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The authors of IMF working paper, Hausmann and Purfield make a series of suggestions to improve India's fiscal federalism.
To enhance transparency, they say India should take a leaf out of America's book and empower an 'independent scorekeeper' -- along the lines of the US Congressional Budget Office -- to make impartial assumptions of growth, revenue and spending.
Another idea is to copy Chile and set a target for a primary budget surplus -- before interest payments -- that is adjusted for the economic cycle.
In the case of India, the targets could be tweaked depending on the monsoon, which has a crucial impact on economic growth.
At the state level, the scorekeeper could have a role in imposing gradually tighter, cyclically adjusted borrowing limits.
A shortcoming of the FBRM is that there are no explicit penalties -- just a dent to the finance minister's reputation -- if the deficit-cutting goals are missed, the IMF paper says.
Given that name-and-shame tactics failed to persuade France and Germany to comply with the euro zone's Stability and Growth Pact, Hausmann and Purfield say it is an open question whether coercive powers would work in India.
But they note that both New Zealand and Brazil have enjoyed success with rules-based budgeting.
New Zealand does not set any numerical targets, but the government is required to follow certain principles for prudent, long-term budgeting. Enforcement relies on the political or capital market fallout if the government abuses the discretion built into the rules framework.
In Brazil, provincial governors or mayors can go to jail if they overspend their budgets. "The perception is that the Brazilian reform has allowed the government to make the budget a credible institution that actually binds government spending and its structure," Hausmann and Purfield write.
In short, there is no lack of ideas for India to explore. Its current deficit plans represent a move in the right direction, but working paper, say more forceful institutional action may be needed to extend the country's good economic run.
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