Tag: #Fiscal-transparency

  • Why India Must Reclaim Fiscal Transparency

    Why India Must Reclaim Fiscal Transparency

    A government budget is far more than a dry recitation of revenues and outlays; it is the most significant contract of trust between a state and its people. For a democracy, this “public purse” is a covenant of accountability. When that covenant is honored through transparency, it anchors economic stability and invites public faith. However, when information is withheld, “information asymmetries” flourish—gaps where the state knows the truth of its finances while the public is left in the dark.These asymmetries are not merely academic concerns; they are the shadows where “hidden debts” grow. In the wake of the pandemic, unrecorded off-budget liabilities have surged to an estimated one trillion dollars globally. Without the sunlight of clear, timely data, financial markets cannot accurately price risk, and citizens cannot judge the true cost of policy choices. To measure the health of this fiscal sunlight, we turn to the Open Budget Survey (OBS), the world’s premier independent benchmark for fiscal governance.The latest OBS findings present a sobering narrative for New Delhi. While once on a path toward greater openness, India’s fiscal governance is currently undergoing a silent but significant shift—one that favors internal secrecy over public scrutiny. Through the pillars of transparency, participation, and oversight, the data reveals a nation retreating from global best practices, even as its peers demonstrate that institutionalized openness is the ultimate safeguard for a developing economy.

    The Great Transparency U-Turn

    India’s once-promising trajectory toward fiscal sunshine has been eclipsed by a return to the shadows of internal-only reporting. In the 2023 OBS report, India achieved a transparency score of 51 out of 100, reflecting a steady climb from earlier years. However, the 2025 report reveals a sharp regression to a score of 44. This decline marks a fundamental shift from providing “limited” information to providing “insufficient” information, effectively stifling informed public debate.The architecture of this decline is specific and deliberate. The backsliding is directly attributed to the government’s decision to reclassify two foundational documents—the Mid-Year Review and the Audit Report—as being for “internal use only.” By pulling these documents from the public domain, the executive has shuttered the windows through which the public could view mid-year fiscal health and adherence to spending rules. This regression endangers the very stability the state seeks to project.”Fiscal transparency is a fundamental prerequisite for financial stability. Without ready access to reliable, comprehensive, and timely information about the government’s true financial position, markets cannot properly evaluate the true costs and benefits of government activities.” —  Based on IMF and RBI premises.

    A Participation Score That Refuses to Move

    If transparency is the ability to see, participation is the ability to speak. On this front, India’s performance remains trapped in a state of “abysmal” stagnation. For both the 2023 and 2025 cycles, India’s public participation score has refused to budge from a dismal 6 out of 100.The breakdown of this score reveals a near-total exclusion of the public from the fiscal lifecycle. While the Ministry of Finance earns a modest score (20/100) for pre-budget consultations during the formulation stage, the door slams shut immediately thereafter. India recorded zeroes across the Approval, Implementation, and Audit stages. This means that once a budget proposal is finalized, there are no formal mechanisms for civil society or the public to testify before the Lok Sabha or contribute to the audit programs of the Comptroller and Auditor General. In the absence of these mechanisms, the budget becomes a monologue by the state rather than a dialogue with the people.

    The South Africa Benchmark: A Global Standard

    The argument that high-level fiscal transparency is a luxury of the developed world is dismantled by the example of South Africa. In the 2023 OBS, South Africa achieved a transparency score of 83 out of 100, ranking 4th globally among 125 nations. It is a study in how a developing economy can institutionalize openness to build international credibility.South Africa’s success is built on mechanisms India currently lacks. While India provides zeroes in audit and implementation participation, the South African National Treasury utilizes “e-consultations” to engage citizens directly. Furthermore, South Africa publishes an exceptionally comprehensive Pre-Budget Statement—a document India does not produce at all—which sets the stage for months of informed debate before the final figures are even tabled.

    The Missing Link: The Independent Fiscal Institution

    Perhaps the most critical differentiator is the presence of an Independent Fiscal Institution (IFI). South Africa’s Parliamentary Budget Office (PBO) is an independent, nonpartisan body whose independence is enshrined in law. Crucially, it reports directly to the legislature, not the executive, providing independent macroeconomic assessments and cost estimates for new policies.In India, the absence of an IFI creates a vacuum filled by “optimism bias”—the systemic tendency for budget projections to offer overly rosy forecasts of growth and revenue. Without an independent counter-weight, lawmakers are forced to accept executive figures at face value. Despite the urgent recommendations of the N.K. Singh (2017) and D.K. Srivastava (2018) committees to establish an independent fiscal council, the proposal remains shelved. This architectural void is the primary reason why Indian legislators often find themselves “flying blind” during the budget cycle.

    The Erosion of Legislative Watchdogs

    The decline in India’s transparency is mirrored by a weakening of its oversight institutions. Legislative oversight dropped from a score of 58 in 2023 to a mere 47 in 2025. The OBS explicitly flags “weak oversight during the planning stage,” noting that the Lok Sabha lacks the independent analysis and sufficient review time required to scrutinize the budget effectively.This erosion is a direct symptom of the missing IFI and the new culture of document secrecy. When the Mid-Year Review and Audit Reports are classified as internal, the “feedback loop” of governance is severed. Lawmakers cannot assess past performance to inform future spending, leading to a loss of what experts call “policy productivity.””Transparency in government accounts dramatically improves the ‘feedback loop’ of governance. When the true fiscal impacts of all policy initiatives are openly reflected, it enhances governmental accountability and ensures greater productivity in how public resources are utilized.” —  13th Finance Commission

    Beyond the Ledger: A Roadmap for Reform

    The path to restoring India’s fiscal standing requires more than a return to the status quo; it requires a structural evolution. First, the government must immediately reverse the classification of the Mid-Year Review and Audit Reports as “internal use” and restore their public availability. Second, India must move beyond its peers by  creating  a comprehensive Pre-Budget Statement to facilitate early-stage debate. Third, the Lok Sabha must institutionalize participation by allowing civil society to testify during budget hearings, following the model of South Africa’s e-consultations.Ultimately, the most vital reform is the establishment of a statutory, independent fiscal council. Without a nonpartisan body to harmonize statistics and check “optimism bias,” the executive’s control over the fiscal narrative remains unchecked.The current trajectory of fiscal secrecy is a risk to India’s long-term macroeconomic stability. As the global economy becomes increasingly sensitive to hidden liabilities and information gaps, we must ask: what is the personal cost of this growing fiscal blackout, and can India truly claim the mantle of a global economic leader while its public purse remains a private secret?

  • Beyond Deficit Targets: Re-Engineering India’s Sub-National Public Finance for Growth

    Beyond Deficit Targets: Re-Engineering India’s Sub-National Public Finance for Growth

    For over two decades, the core philosophy of macroeconomic management in India has been guided by a singular mandate: enforce fiscal discipline through strict numerical caps. Enacted through the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 at the national level and subsequent Fiscal Responsibility Legislations (FRLs) across various states, these boundaries were designed to eliminate the “deficit bias” of governments, curb inflation, and secure long-term debt sustainability.


    However, an extensive empirical study by researchers Irsad, Mohd Yousuf Malik, and Syed Hasan Jafar evaluating India’s public finances from 1991 to 2022 exposes a deep structural flaw in this mechanism. The authors demonstrate an institutional “Decentralization Paradox”: while uniform fiscal rules successfully anchor stability at the national level, they create a restrictive trap that suppresses economic expansion at the sub-national (state) level.


    Fortunately, India’s public finance policy is undergoing a massive structural evolution. By connecting the historical baseline of that academic paper with NITI Aayog’s Fiscal Health Index (FHI) 2026, the legislative overhauls of the 16th Finance Commission, and the operational funding of the Central Government’s SASCI Scheme, we can map out how India is successfully shifting from rigid containment to a flexible, growth-centric framework.

    1. The Academic Diagnosis: The Simultaneous Model and the Capex Trap

    To untangle how legislative rules affect different tiers of government, the authors built a comprehensive Fiscal Performance Index (FPI) using Principal Component Analysis. This index aggregates six distinct variables to capture both revenue mobilization and expenditure quality:

    • Positive Indicators (Improve FPI): Own Tax Revenue to GDP/GSDP, Capital Expenditure to Total Expenditure, and Non-Tax Revenue to Total Revenue Receipts.
    • Negative Indicators (Degrade FPI): Fiscal Deficit to GDP/GSDP, Revenue Deficit to GDP/GSDP, and Interest Payments to Revenue Receipts.
      Because economic growth influences fiscal performance, and fiscal performance simultaneously impacts growth, standard statistical models face a “chicken-and-egg” dilemma of reverse causality. To resolve this, the authors deployed a Two-Stage Least Squares simultaneous equation framework. Instead of treating growth and fiscal health in isolation, the framework mathematically isolates the independent impact of legislative rules by controlling for external factors like the Terms of Trade, inflation, total outstanding debt liabilities, labor force expansion, and trade openness.

    The Core Findings:

    • The FPI Divergence (+0.14 vs. -0.04): The implementation of fiscal rules shows a significant positive coefficient of 0.14 with the national FPI, confirming that rules successfully consolidated central public finances. However, at the state level, it yielded a negative coefficient of -0.04, proving that rigid targets strip sub-national governments of the operational flexibility needed to handle local shocks.
    • The Expenditure Compression Trap: The model reveals that strict legislative rules trigger a stark growth penalty—-4.54 for national GDP and -5.09 for sub-national GSDP. When a state faces a revenue squeeze, it cannot easily reduce “committed expenditures” (salaries, pensions, and interest payments). To satisfy statutory deficit limits, it compresses the only flexible buffer available: discretionary Capital Expenditure.
    • The Multiplier Asymmetry (5.23): The framework shows that public investment holds an enormous growth coefficient of 5.23 at the state level, far higher than the 2.01 found at the center. Consequently, forcing states to trim infrastructure outlays directly penalizes long-term economic expansion.
    • Weak Growth Feedback Loops: The model proves that economic growth feeds back into fiscal health at a rate of 0.06 nationally, but a mere 0.01 at the state level. Sub-national governments cannot rely on national growth to clean up their balance sheets; their stability depends entirely on localized expenditure design.

    2. Mapping the Symptoms: NITI Aayog’s Fiscal Health Index 2026

    If the academic paper diagnoses a historical structural disease, NITI Aayog’s Fiscal Health Index (FHI) 2026 provides the active empirical proof. Tracking longitudinal trends over a clear decade-long baseline (FY 2014–15 to FY 2023–24), NITI Aayog organizes its ranking framework around Five Key Pillars that directly correlate with the variables identified by the academic paper.

    Structural Correlation: Academic FPI vs. NITI Aayog FHI 2026

    The Widening Sub-National Asymmetry

    The FHI 2026 results expose a massive divergence among major states, confirming the authors’ warnings about treating unequal states with uniform rules:

    • The Achievers: States like Odisha (which has topped the index for two consecutive years), Goa, and Jharkhand maintain excellent fiscal health. They consistently hold large capital outlays (around 4–5% of GSDP) and robust internal revenues, insulating them from expenditure compression.
    • The Committed Expenditure Trap: At the bottom, states like Punjab (ranking last with a score of 12.4 out of 100), West Bengal, and Kerala face severe fiscal distress. Their committed expenditures (salaries, pensions, and subsidies) absorb an overwhelming 50–60% of their total revenue receipts, leaving virtually zero fiscal space for developmental capex.

    Abandoning Uniformity: The North-East Decoupling

    In a direct implementation of the paper’s primary recommendation to abandon “one-size-fits-all” templates, NITI Aayog’s 2026 index completely decoupled the 10 North-Eastern and Himalayan states from the major states, ranking them on an independent grid. This officially recognizes that unique geographical isolation, sparse populations, and high service delivery costs require distinct, calibrated fiscal baselines.

    3. The Operational Antidote: The GoI’s SASCI Scheme

    To break the “capex compression trap” highlighted in the paper, the Central Government deployed a powerful operational counter-measure: the Scheme for Special Assistance to States for Capital Investment (SASCI).
    First rolled out by the Ministry of Finance in October 2020 during the pandemic revenue shock, SASCI acts as a countercyclical safety valve. It extends 50-year interest-free loans to state governments that are strictly earmarked for capital asset creation.

    How SASCI Resolves the Financial Dilemma:

    • Over and Above Limits: SASCI funds are provided completely outside a state’s normal Net Borrowing Ceiling. When local revenues contract, states can draw down these funds to sustain their core infrastructure pipeline without breaching their local FRL limits.
    • Excluding Revenue Leakage: The scheme explicitly bars states from utilizing these funds to bridge revenue deficits, cover interest burdens, or pay administrative salaries.
    • Targeting Structural Asymmetry: SASCI incorporates dedicated windows like the “Pride of Hills” allocations (safeguarding capital budgets for Himalayan states) and “Unity Malls” funding.
    • Upgrading Digital Governance: Reflecting the paper’s demand for deep public finance IT improvements, Part-IV of the SASCI scheme links funding to the mandatory integration of state treasuries with the Central Public Financial Management System (PFMS), establishing automated, end-to-end digital tracking of asset creation.

    4. The Legislative Overhaul: The 16th Finance Commission (2026–2031)

    While SASCI injects active capital into state budgets, the 16th Finance Commission framework provides the long-term legislative architecture designed to change sub-national incentives for the 2026–2031 allocation period.

    1. Re-Engineering the Devolution Loop: The 10% GDP Weight

    The 16th Finance Commission maintained the vertical devolution share to states at 41%, but introduced a major modification to the horizontal distribution criteria: a 10% weight for a state’s direct contribution to nominal GDP, replacing the older, generic “tax effort” metric. This directly addresses the paper’s finding that growth feedback loops are structurally weak for states (0.01). By rewarding GSDP expansion, the commission ensures that states that drive local economic engines are automatically compensated with a larger share of untied central taxes.

    2. Eliminating the Revenue Deficit Crutch

    The commission has systematically discontinued open-ended post-devolution Revenue Deficit Grants, pivoting central transfers heavily toward Performance-Based Grants. This penalizes states that rely on central adjustments to finance daily operational deficits, forcing them to focus on the paper’s primary positive variable: expanding their Own Tax Revenue.

    3. Clamping Down on Off-Budget Liabilities

    To prevent states from window-dressing their balance sheets, the 16th Finance Commission formalizes strict rules regarding hidden debt. All off-budget borrowings incurred by states through public sector undertakings (PSUs) or special purpose vehicles must be fully adjusted against their Net Borrowing Ceilings under Article 293(3). This creates absolute accounting transparency, forcing hidden liabilities back onto the primary balance sheet and creating a true, verified baseline for macro-fiscal performance evaluation.

    5. The New Era of Fiscal Federalism

    The clear convergence between academic research, NITI Aayog’s diagnostic indexing, and active central policies reveals a significant shift in India’s macroeconomic philosophy. The era of treating deeply unequal states with rigid, identical budget rules is drawing to a close.
    By protecting high-multiplier capital expenditure via SASCI, clamping down on off-budget window dressing, decoupling unique regional economies, and directly rewarding states for their nominal GSDP contributions through the 16th Finance Commission, India is successfully forging a new model of cooperative federalism. This balanced approach preserves macro-discipline at the top while safeguarding the structural growth engines of the states below.

  • What if a state’s real liabilities are larger than what its budget appears to show?

    That is the central concern with off-budget borrowings.

    A WorldBank study for the 16th FinanceCommission notes that these are borrowings raised by PSUs, SPVs, or other government-controlled entities, where repayment is ultimately supported by the government through grants, guarantees, or escrow of future revenues. So the borrowing may sit outside the budget, but the fiscal risk does not.

    The root cause is fairly clear: persistent subsidy pressures, loss-making public utilities, and infrastructure financing needs. Off-budget routes allow expenditure without fully reflecting the burden in the budget, which weakens fiscal transparency and creates hidden debt.

    Why is this worrying? Because reported figures themselves are often incomplete.

    The study found major gaps between what some states reported and what emerged from CAG-based reporting. For FY2021–22, TamilNadu reported ₹594 crore of OBBs, while the CAG-linked figure cited in the study was ₹12,357 crore. WestBengal reported ₹1,089 crore, against ₹4,311 crore in the CAG-linked figure used in the study. It also clearly states that there is no independent institutional mechanism to validate reported OBBs, and many cases may be underreported or missed altogether.

    That is what makes hidden liabilities especially dangerous: they weaken the credibility of deficit and debt numbers, complicate compliance with FRBM limits and eventually return as explicit fiscal pressure.

    One reform path already exists– The study highlights Karnataka’s approach of broadening the definition of liabilities under its fiscal responsibility legislation to include PSU/SPV borrowings. That is the right principle: if public resources will ultimately service the liability, it should not remain outside the state’s fiscal lens.

    The wider recommendations are equally important: a uniform reporting framework, separate disclosure of guarantees, grants and loans, annual reporting of escrowed revenues/revenue forgone, better lender-wise disclosures, and modernization of the accounting framework.

    Off-budget borrowing is not just an accounting issue. It is a fiscal governance issue.

    When liabilities are moved outside the budget, accountability also moves with them. And that is precisely why transparent reporting matters.