provide the parliament and its committees with the capacity to contribute to the budget process. Parliamentary scrutiny of public finance is a very important aspect for holding the government(s) accountable to the people. However, the Parliament as well as the state legislatures are institutionally fragile and ineffective in fulfilling their oversight and scrutiny functions. There is a legitimate democratic need in this country to strengthen the capacity of Parliament and its members. A PBO can ensure that parliamentarians remain informed well enough to perform their budgetary and oversight responsibilities effectively. Establishing a PBO in Parliament will have a positive impact on its ability to carry out budgetary oversight and fiscal decision-making.

Connecting the dots:

Parliamentarians carry out an important function of budgetary oversight. However the parliamentary control over budget process has remained ineefective. Discuss why is it important to have Parliamentary budget office(PBO) so as to increase the effectiveness of parliamentary insight.

NATIONAL

TOPIC:

General Studies 2

Indian Constitution- historical underpinnings, evolution, features, amendments, significant provisions and basic structure.
Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Worsening state finances

In news:

The viral of farm loan waivers is acquiring epidemic proportions. Unfortunately, broader structural changes in agriculture have eluded coherent implementation. The loan waivers of February 1990 by the National Front government led to sharp fiscal deterioration and the subsequent balance of payments crisis. Subsequent loan waivers had similar results. State governments are entitled to take such decisions but manage their financial consequences. Farm loan waivers are a subset of the broader issue of sustainable State finances. We need to address several issues.

Fiscal consolidation

State expenditure higher than that of centre:
Following the 14th Finance Commission recommendations, the total State expenditure (as a percentage of GSDP) is higher than even the Centre’s.
State finances have increasingly become a crucial lynchpin of India’s fiscal framework. Many State governments have adopted State-level fiscal laws and adhered to the 3% fiscal target under the State-level FRBMs (Fiscal Responsibility and Budget Management Act).
However as per a report of the Reserve Bank, State Finances: A Study of Budgets 2016-17, the combined deficit of the States reached 3.6% of GDP in FY16, significantly higher than 2.6% in the previous year. This significantly breaches the 3% fiscal deficit stipulated by the States themselves in their FRBMs. The fiscal consolidation of the Centre is more than offset by expansion of the States. This is partly explained by the State power distribution companies (DISCOM) debt, 75% of which will be explicitly accounted in States’ balance sheets, and treated as capital spending in fiscal accounts. The quality of compliance by States has also deteriorated. These go beyond UDAY (Ujwal DISCOM Assurance Yojana) to include irregularities in food credit accounts of State governments with commercial banks, off-balance sheet expenditures, and creative accounting engineering to evade stipulated targets.

Unsustainable debt-to-GDP ratio for States:

Debt is considered sustainable if debt-GDP ratio is stable or on a declining path. This is a necessary condition for solvency of any government’s finances. While debt ratios for the Central government are projected to decline, the debt ratio for the States under status quo and present FRBM scenarios is projected to increase.
This is mainly because the primary deficit (total deficit excluding the interest payments), a driving variable in debt dynamics, is much higher for the States compared to the Centre. The Centre’s primary deficit according to the RBI report is 0.7% of GDP while that of the States is close to 2% of GDP. Nonetheless, if this picture persists, State debts will increase from close to 20% of GDP to 35% of GDP over the next 10 years. A significant consolidation by the States would be needed to keep the debt ratio stable for the States.

Challenges arising due to worsening state finances:

Given the increased foreign holdings of Indian government bonds, a worsening of State finances will dent India’s credibility among foreign institutional investors (FIIs).
The rise in government bond yield of State government securities would increase the interest burden on new debt and also for the old debt which are re-priced. Such a scenario could make State debt more explosive.
Borrowings by States are likely to increase sharply due to interest of UDAY bonds, and more importantly, the viral of farm loans waivers. With little compensatory action, this will seriously undercut the hard-won battle to secure fiscal prudence for the country as a whole.

Although composite State finances are useful to analyse, there are marked variations across States. States like Tamil Nadu, Gujarat, and Maharashtra have significantly lower fiscal deficit, with more intensive tax efforts, than States like Uttar Pradesh and Jharkhand, which collect lower tax and are fiscally less prudent.

What can be done?

Following steps can be taken:

First, we must improve the due diligence by the Central government in giving consent to borrowings by States under Article 293 of the Constitution. Unfortunately, there is some lack of coordination within the Ministry of Finance itself. Approvals for State government borrowings are accorded by the State Plan Division with little coordination with the Budget Division, which monitors implementation of FRBM obligations. A more stringent criteria in approving borrowings for States which deviate from stipulated fiscal norms is urgently needed. The criteria must be transparent and apolitical in character.
Second, whenever the Central government breaches the fiscal norms, it secures parliamentary approval. State governments must be encouraged to adopt a similar practice by securing the approval of the State Legislature.
Third, regulatory measures can be devised to enable bond yields to be responsive to market signals and bridge the information asymmetry between markets and State finances of the concerned State governments.
Finally the 15th Finance Commission must address the broader issue of adherence by States to fiscal obligations. It must restore adherence to fiscal norms as an important ingredient in the devolution formula. This also implies inter se distributional burden among the States themselves.

Conclusion:

Investors recognize and reward macro stability. Fiscal prudence exercised by the Central government has been widely acclaimed. The management of State finances must not undercut this important achievement which is central to investor confidence and enhanced credit rating. Unchecked profligacy by States can undermine the overall macro stability and thus must be checked.

Connecting the dots:

Present situation of state finances shows a worrying picture. With demands of farm loan waiver the fiscal situation is likely to become more unsustainable. Discuss the need of maintaining fiscal discipline by states. Also mention the steps to be taken to do the same.