The Confederation of Indian Industry(CII), in an unprecedented move, has introduced a Fiscal Performance Index (FPI) to critically evaluate the quality of budgets presented by both the Centre and state governments. This composite FPI is a novel tool that employs numerous indicators to assess the quality of Budgets at varying governance levels. This methodological approach follows in the footsteps of the United Nations Development Programme (UNDP) Human Development Index, incorporating six distinct elements for a comprehensive assessment of budget quality.
The Components of Fiscal Performance Index
The six components that constitute the FPI are designed to offer a holistic evaluation of government budgets. First, the Quality of Revenue Expenditure examines the share of revenue expenditure excluding interest payments, subsidies, pensions, and defence in GDP. Next, the Quality of Capital Expenditure is evaluated by the share of capital expenditure, excluding defence, in GDP. The third element, Quality of Revenue, compares the net tax revenue ratio to GDP (or the own tax revenue for states).
The concept of Degree of Fiscal Prudence is bifurcated into fiscal deficit to GDP, and revenue deficit to GDP. Lastly, the Debt Index takes into account the changes in debt and guarantees relative to GDP.
Findings of the Fiscal Performance Index
The index’s findings reveal that high-income states have typically underperformed regarding expenditure quality and their own tax receipts index compared to their low-income counterparts. Despite this, these states have shown above-average performance on the deficit prudence index. Interestingly, low-income states like Bihar and Uttar Pradesh, known for their high fiscal deficit ratios, have performed well on the FPI.
This blatantly showcases the inadequacy of using only the fiscal deficit to GDP ratio as a tool for analyzing a state’s fiscal performance. Expenditures that contribute to infrastructure, education, healthcare, and other social sectors are deemed beneficial for economic growth. Furthermore, compared to one-time income sources, tax revenues provide a more sustainable revenue source for the government.
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| Components | Description |
|---|---|
| Quality of Revenue Expenditure | Share of revenue expenditure (excluding interest payments, subsidies, pensions, and defence) in GDP |
| Quality of Capital Expenditure | Share of capital expenditure (excluding defence) in GDP |
| Quality of Revenue | Ratio of net tax revenue to GDP |
| Degree of Fiscal Prudence I | Fiscal deficit to GDP |
| Degree of Fiscal Prudence II | Revenue deficit to GDP |
| Debt Index | Change in debt and guarantees to GDP |
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Recommendations and Overview of Confederation of Indian Industry (CII)
The Fiscal Responsibility and Budget Management (FRBM) Act, which sets targets to reduce fiscal deficits for governments, should not solely concentrate on one component per the CII’s recommendations. Instead, a comprehensive performance review of all entities from all perspectives—expenditure quality, revenue receipt quality, and fiscal prudence—should be contemplated.
Regarded as India’s premier business association since its inception in 1895, the Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry-led and industry-managed organization that plays an impactful role in India’s development process. With around 9000 members from both public and private sectors, along with SMEs and MNCs, and an indirect membership of over 300,000 enterprises from approximately 276 national and regional sectoral industry bodies, it has been instrumental in fostering an environment conducive to the development of India, partnering with industry, Government, and civil society.
