WHY focus on Public Finance reforms?
The primary challenge in a democracy is balancing short-term political gains with long-term welfare of the public. Recent decisions by some states to revert to the Old Pension Scheme (OPS) and prioritise short-term populism over long-term growth prospects highlight this challenge. These decisions necessitate building a consensus around the institutional measures required to ensure the fiscal health of the country’s future.
1. Unsustainable nature of short-term spending:
The current political climate often prioritises individual short-term welfare (ISW) programs at the expense of long-term public finances, infrastructure development, and economic growth. ISW programs without economic growth are not sustainable. They require increased borrowing, leading to a higher debt burden.
Many states are already spending well beyond their means. The debt burden, primarily incurred to meet current needs, arises from ISW measures that offer temporary relief without enhancing individual capacity or promoting future growth. The decision to revert to schemes such as the OPS, which involve long-term, unfunded, legally binding, index-linked liability, will further increase the States’ future debt requirements. Without adequate investments that enhance productivity and growth, the mounting debt will create a vicious cycle of debt trap, pushing the country toward fiscal disaster.
2. Achieve balance between welfare and growth:
To break the cycle of unsustainable debt and ensure long-term fiscal health, achieving a balanced approach is necessary. We need social programs to ensure basic needs are met, but they must not come at the cost of long-term productivity and economic growth. In India, this means investing in infrastructure, essential services, quality education, and healthcare. These investments will not only improve basic living standards but also stimulate rapid growth through capacity enhancement and creating opportunities for employment and entrepreneurship. This growth, along with increased tax revenue it generates, can then be used to support more effective welfare programs, ultimately lifting more people out of poverty.
HOW can we reform?
Strengthening fiscal responsibility through constitutional means:
The existing constitutional framework can be leveraged to strengthen fiscal responsibility without infringing on the government’s sovereignty regarding public expenditure. Governments at the Union and state levels have the freedom to formulate policies and execute welfare measures and projects, but they must do so while adhering to principles of fiscal responsibility and resource availability.
The existing constitutional mechanisms such as Article 293 must be strengthened to ensure that borrowing is not used to meet current expenditures. Additionally, any policy with long-term fiscal implications, like the OPS, must be funded as it accrues, preventing the burden from falling on future generations.
Implementing best practices in public finance management:
Establishing a credible and independent institution, like a permanent finance commission or a fiscal council, is crucial. This body would monitor public finances at both Union and state levels, similar to the Office of Budget Responsibility (OBR) in the UK. The body can function as a fiscal watchdog, offering independent analysis of public finances for both the Union and the states, including forecasts, scrutiny of public policy costs and evaluation of performance against fiscal targets. Furthermore, such a body could be empowered to provide cost-benefit analysis of very large public infrastructure projects. This ensures that public finances are not strained by projects where the benefits do not justify the costs.
WHAT has FDR done so far?
Published advocacy paper titled ‘Preserving Growth Momentum: A Politically Viable Framework for Fiscal Prudence’
The paper analyses the current state of public finances, identifies potential threats, and proposes institutionally sound solutions within the Indian constitutional framework. Notably, the key recommendations were presented to the Union Finance Minister in 2022.
Roundtable on ‘A Viable Framework for Fiscal Prudence’, Indian Democracy at Work – 3rd Edition
To build consensus and garner expert support, FDR convened a national roundtable and brought together leading public finance experts, former civil servants, and politicians to discuss and agree upon essential institutional mechanisms for ensuring fiscal prudence.
Digital Public Awareness Campaign
Recognising the importance of public understanding, FDR launched a digital campaign to raise awareness about the dangers of short-term, fiscally irresponsible policies such as the Old Pension Scheme (OPS). The campaign provided a platform for the public to express their concerns and advocate for responsible fiscal practices.