NCAER Recommends State-Level Fiscal Councils

February 13, 2025

Recent discussions on fiscal governance in India have brought into light the need for independent fiscal councils at the state level. A research paper by the National Council of Applied Economic Research (NCAER) has recommended the establishment of these councils. The aim is to enhance the institutional capacity of states in managing their finances.

Purpose of Fiscal Councils

Fiscal councils serve to provide independent assessments of state government forecasts.
They evaluate revenue and expenditure predictions made by the state.
Additionally, these councils generate their own forecasts.
This independent analysis can help identify the scope for realising contingent liabilities.

International Examples

The European Union (EU) provides a relevant example of fiscal councils in action.
Each EU member state is required to establish its own fiscal council.
The European Commission acts as a quasi-fiscal council at the Union level. This arrangement allows for better oversight and assessment of member states’ budgetary forecasts.

Historical Recommendations

Various bodies have previously suggested the creation of a fiscal council for India’s central government.
The Thirteenth Finance Commission proposed an autonomous body that would report to the Ministry of Finance.
The Fourteenth Finance Commission also noted the benefits of fiscal councils globally.
However, the Government of India has rejected these proposals, citing concerns over the potential limitations on the finance ministry’s powers.

Forensic Analysis of State Finances

The NCAER paper advocates for forensic analyses of states with high debt levels. This involves identifying specific reasons for revenue shortfalls or expenditure overruns. About historical financial missteps is crucial for preventing future fiscal issues.

Debt Levels Among States

State debts in India vary. For instance, Punjab’s debt is nearly 50% of its state gross domestic product (SGDP), while states like Odisha, Maharashtra, and Gujarat maintain levels below 20%. Over the past decade, larger states have seen their debt-to-SGDP ratios increase by over 10 percentage points.

Market Discipline and RBI Policies

The NCAER paper suggests that the Reserve Bank of India (RBI) should reconsider its intervention policies. Currently, the RBI caps spreads on the bonds of heavily indebted states. Reducing such interventions could enhance market discipline, which is essential for encouraging fiscal responsibility among states.

Revisiting the Role of Finance Commissions

The paper also calls for a reevaluation of the Finance Commission’s role. It argues that current allocation methods do not incentivise fiscal prudence. The Commission’s mandate to allocate more resources to states with larger revenue deficits inadvertently encourages poor financial management.

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