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TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
- Government Budgeting.
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:
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:
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:
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:
TOPIC:
General Studies 2
General Studies 3
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:
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:
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.
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